Category Archives: IRA Issues

California Wildfires: Congress Grants Expanded Access to Retirement Savings

The recently-signed Bipartisan Budget Act of 2018 (the “Act”) expands access to 401(k) and other retirement plan savings for those impacted by the California wildfires that occurred late last year in federally-declared disaster areas including Santa Barbara and Ventura counties. The expanded access is available to individuals whose principal residence is or was located in the “California wildfire disaster area” at any time between October 8, 2017 to December 31, 2017 and who sustained an economic loss – whether personal or business – as a result of the wildfires, and whose employer agrees to amend their plan by December 31, 2019 to include the special rules (retroactive to 2018).   Those taking IRA withdrawals should check with their IRA custodians or trustees re: availability of the new measures.

As to whether the relief extends to those affected by flooding, mudflows, and debris flows directly related to the wildfires, there is some uncertainty in the wording of the Act. As mentioned above, eligible individuals are determined based on their residence on or before December 31, 2017, a date which preceded the January 9, 2018 flooding, mud and debris flow.  However, the Act defines “California wildfire disaster area” as the area subject to Presidential disaster declarations made between January 1, 2017 through January 18, 2018.  The original California wildfire disaster declaration was made January 2, 2018, and was amended on January 10 and 15 to incorporate damage from flooding, mudslides and debris flow directly related to the wildfires, which would suggest that those related types of damage would come within the scope of the relief. More guidance from the government would be helpful on this point.

There are three main types of expanded access:

  • Special withdrawal rules

-Eligible individuals may take plan or IRA withdrawals of up to $100,000 without application of the 10% penalty tax that ordinarily applies before age 59 ½.  Although California’s Franchise Tax Board generally follows federal disaster relief, a California early withdrawal penalty of 2.5% may apply, so check with your CPA.  The withdrawal must take place between October 8, 2017 and December 31, 2018.  The tax impact of the withdrawal may be spread over up to 3 years from the date of the withdrawal, or tax may be avoided entirely by repaying the full amount to the plan, or an IRA, within the same 3 year period.

  • Retirement plan loan relief

– An extension of up to one year applies to repayments due on a plan loan that was outstanding on or after October 8, 2017.  The one year extension does not cause the loan to exceed the maximum five-year repayment period.  Interest continues to accrue during the extension.

– New plan loans may be taken out on or after Feb. 9, 2018, through Dec. 31, 2018 in an amount up to the lesser of $100,000, or 100% of the vested retirement plan account (increased from $50,000 or 50%).   The limit is reduced by an amount equal to the highest outstanding balance of all loans during the prior twelve months.

  • Repayment of amounts taken out to buy or build a home in the disaster area

  –Persons who took hardship withdrawals from their plans after March 31, 2017 and before January 15, 2018 in order to buy or build a personal residence can re-deposit their withdrawals, or roll them to an IRA, by June 30, 2018, if the purchase or construction could not go forward as a result of the wildfires. The same relief is available to first-time homebuyer IRA withdrawals made during this time.

In earlier guidance, the IRS extended the filing deadline for personal and business income taxes by two weeks for those affected by the California wildfires, and California’s Franchise Tax Board granted equivalent relief for state returns. The new deadline for personal returns is April 30, 2018.

Note:  a version of this post was published in the Pacific Coast Business Times on February 23, 2018.

 

 

 

 

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IRS Announces New Benefit Limits for 2018

olga-delawrence-386839On October 19, 2017 the IRS announced 2018 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.   Salary deferral limits to 401(k) and 403(b) plans increased $500 to $18,500, but other dollar limits remained unchanged, including the compensation threshold for highly compensated employee status. Specifically, an employee will be a highly compensated employee (HCE) in 2018 on the basis of compensation if he or she earned more than $120,000 in 2017.  Citations below are to the Internal Revenue Code.

In a separate announcement, the Social Security Taxable Wage Base for 2018 increased to $128,400 from $127,200.

