Although available for over two decades, it is still surprising to see the general lack of awareness that most employers have regarding their eligibility for a tax credit in connection with their establishment of a retirement plan.  As a result, this article is intended to familiarize readers with this tax credit so that they can evaluate its applicability to their (or their client’s) tax situation.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”)[1] initially created a three year tax credit eligibility in relation to “qualified plan start-up costs” incurred by certain small employers who establish a new “eligible employer plan”.  For this purpose, qualified plan start-up costs are any ordinary or necessary expenses incurred with regard to the establishment of such plan, its administration or certain costs incurred related to employee investment education expenses.

The value of this credit was then increased under the Setting Up Every Community for Retirement Enhancement (“SECURE”) Act for tax years beginning after December 31, 2019 from 50% of start-up costs up to a potential maximum of $500 per year to 50% of start-up costs up to a potential maximum credit of $5,000 per year.  However, Congress wasn’t done there.

In December of 2022, the SECURE 2.0 Act of 2022 (“Secure 2.0”) further incentivized employers to start new retirement plans by increasing this tax credit even more. For tax years beginning after December 31, 2022, the start-up tax credit for an employer with 50 or fewer employees increased from 50% to 100% of the start-up costs up to a potential maximum credit of $5,000 per year. However, businesses with 51-100 employees remain subject to the “old” 50% of start-up costs restriction.    Employers with over 100 employees are not eligible for this credit.  Also, the employer may not deduct any start-up costs if it claims a credit.

It is important to note that this start-up credit is only available with respect to the establishment of an “eligible employer plan”.  In general, an eligible employer plan is a tax-qualified plan under section 401(a) of the Code (such as a profit sharing plan, 401(k) plan and/or defined benefit plan, among others), Simplified Employee Pension Plan (“SEP”) or Savings Incentive Match Plan for Employees (“SIMPLE”).  In addition, in order to qualify for the credit, the newly established plan must have at least one participating non-highly compensated employee.  This final eligible plan qualification is of great importance because it effectively eliminates the credit with regard to “solo(k)” plans.

With SECURE 2.0’s increase to the start-up credit, Congress also granted another tax credit in relation to the amount of employer contributions made to start-up plans (other than defined benefit plans) for the benefit of employees earning less than $100,000. The amount of this credit is capped at $1,000 per employee for employers with 50 or fewer employees and slowly phases out for employers with between 51-100 employees. Employers with over 100 employees are not eligible for this credit.  This tax credit is further restricted to 100% of the eligible amount in the first and second years, 75% in the third year, 50% in the fourth year, 25% in the fifth year and no credit for any tax years after the fifth year.

Although beyond the scope of this article, it is noteworthy that the SECURE Act also established a tax credit for plans that implement an “eligible automatic enrollment arrangement” (“EACA”) of $500 for each of the first 3 years that the plan has such an auto enrollment feature.  This “auto enroll” tax credit is separate and distinct from the start-up tax credits that are the subject of this article and both the start-up and auto enroll credits can be claimed concurrently.  Also noteworthy is that the EACA need not be in place at the time the plan is established in order to qualify for the credit.  As with the previously discussed small plan establishment tax credit, this credit is effective for tax years beginning after December 31, 2019.

Obviously, these rules are complicated and everyone’s tax situation is different.  Consequently, as much as we hope this article helped you to better understand this topic, it is not to be construed as financial, tax or legal advice.  Therefore, if you believe that it may apply to your (or your client’s) company, be sure to further discuss it with a qualified accountant or tax professional.  For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.

Almost every sponsor of every tax-qualified retirement plan must obtain a fidelity bond in accordance with section 412 of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).  Despite the broad application of this requirement, a surprising number of plan sponsors are unaware of this requirement and, in fact, do not have a bond at all or do not have a bond in the proper amount.  Consequently, this article is written in order to help explain the requirement in order to attempt to ensure that those who are subject to this requirement satisfy it.

Obviously, in order to reasonably expect to satisfy this “ERISA bond” (“ERISA Bond”) requirement, it is necessary to understand exactly what it is.  In this regard, an ERISA Bond is a type of insurance that protects a plan against losses caused by acts of fraud or dishonesty. Fraud or dishonesty includes, but is not limited to, larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, willful misapplication, and other acts.

