Many employers are unaware that, in certain circumstances, they may be eligible for a valuable tax credit in connection with their establishment of a retirement plan.   Although this particular tax credit has been available for over a decade, it is still surprising to see the general lack of awareness that most plan sponsors have regarding this tax saving opportunity.  As a result, this article is intended to familiarize readers with this tax credit so that they can attempt to evaluate its application to their (or their client’s) tax situation.

Effective for tax years beginning on or after January 1, 2002, the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”)[1] created a tax credit for “small employers” who establish a new “eligible employer plan”.  The credit is equal to up to 50 percent of the “qualified plan start-up costs” incurred for a period of up to three years.  In addition, a $500 maximum limit applies in relation to the credit for each of the three years that the credit may be claimed.  An employer may elect to initially apply the credit to the year the permissible plan is established or to the year before establishment.  Also, the employer may not deduct any start-up costs if it claims the credit.  For those readers who possess a greater familiarity with the Internal Revenue Code of 1986, as amended (“Code”), and the tax credits available thereunder to businesses, this credit is allowed in connection with the general business credit permitted under section 38(b).

As you can see, there are several very important “defined terms” included within the authorizing language for the credit that are critical to determining its availability to any particular plan sponsor.  First of all, only a “small employer” is eligible to claim this tax credit.  In this context, a small employer is defined in the same manner as it is used in conjunction with SIMPLE plans.  Thus, in general, a small employer for purposes of this tax credit is an employer with 100 or fewer employees who received at least $5,000 of compensation from such employer for the preceding year.

Another important consideration is that the 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.

Finally, the credit may only be applied in connection with “qualified plan start-up costs”.  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.

Obviously, everyone’s tax situation is different so, 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.

In 2018, we wrote about the Bipartisan Budget Act of 2018 (“Budget Act”) and the unanticipated inclusion of certain provisions of the Budget Act that generally expanded the availability of hardship withdrawals from retirement plans.  Since the publication of that article, the U.S. Treasury Department has released proposed regulations that begin to provide the guidance that practitioners and plan sponsors require in order to implement the changes to the hardship withdrawal rules (“Proposed Regulations”).  Final regulations on this matter are anticipated sometime later in 2019.  However, since several provisions of the Budget Act were slated to be effective as early as January 1, 2019, it is important to understand the content of the Proposed Regulations now in order to be poised to take advantage of them once they are finalized.  Therefore, the following generally discusses the content and impact of the Proposed Regulations.

Before discussing the Proposed Regulations, it is worth mentioning that it is not possible to be entirely definitive on the impact and requirements of the new rules until they are issued in final form at some point in the future.  Thus, even though there may be plan sponsors who would like to take immediate advantage of the content of the Proposed Regulations, it would be prudent to wait until the Proposed Regulations are issued in final form before attempting to effectuate the guidance provided therein in order to avoid inadvertently violating any yet to be released requirements.  In this regard, it also is noteworthy that most retirement plans will need to be amended in order to take advantage of these changes.  However, as a result of the yet to be final status of the Proposed Regulations, many plan document providers have not yet released the plan language and documentation necessary to formally memorialize these changes.  Consequently, even though it is expected that plan sponsors will have a “grace period” during which they will be able to retroactively amend their plans to incorporate the necessary plan provisions, it remains prudent for all parties to understand the full scope of the new rules before attempting to comply with their requirements.  Thus, again, it likely is in the best interests of most plan sponsors to delay implementing these new rules until final regulations are released by the U.S. Treasury Department.

Prior to the release of the Proposed Regulations, Treasury regulations existed that generally described how a hardship withdrawal would only be permissible to the extent that the amount distributed was necessary to satisfy a financial need.  In this regard, the existing regulations established both a facts and circumstances method and a safe harbor method of satisfying this requirement.  However, the Proposed Regulations propose to eliminate both the facts and circumstances and safe harbor methods of establishing the amount of the financial need in favor of a new three prong test that mirrors the old safe harbor method with certain exceptions.  The three prongs of the newly proposed rule are as follows: 1) the distribution does not exceed the amount of the participant’s need; 2) the participant has obtained all other currently available distributions under the plan and all other plans of deferred compensation maintained by the employer; and 3) on or after January 1, 2020, the participant must represent in writing that he or she has insufficient cash or other liquid assets to satisfy the need.  To further explain, this new test would only apply to determining the amount of the purported need and essentially would serve to eliminate the currently applicable regulatory requirements that a participant: 1) first obtain any nontaxable plan loans to attempt to satisfy the need; and 2) have his or her ability to make elective deferral contributions suspended for at least six months after the receipt of the hardship withdrawal.

