2020 Cost of Living Increases
Notice 2019-59 was released November 6, 2019, highlighting changes made by the Internal Revenue Service to the cost-of-living adjustments that will be applicable to the dollar limits applied to tax-qualified retirement plans for 2020.
2019 Cost of Living Increases
Notice 2018-83 was released November 1, 2018, highlighting changes made by the Internal Revenue Service to the cost-of-living adjustments that will be applicable to the dollar limits applied to tax-qualified retirement plans for 2019.
Why Sponsor a Qualified Retirement Plan?
There are a number of reasons why an employer would consider sponsoring a qualified retirement plan. Those reasons include:
A better, more productive employee workforce.
A significant contribution to the social well being of America.
Their own wealth accumulation needs.
We have all heard the discussions of the inadequacies of the Social Security system and the growing demands of a large number of retirees. Working people are rightly concerned about how they are going to fund their retirement years. Their life expectancy has grown measurably longer than their parents and grandparents and the cost of living continues to escalate. These types of financial concerns often weigh on workers and distract them from their full productive potential.
Qualified retirement plans are one of the first things prospective employees consider when they are investigating new employment. For both the existing employee and the prospective new hire, a retirement plan begins to address the concerns of, “How can I begin to manage the wealth accumulation needs of my future?” By providing a retirement plan, the sponsoring employer is helping their own employees answer this question and contributing to the overall savings discipline of the country.
Most business owners have spent years developing their businesses. They have invested their time, their energy and their money in creating businesses that provide employment that helps their fellow citizens and fuels the American economy. Many have had little time or spare income to accumulate wealth and secure the future for themselves and their families. Sponsoring a qualified retirement plan creates a context within which the Employer and Plan Sponsor also can begin to secure their future needs. Business owners can often create plans that provide significant contributions for themselves while maintaining reasonable employee costs.
The simple answer as to why to sponsor a qualified retirement plan, is that it is the right thing to do. Right for employees, right for the economy and right for the business owner and plan sponsor.
Planning for a secure retirement is a significant challenge...
Congress has long recognized the difficulty of saving, particularly on a long-term basis for retirement. As a consequence, Congress has provided significant opportunities to create savings by dedicating a portion of the Tax Code to outlining how this can and should be done.
What are those advantages?
The basic premise is that retirement plans enjoy favorable tax treatment.
Employer contributions to retirement plans are tax-deductible as are the costs of maintaining the plan.
Neither the plan nor the participants pay current taxes on either contributions or investment earnings.
Participants are not taxed on their benefits until they receive those benefits as distributions.
These advantages allow contributions and earnings to compound at a faster rate in a tax-deferred environment than would be possible in the absence of a retirement plan.
Law Provides Further Protection for Retirement Plan Assets
One of the many advantages of retirement plans is that the benefits of those plans are protected from creditors in the event of bankruptcy. Unfortunately, some plans have not been eligible for this protection and in other cases, the extent of the protection has been a source of confusion and litigation. For example, assets held in IRAs have had little to no protection under federal law while sometimes being protected (or partially protected) under various state laws.
Effective October 17, 2005, when the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) goes into effect this situation will change.
Which Plans Are Protected Under the Law?
The new law provides clearly defined protection from creditors for the following kinds of retirement plans:
Qualified retirement plans under Internal Revenue Code Section 401, this will include 401(k) plans, profit sharing plans and defined benefit plans
403(b) and 457 plans provided by Governmental and exempt organizations
Except in the case of IRAs, there is no limit on the amount of assets that may be protected in the event of bankruptcy. IRA assets attributable to an individual’s own contributions are subject to a $1,000,000 limit. This limit, however, does not apply to IRA assets attributable to employer retirement plan contributions (including employee 401(k) contributions) rolled over or transferred from eligible employer-sponsored plans listed above. For example, if you transfer $1,000,000 from a profit sharing plan to an IRA and that amount grows, with investment income, to $1,500,000, the full $1,500,000 is protected from creditors.
Clearly, keeping clear records of roll-overs and transfers is key to preserving the maximum protections
Any plan that has received a favorable determination letter from the Internal Revenue Service will be presumed to be a qualified plan. Plans that do not have favorable determination letters must demonstrate that:
Neither the IRS nor a court has made a prior determination that the plan is not qualified under Section 401 of the Code.
Either the plan is in substantial compliance with Section 401, or the plan is not in substantial compliance with Section 401 but the debtor is not materially responsible for that failure.
Although somewhat ambiguous, creditor protection has always been a significant advantage of retirement plan savings. This new law will not only continue to protect retirement plan assets from creditors in bankruptcy proceedings but will also extend the protection to situations not previously covered by prior law. Asset protection remains one of the many significant advantages of qualified retirement plans.