It is important to understand that the ERISA Bond is different from fiduciary insurance.  The ERISA Bond protects plan participants from the acts of fraud or dishonesty described above.  However, fiduciary insurance protects a plan fiduciary from claims relating to a fiduciary breach under ERISA.  Thus, the ERISA Bond protects plan participants while fiduciary insurance protects plan fiduciaries.  In addition, the ERISA Bond is a mandatory requirement under ERISA for most retirement plans while fiduciary insurance is not required.

As mentioned above, most retirement plans are required to have an ERISA Bond.  This raises the question of exactly which plans must obtain the ERISA Bond. Although the bonding requirements generally apply to most ERISA retirement plans (and many funded welfare benefit plans), the ERISA bonding requirements do not apply to plans that are not subject to Title I of ERISA; the most notable of which are owner only, “solo k”, plans or to employee benefit plans that are completely unfunded (i.e., the benefits are paid directly out of an employer’s or union’s general assets).

Now that we understand which plans must have ERISA Bond coverage, we also need to understand exactly which persons must be covered by the ERISA Bond.  Under ERISA, every person who “handles funds or other property” of an employee benefit plan is required to be bonded unless covered by an ERISA exemption. ERISA makes it an unlawful act for any person to “receive, handle, disburse, or otherwise exercise custody or control of plan funds or property” without being properly bonded.

In application, the “handles funds or other property” qualification generally encompasses the ERISA plan administrator and those officers and employees of the plan or plan sponsor (employer, joint board, or employee organization) who handle plan funds by virtue of their duties relating to the receipt, safekeeping and disbursement of funds.

“Funds or other property” generally refers to all funds or property that the plan uses or may use to pay benefits to plan participants or beneficiaries. Plan “funds or other property” includes all plan investments such as land and buildings, mortgages, and securities in closely-held corporations. It also includes contributions from any source (such as employers, employees, and employee organizations) that are received by the plan, and cash, checks and other property held for the purpose of making distributions to plan participants or beneficiaries.

A person is deemed to be “handling” funds or other property of a plan whenever his or her duties or activities could cause a loss of plan funds or property due to fraud or dishonesty, whether acting alone or in collusion with others. The general criteria for “handling” includes but is not limited to: 1) physical contact with cash, checks or similar property; 2) power to transfer funds from the plan to oneself or to a third party; 3) power to negotiate plan property (e.g., mortgages, title to land and buildings or securities); 4) disbursement authority or authority to direct disbursement; 5) authority to sign checks or other negotiable instruments; or 6) supervisory or decision-making responsibility over activities that require bonding.

Generally, the amount of the ERISA Bond must be equal to at least 10% of the amount of funds “handled” in the preceding year. The bond amount cannot, however, be less than $1,000, and the Department cannot require a plan official to be bonded for more than $500,000, or $1,000,000 for plans that hold employer securities. These amounts apply for each plan named on a bond.

For example, assume a company’s plan has total assets of $1,000,000. The plan trustee, named fiduciary and administrator are three different company employees that each have access to the full $1 million, and each has the power to transfer plan funds, approve distributions, and sign checks. Under ERISA, each person must be bonded for at least 10% of the $1 million or $100,000.  (Note: Bonds covering more than one plan may be required to be over $500,000 to meet the ERISA requirement because persons covered by the bond may handle funds or other property for more than one plan.)

Finally, it is permissible under ERISA to pay for the ERISA Bond with plan assets. The purpose of the ERISA Bond requirements is to protect the plan. The ERISA Bond does not protect the person handling plan funds or other property or relieve them from their obligations to the plan.  As a result, there is no conflict created if the plan pays for the ERISA Bond.

As much as we hope this article helped you to better understand this topic, it is not to be construed as financial, tax or legal advice.  Therefore, if you believe that the issues discussed herein may apply to your (or your client’s) company, be sure to further discuss it with a qualified retirement plan professional.  For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.