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The Emerging Benefit Trend of Student Loan Assistance

Employers are by now familiar with the scary statistics on mounting student loan indebtedness, including that approximately 71% of 2015 college seniors graduated with a student loan, and almost 80% of millennials believe that student loan debt will make it harder for them to meet their financial goals.  Per Mark Kantrowitz of Cappex.com, the average student loan balance increased by almost 50% between 2005 and 2015, and now hovers around $35,000 per graduate.

Large student loan debt impacts current employees and prospective new hires in many ways: it may cause rejection of a desired position or promotion due to income needs, it may postpone retirement plan participation due to cash flow needs, and it may delay or even rule out home ownership or starting families, leading to a less stable and community-involved workforce.

Employers want to be able to help mitigate some of the downside of high student loan debt among their employees, but their efforts are hindered by the fact that employer loan payments on behalf of an employee are currently taxable to the employee.

Several pieces of new legislation proposed for the 2017-2018 Congressional term encourage or facilitate employer assistance with student loan repayments through tax incentives. A survey of some of these measures follows:

The Higher Education Loan Payments (HELP) for Students and Parents Act (H.R. 1656)

  • This measure would permit employers to make up to $5,250 per year in tax-free student loan repayments on behalf of employees, and provide an employer tax credit based on 50% of contributions made within that dollar limit.
  • It would also permit employers to make up to $5,250 per year in the form of “qualified dependent 529 contributions” direct to employees’ tax-exempt tuition savings accounts set up on behalf of their children (up to age 19; students up to age 24), and would provide a corresponding 50% employer tax credit.
  • If passed it would thereby double the current $5,250 limit on employer education assistance under Internal Revenue Code (“Code) § 127.
  • Significant for smaller employers, the HELP for Students and Parents Act would treat sole proprietors and partners as employees for purposes of the excludible contributions.

The Student Loan Repayment Act (H.R. 615)

  • This bill would offer employers a 3-year business tax credit equal to 50% of startup costs for a student loan program (up to $500 per participating employee) under which the employer matches employees’ student loan repayments, up to $2,000 per year.
  • The startup costs are program creation costs, not amounts used for employer matching contributions.
  • The bill would also allow employers who hire “qualified student loan repayers” to claim the Work Opportunity Tax Credit, which encourages hiring of select populations such as veterans and recipients of certain types of public assistance. A “qualified student loan repayer” must have at least an associate’s degree, and outstanding education loans of at least $10,000.

The Student Loan Repayment Assistance Act (H.R. 108)

  • This bill would amend the Code to allow businesses a tax credit for employer-paid student loan repayments made direct to the lender, equal to 10% of the amounts that the employer pays on behalf of any employee, not to exceed $500 per employee per month.
  • The credit would be refundable for small businesses and non-profits who cannot use the credit against taxes.
  • The bill would require a written plan document, notice to employees, annual reporting to IRS and must be made “widely available” to employees (not discriminate in favor of “highly compensated employees”).

The Retirement Improvement and Savings Enhancement (RISE) Act of 2016

  • This measure took the form of a discussion draft in the 2014-2016 Congress but likely will be re-introduced in the current 115th Congress.
  • It would permit employers to make matching contributions to an employee’s 401(k) or SIMPLE IRA account based on his or her student loan repayments, essentially treating employee student loan repayment as equivalent of a 401(k) salary deferral.
  • Its retirement provisions would also curtail currently permissible IRA strategies including “mega Roth IRAs” and stretch IRAs, and would permit IRA contributions after reaching age 70 1/2.

As legislative efforts progress, vendors are already stepping in to the breach. Tuition.io provides a software interface that permits employer money to go direct to repay student loans, without going through employee pay.  The average employer contribution per paycheck is $50 – $200.   Other vendors include Student Loan Genius, PeopleJoy, Peanut Butter, and Gradifi.