401(k) Hardship Withdrawals
On September 19, 2019 the IRS issued final regulations to the 401(k) hardship withdrawal rules as a result of the Bipartisan Budget Act of 2018 (BBA 2018) and Tax Cuts and Jobs Act (TCJA 2018). This will impact all retirement plans that have a hardship withdrawal provision effective with transactions processed on or after January 1, 2020.
401(k) plans may include provisions allowing “in-service” distributions if a plan participant incurs a financial hardship based on delineated criteria. Your plan document outlines the method of determining what qualifies as a hardship distribution. To reduce the administrative burden a “Safe Harbor” definition is typically used by providing clear reasons for a hardship withdrawal vs. a non-Safe Harbor definition.
Under the "safe harbor" rules, the following reasons for withdrawal were deemed to be financial hardships:
Medical expenses for the employee, the employee’s spouse or dependent.
Purchase of a principal residence of the employee.
Tuition and related educational fees for post-secondary education for the employee, the employee’s spouse, children or dependents.
Payment to prevent eviction from the employee’s primary residence or foreclosure on the mortgage on the employee’s primary residence.
Funeral expenses of parents, spouse, children or dependents of the employee.
Certain expenses relating to the repair of damage to the employee’s principal residence.
Expenses and losses due to FEMA declared disasters.
Key Changes Under the Final Regulation
The plan sponsor is required to discontinue the 6-month suspension of salary deferrals effective with transactions processed on or after January 1, 2020.
The plan sponsor can discontinue the requirement that a participant must take all available participant loans from the plan prior to requesting a hardship.
The plan sponsor can allow earnings to be considered when determining the amount of hardship allowed.
The plan sponsor has the option to expand the types of contributions available to participants.
The “facts and circumstances” method for determining necessity under the non-safe harbor hardship distribution method have been replaced by a single standard.
In 2020 we will communicate the amendment needed for your plan document.
If you have questions on the options available or need to implement an operational checklist, please contact your
CrossPlans administrator for assistance.
Roth 401(k) Plans
Beginning in 2006, 401(k) plans will allow employees to designate some (or all) of their elective contributions as Roth 401(k) contributions
Roth 401(k) Contributions
Traditional 401(k) contributions are excluded from an employee’s taxable income in the year they are made but the account balance, including earnings, is taxed as ordinary income when it is distributed.
On the other hand, Roth 401(k) contributions are not excluded from an employee’s taxable income in the year they are made. However, distributions of these contributions, along with their investment income will be tax-free.
Which is better? That answer depends on several variables including, the age of a participant, yield on investments, present and future tax rates as well as other factors that may be considered.
Contact us for more information.
Roth 401(k) versus a Roth IRA
There is no income threshold for a Roth 401(k)—all participants can contribute regardless of how much money they make. An individual can contribute to a Roth IRA only if his or her income does not exceed a threshold amount.
An individual can contribute up to $5,500 to a Roth IRA in 2016 (subject to the income threshold rules). This amount may be adjusted for cost-of-living increases thereafter. If the individual is age 50 or older in 2016, he or she can make an additional $1,000 “catch up” contribution.
In a Roth 401(k), the contribution limits are significantly higher: up to $18,000 in 2016 plus an additional $6,000 for those age 50 or older. These amounts may be adjusted for cost-of-living increases thereafter.
What must a plan sponsor do if they want to offer Roth 401(k)s?
Plan documents need to be amended to allow for Roth 401(k) contributions. These amendments will need to be adopted prior to making any Roth 401(k) contributions.
Employees must also designate a portion of their 401(k) contributions as Roth 401(k) contributions. Plans will need to have election forms available for participants to do this. Payroll systems must also be able to handle the Roth 401(k) contributions.
Roth 401(k) contributions must be accounted for separately from pre-tax 401(k) contributions. The plan’s record keeper must be prepared to track these separate accounts.
What other requirements will a plan have to meet?
Roth 401(k) contributions must be combined with pre-tax 401(k) contributions for purposes of the actual deferral percentage (ADP) test.
The combined Roth 401(k) and pre-tax 401(k) contributions for any individual cannot exceed the annual maximum ($18,000 in 2016 plus an additional $6,000 catch up contribution for individuals age 50 and older.)
Employers will be able to make matching contributions with respect to both Roth and traditional 401(k) contributions. Matching contributions are treated the same as under current law regardless of whether they are based on Roth or traditional 401(k) contributions.
The plan must provide that Roth 401(k) contributions may be rolled over only to another plan that allows Roth 401(k) contributions or to a Roth IRA.
Required minimum distributions must be made to individuals age 70½ and older (or, in the case of a non-5% owner, at termination of employment, if later).
Distributions can only be made upon termination of employment or in cases of financial hardship.
Accounts are subject to the same distribution restrictions as pre-tax 401(k) accounts.
All contributions must be non-forfeitable.