401k Requirements

June 17, 2024

3799 / What special rules governing retirement plan distributions were implemented for 2018 and 2019 disaster areas?

<div class="Section1"> The 2019 Tax Certainty and Disaster Relief Act extended the rules governing qualified disaster distributions from retirement accounts, discussed below for victims of disasters that occurred in 2018 through 60 days after enactment of the bill (December 20, 2019). The distribution itself must be made within 180 days after enactment of the law to qualify. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>. See also Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of how the CARES Act expanded the retirement plan distribution rules for 2020 in response to the COVID-19 pandemic. The 2017 tax reform legislation,<a href="#_ftn1" name="_ftnref1">1</a> the 2017 Disaster Tax Relief and Airport and Airway Extension Act,<a href="#_ftn2" name="_ftnref2">2</a> and the Bipartisan Budget Act of 2018,<a href="#_ftn3" name="_ftnref3">3</a> include special tax relief for taxpayers affected by certain presidentially declared disasters that occurred in 2016 and 2017. A 2016 qualified disaster is a major disaster that was declared in 2016 by the president. A 2016 qualified disaster distribution is any distribution received from an eligible retirement plan in 2016 or 2017 if the recipient’s main home was located in a 2016 qualified disaster area and the recipient sustained an economic loss from the disaster. A 2017 qualified disaster is limited to Hurricane Harvey and Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, and the California wildfires. To be a 2017 qualified disaster distribution, the following requirements must be met: 1. The distribution was made: a. After August 22, 2017, and before January 1, 2019, for Hurricane Harvey or Tropical Storm Harvey (both referred to as Hurricane Harvey); b. After September 3, 2017, and before January 1, 2019, for Hurricane Irma; c. After September 15, 2017, and before January 1, 2019, for Hurricane Maria; or d. After October 7, 2017, and before January 1, 2019, for California wildfires. 2. The recipient’s main home was located in a disaster area listed below on the date or any date in the period shown for that area. a. August 23, 2017, for the Hurricane Harvey disaster area. b. September 4, 2017, for the Hurricane Irma disaster area. c. September 16, 2017, for the Hurricane Maria disaster area. d. October 8, 2017 to December 31, 2017, for the California wildfire disaster area. 3. The recipient sustained an economic loss because of Hurricane Harvey, Hurricane Irma, Hurricane Maria, or the California wildfires None of the Acts define economic loss. Examples of economic loss include loss, damage, or destruction of real or personal property; loss related to displacement from a home; and loss of livelihood due to temporary or permanent layoff.<a href="#_ftn4" name="_ftnref4">4</a> There is no requirement that the amount of the qualified disaster distribution relate to the amount of the taxpayer’s economic loss from the disaster or be made on account of the disaster. The Acts provide special rules for distributions from retirement accounts (qualified plans, 403(a)s, 403(b)s, governmental 457(b)s, and traditional, SEP, SIMPLE, and Roth IRAs). Distributions from retirement accounts made because of a qualified disaster are exempt from the 10 percent early distribution penalty (or 25 percent early distribution penalty for certain SIMPLE IRA distributions) if the penalty would otherwise be imposed under IRC Section 72(t). Qualified disaster distributions are treated as meeting the applicable plan’s distribution requirements. The amount that may be treated as a qualified disaster area distribution is limited to $100,000 (the amount for any given year must be reduced by the amounts treated as 2016 disaster area distributions in prior years). If a taxpayer is affected by multiple qualifying disasters, the $100,000 limit is applied separately to each disaster distribution. Taxpayers may recognize income attributable to a qualified disaster distribution over a three-year period beginning with the year the qualified disaster distribution was made (unless an election to the contrary is made). In addition, taxpayers are also permitted a three-year period from the day after the distribution is received to make a repayment of qualified disaster distributions that is eligible for tax-free rollover treatment to an eligible retirement plan or made on account of a hardship. These repayments may be made at once or via a series of payments and will essentially be treated as though they were rollovers made within the 60-day window. A repayment to an IRA is not considered a rollover for purposes of the one-rollover-per year limitation for IRAs. The following types of distributions cannot be repaid: <ul> <li>Qualified disaster distributions received as a beneficiary other than as a surviving spouse</li> <li>Required minimum distributions</li> <li>Periodic payments other than from an IRA that are for 10 years or more, the recipient’s life or life expectancy or the joint lives or life expectancies of the recipient and their beneficiary.</li> </ul> Plans that make such a distribution also are protected against potential disqualification. Plans that permit qualified 2016 disaster distributions must be amended by the last day of the plan year beginning on or after January 1, 2018. Plans that permit qualified 2017 disaster distributions must be amended by the last day of the plan year beginning on or after January 1, 2019. Taxpayers who received certain distributions from retirement plans to buy or construct a principal residence but did not buy or construct the residence because of Hurricane or Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, or the California wildfires had the opportunity to recontribute the distributions to an eligible retirement plan. The distributions had to be repaid before March 1, 2018 for repayments as a result of a hurricane or July 1, 2018 for repayments due to the California wildfires. A distribution that was not repaid before the applicable date may be taxable for 2017 and subject to the 10 percent additional tax on early distributions (or the 25 percent additional tax on certain SIMPLE IRA distributions). Individuals affected by a qualified disaster (as extended by the 2019 law) qualify for relaxed rules on loans from qualified plans. The plan administrator may increase the regular $50,000 limit on plan loans to $100,000 and the 50 percent of vested benefit limit to 100 percent. For individuals affected by a hurricane, the loan must have been made between September 29, 2017 and December 31, 2018. For someone affected by the California wildfires, the loan must have been made during the period beginning February 9, 2018 and ending on December 31, 2018. In addition, loan payments due during a specified period ending on December 31, 2018 may be suspended for one year by the plan administrator. The period begins on: <ul> <li>August 23, 2017 if the recipient’s home was located in the Hurricane Harvey disaster area</li> <li>September 4, 2017 if the recipient’s home was located in the Hurricane Irma disaster area</li> <li>September 16, 2017 if the recipient’s home was located in the Hurricane Maria disaster area; or</li> <li>October 8, 2017 if the recipient’s home was located in the California wildfire disaster area.</li> </ul> Casualty losses associated with a qualified 2016 or 2017 disaster are deductible regardless of whether total losses exceed 10 percent of the taxpayer’s adjusted gross income (AGI), so long as the loss exceeds $500 per casualty. Taxpayers who do not itemize their deductions may increase their standard deduction by the net qualified disaster loss. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  Section 11028, 2017 Tax Act, P.L. 115-97. <a href="#_ftnref2" name="_ftn2">2</a>.  Title V, Disaster Tax Relief and Airport and Airway Extension Act of 2017, P.L. 115-63. <a href="#_ftnref3" name="_ftn3">3</a>.  Subdivision 2, Title I, Bipartisan Budget Act of 2018, P.L. 115-123. <a href="#_ftnref4" name="_ftn4">4</a>.  2017 IRS Publication 976, Disaster Relief. </div></div>