One compliance question that these programs raise is whether student loan repayment programs would comprise ERISA plans, subject to trust and reporting requirements, or simply be viewed as “payroll practices” exempt from Title I of ERISA.  They do not provide retirement income or defer compensation to retirement age, thus would not likely be an ERISA pension plan, and do not provide benefits within the definition of ERISA “health and welfare” plans, so probably would not fall within ERISA’s scope.  This should help encourage formation of these programs by employers, as ERISA compliance burdens can be complicated and costly. Employers may still need to meet certain requirements in order to ensure tax-qualified status, however, as in the case of the Student Loan Repayment Assistance Act, which imposes documentation, notice and reporting duties.

Employers that want to address their employees’ student loan debt through workplace financial assistance can take the following steps to help select the program or policy that best suits their needs:

  • Talk to your recruiters and use other methods to estimate the student loan burden faced by your staff and new hire candidates.
  • Carefully evaluate various student loan aid vendors and identify those with the best fit for your organization.
  • Invest time in plan design and scheduling a roll out.
  • Remember that communication and ease of use are both key success factors.
  • Continue to monitor legislation for new assistance options.

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IRS Announces New Benefit Limits for 2017

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On October 28, 2017 the IRS announced 2017 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.   Salary deferral limits to 401(k) and 403(b) plans remained unchanged for the second year in a row, but other dollar limit adjustments were made. Citations below are to the Internal Revenue Code.

Limits That Remain the Same for 2017 Are As Follows:

–The annual Salary Deferral Limit for 401(k), 403(b), and most 457 plans, currently $18,000, stays the same.

–The age 50 and up catch-up deferral limit, currently $6,000, also remains the same. For 2017 as in this year, the maximum salary deferral an individual age 50 or older may make is $24,000.

–The compensation threshold for determining a “highly compensated employee” remains unchanged at $120,000.

–Traditional and Roth IRA contributions and catch-up amounts remain unchanged at $5,500 and $1,000, respectively.

–The compensation threshold for SEP participation remained the same at $600.

–The SIMPLE 401(k) and IRA contribution limit remained the same at $12,500.

Limits That Changed for 2017 Are As Follows:

–The maximum total annual contribution to a 401(k) or other “defined contribution” plan under 415(c) increased from $53,000 ($59,000 for employees aged 50 and older) to $54,000 ($60,000 for employees aged 50 and olded).

–The maximum annual benefit under a defined benefit plan increased from $210,000 to $215,000.

–The maximum amount of compensation on which contributions may be based under 401(a)(17) increased from $265,000 to $270,000.

-The compensation dollar limit used to determine key employees in a top-heavy plan increased from $170,000 to $175,000.

In a separate announcement, the Social Security Taxable Wage Base for 2017 increased from $118,500 to $127,200.  

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A Conversation About the DOL Fiduciary Rule (Audio File)

The Department of Labor recently published a final regulation defining a “fiduciary” for purposes of investment advice rendered for a fee with regard to “retirement accounts.” The final regulation marks the first change in the regulatory definition of this type of fiduciary since the regulation originally was published in 1975. Retirement accounts under the new rule include those held under qualified plans (e.g., 401(k), pension plans), which have always been subject to ERISA, and now for the first time with regard to IRAs, which formerly were subject only to Internal Revenue Code rules governing self-dealing and other forms of prohibited transactions that the Internal Revenue Service enforced through audits.  The new rule – together with new and amended prohibited transaction exemptions related to the rule – becomes applicable on April 10, 2017, with full implementation required on and after January 1, 2018.

Recently I was interviewed about the new definition of an investment advice fiduciary for an episode of Money Talk that KZSB (1290 AM) will broadcast a 2:00 p.m. PDT on June 20, 2016.  The interview provides a broad overview of the rule and how it will likely impact IRA investors, employers, and the investment industry.  Joining me were program hosts Dianne Duva, Partner at Arlington Financial Advisors, and Neil Kriesel, who worked in finance for many years, has taught at SBCC as an adjunct faculty member and serves on the SBCC Foundation Board and various other non-profit organizations.  Click below to listen.