The Proposed Regulations would also affirmatively establish that, effective as of January 1, 2020, plan sponsors shall be prohibited from suspending a participant’s ability to make elective deferral contributions following his or her receipt of a hardship withdrawal.  In addition, the Proposed Regulations indicate that plan sponsors have the discretion to eliminate the elective deferral suspension rule as early as the first day of the first plan year beginning on or after December 31, 2018 and that such discretion extends to the elimination of the rule in connection with hardship withdrawals that may have been granted prior to the effective date of such change.

Finally, the Proposed Regulations formally expand the money sources from which a hardship withdrawal may be obtained to also include qualified nonelective contributions (“QNECs”), qualified matching contributions (“QMACs”) and the earnings associated with those amounts as well as earnings on elective deferral contributions.  However, it is noteworthy that plan sponsors are not required to expand the sources from which hardship withdrawals may be made in this manner.

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 or are considering implementing these rule changes, 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.

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     Over the course of the last two years, we at Legacy Retirement Solutions, LLC (“Legacy”) have diligently worked to help our clients satisfy the most recent Internal Revenue Service (“IRS”) mandated restatement of pre-approved defined contribution retirement plans. This requirement was commonly referred to as the “Pension Protection Act” (“PPA”) restatement requirement in honor of the piece of retirement plan related legislation that most significantly influenced the content of the restated plan documents.

     As you, hopefully, already realize due to you and/or your clients’ satisfaction of this requirement; the general deadline to adopt a pre-approved defined contribution PPA restatement was April 30, 2016. An important part of our PPA restatement efforts here at Legacy included what many plan sponsors may have perceived as “annoying” and “duplicative” follow-ups. However, the follow-up was necessary in order to best ensure that the requisite plan documents were not only received by each of Legacy’s plan sponsor clients that required them but also that they were understood and, possibly most importantly, timely executed. These efforts beg the question of: what would happen if a plan sponsor didn’t timely adopt a PPA restatement? The remainder of this article is intended to discuss the implication of such failure as well as what could be done to resolve it.  

      If a plan sponsor did not sign a PPA restated defined contribution plan document as required on or before the April 30, 2016 deadline; the associated retirement plan is no longer entitled to tax-favored treatment. The loss of tax-favored treatment may: 1) eliminate prior years’ deductions for contributions paid to the plan; 2) make the trust of the plan subject to taxation for current and certain prior years; and 3) force taxable distributions of all of the plan’s assets to its participants. Obviously, these consequences are both significant and severe.   Fortunately, there is a voluntary correction methodology established by the IRS available to rectify this situation and which allows a plan sponsor to avoid the severe tax consequences described above.

     More specifically, a plan sponsor that does not timely adopt a restated PPA pre-approved defined contribution retirement plan document can restore the tax-favored status of such plan by retroactively adopting such plan under the auspices of the Voluntary Correction Program with Service Approval Program (“VCP”) as sponsored by the IRS. Successful completion of the program results in a “compliance statement” from the IRS which is a formal memorialization of the appropriate correction of the failure. In that event, the plan at issue is able to return to its tax-favored status thereby protecting the sponsor’s deductions, the trust’s tax-exempt status and the participant’s tax deferment goals.  

     Although there is no requirement that a plan sponsor employ a retirement plan professional (such as an attorney) to prepare and submit a matter to VCP for correction, we strongly recommend consulting with a retirement plan professional experienced in such matters before attempting to embark down this path. This is because, while the VCP process can prove to be extremely beneficial, it also can be challenging as it requires careful preparation, attention to detail and, generally, direct negotiation with the IRS regarding the content of such submission.

      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.