On June 29, 2020, the Internal Revenue Service (“IRS”) released Notice 2020-52 (“IRS Notice”) which grants certain COVID-19 related relief to retirement plan sponsors who employ a safe harbor 401(k) (“Safe Harbor”) plan design feature.  The majority of the guidance is temporary relief which expires on August 31, 2020.  However, the IRS Notice also includes a clarification that shall remain effective after August 31, 2020.

Temporary Suspension of Economic Loss / Safe Harbor Notice Content Requirement

Generally, a Safe Harbor feature is required to be effective for a full 12-month plan year.  However, in certain circumstances, it is permissible to suspend or reduce the Safe Harbor feature during the current plan year (“Mid-Year”) if certain additional requirements are met.  More specifically, in order for a Safe Harbor feature to permissibly be suspended Mid-Year, the plan sponsor of such plan must either:

1) be operating at an economic loss; or

2) the Safe Harbor notice issued by the plan sponsor to each eligible employee before the beginning of the plan year (“SH Notice”) must include specific language advising that:

a) the plan may be amended Mid-Year to reduce or suspend Safe Harbor employer contributions; and

b) the reduction or suspension will not be effective for at least 30 days after all eligible employees receive notice of the intended suspension or reduction of employer Safe Harbor     contributions[1].

However, the IRS Notice temporarily suspends the economic loss and/or SH Notice content requirements described above.  Therefore, with regard to any suspension or reduction of Safe Harbor employer contributions that occurs from March 13, 2020 through and including August 31, 2020, a plan sponsor is neither required to have been operating at an economic loss nor to include the specific language referenced above within their annual SH Notice.

Temporary Suspension of 30 Day Advance Notice Requirement for Safe Harbor Profit Share

As suggested by the discussion above, generally a suspension or reduction of a Safe Harbor contribution feature may not occur any earlier than 30 days after each eligible employee receives supplemental notification of the intended suspension or reduction.  With respect to this 30 day advance notice requirement, the IRS Notice indicates that such requirement shall not apply with regard to the suspension or reduction of Safe Harbor profit sharing features that occur from March 13, 2020 through and including August 31, 2020.  It is important to note that this suspension of the 30 day advance notice requirement only applies to Safe Harbor profit sharing contribution features and does not apply to Safe Harbor matching contribution features.    Regardless, the temporary relief within the IRS Notice shall only be available if:

1. A supplemental notice advising of the suspension or reduction in Safe Harbor profit sharing contributions is received by each eligible employee by no later than August 31, 2020; and
2. The plan amendment that reduces or suspends the Safe Harbor profit sharing contributions is adopted no later than its effective date.

Suspension or Reduction of Safe Harbor Contribution for HCEs Only

In general, it is not permissible to implement a Mid-Year change to a Safe Harbor plan that reduces or otherwise narrows the group of employees eligible to receive Safe Harbor contributions.  Thus, for example, it would not be permissible to amend a Safe Harbor plan Mid-Year in order to exclude all “Sales Associates”.  However, the IRS Notice clarifies that it is permissible to implement a Mid-Year amendment to a Safe Harbor plan in order to reduce or suspend a Safe Harbor contribution if such reduction or suspension only applies to “highly compensated employees” (“HCEs”).  Typically, an HCE is any employee who owns greater than 5 percent of the plan sponsor or earned greater than $125,000[2] in the prior year.

In order to implement the HCE clarification discussed in the IRS Notice, the affected HCEs must first receive an updated SH Notice.  Such updated SH Notice must advise them of the change to their eligibility to receive the Safe Harbor contribution and must also provide them with an opportunity to change their deferral election before the Mid-Year reduction or suspension is implemented. In general, these timing requirements are deemed to be satisfied if the updated SH Notice is provided at least 30 days before the effective date of the change.

We hope that this article helped you to better understand this topic.  However, please be advised that it is not intended to serve as financial, tax or legal advice so it should not be construed as such.  If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional.  For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.

[1] Each Safe Harbor notice prepared by Legacy Retirement Solutions, LLC for its clients includes the necessary language advising all eligible employees that the plan at issue may be amended Mid-Year to reduce or suspend Safe Harbor employer contributions and that such reduction or suspension will not be effective for at least 30 days after such notice is received.

[2] This is the current 2020 dollar amount which is annually adjusted by the IRS for cost of living increases.