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Few Changes Are Made to 2016 Benefit Plan Limits

On October 21, 2015 the IRS announced 2016 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.   There are few changes to be noted, as the increase in the cost-of-living index stayed below many thresholds necessary to trigger adjustments. Citations below are to the Internal Revenue Code.

Limits That Remain the Same for 2016 Are As Follows:

–The annual Salary Deferral Limit for 401(k), 403(b), and most 457 plans, currently $18,000, stays the same.

–The age 50 and up catch-up limit, currently $6,000, also remains the same. For 2016 as in this year, the maximum plan deferral an individual age 50 or older may make is $24,000.

–Maximum total annual contributions to a 401(k) or other “defined contribution” plans under 415(c) remains at $53,000 ($59,000 for employees aged 50 and older).

–The maximum annual benefit under a defined benefit plan remained at $210,000.

–Maximum amount of compensation on which contributions may be based under 401(a)(17) remains at $265,000.

–The compensation threshold for determining a “highly compensated employee” remains unchanged at $120,000.

–The compensation dollar limit used to determine key employees in a top-heavy plan remains unchanged at $170,000.

–The compensation threshold for SEP participation remained the same at $600.

–The SIMPLE 401(k) and IRA contribution limit remained the same at $12,500.

–Traditional and Roth IRA contributions and catch-up amounts remain unchanged at $5,500 and $1,000, respectively.

–The Social Security Taxable Wage Base for 2016 remains at this year’s level, $118,500.

Limits That Changed for 2016 Are As Follows:

  • The deductibility of IRA contributions made by someone who is not covered by an employer’s retirement plan but is married to someone who is, phases out if their joint income is between $184,000 and $194,000, up from $183,000 and $193,000.
  • The deductibility of contributions to a Roth IRA phases out over the following adjusted gross income ranges:
    • $184,000 to $194,000 for married couples filing jointly, also up from $183,000 and $193,000;
    • $117,000 to $132,000 for singles and heads of households, up from $116,000 to $131,000.
  • The retirement savings contribution tax credit (saver’s credit) for low and moderate-income workers is limited to those whose adjusted gross income does not exceed:
    • $61,500 for married couples filing jointly, up from $61,000;
    • $46,125 for heads of households, up from $45,750; and
    • $30,750 for married filing separately and for singles, up from $30,500.

 

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IRS Announces Increased 2015 Retirement Plan Contribution Limits

On October 23, 2014 the IRS announced 2015 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.   A 1.7% rise in the September CPI-U over 2013 triggered $500 increases to the annual maximum salary deferral limit for 401(k) plans, and the catch-up limit for individuals age 50 or older. Citations below are to the Internal Revenue Code.

Limits That Increase for 2015 Are As Follows:

–The annual Salary Deferral Limit for 401(k), 403(b), and most 457 plans, currently $17,500, increases $500 to $18,000.

–The age 50 and up catch-up limit also increases $500, to $6,000 total. This means that the maximum plan deferral an individual age 50 or older in 2015 may make is $24,000.

–Maximum total annual contributions to a 401(k) or other “defined contribution” plans under 415(c) increased from $52,000 to $53,000 ($59,000 for employees aged 50 and older).

–Maximum amount of compensation on which contributions may be based under 401(a)(17) increased from $260,000 to $265,000.

–The compensation threshold for determining a “highly compensated employee” increased from $115,000 to $120,000.

–The compensation threshold for SEP participation increased from $550 to $600.

–The SIMPLE 401(k) and IRA contribution limit increased $500 to $12,500.

–The Social Security Taxable Wage Base for 2015 increased from $117,000 to $118,500.

Limits That Stayed The Same for 2015 Are As Follows:

–Traditional and Roth IRA contributions and catch-up amounts remain unchanged at $5,500 and $1,000, respectively.

–The compensation dollar limit used to determine key employees in a top-heavy plan remains unchanged at $170,000.

–The maximum annual benefit under a defined benefit plan remained at $210,000.

 

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