March 13, 2024

3798 / What requirements apply to hardship withdrawals from a 401(k) plan?

Editor's Note: The SECURE Act 2.0 created new rules allowing plan participants to take emergency distributions to cover immediate financial hardships without penalty. These emergency distributions will be limited to $1,000 each year. Also, taxpayers who take emergency distributions must repay the distribution within a three-year period or will be prohibited from taking another $1,000 distribution during the following three-year period. Non-highly compensated employees may be entitled to contribute the lesser of (1) 3% of compensation or (2) $2,500 to pension-linked emergency savings accounts (PLESAs) using after-tax dollars if their employer elects to establish a PLESA. See Q3798.1 for details. The 2017 tax reform legislation created new rules governing hardship distributions made because of qualified 2016 disasters. The CARES Act further expanded hardship distribution eligibility in response to the COVID-19 pandemic in 2020. See Q3799-Q3801 for details. Hardship withdrawals may be made from a 401(k) plan only if the distribution is made on account of an immediate and heavy financial need and the distribution is necessary to satisfy the financial need.<a href="#_ftn1">2</a> The distribution may not exceed the employee's maximum distributable amount. Hardship withdrawals generally may not be rolled over ( Q <a href="javascript:void(0)">3998</a>).<a href="#_ftn2">3</a> Not all plans provide for hardship withdrawals, and plan sponsors must first look to the plan documents before determining whether a hardship distribution can be made. The final regulations cited here took effect for plan years beginning on or after January 1, 2006.<a href="#_ftn3">4</a>The Pension Protection Act of 2006 called for regulations modifying the hardship requirements to state that if an event constitutes a hardship with respect to a participant's spouse or dependent, it constitutes a hardship with respect to the participant, to the extent permitted under the plan.<a href="#_ftn4">5</a>An employee's maximum distributable amount generally is equal to the employee's total elective contributions as of the date of distribution reduced by the amount of previous distributions on account of hardship.<a href="#_ftn5">6</a> Early in 2018, Congress passed the Bipartisan Budget Act of 2018 (BBA 2018), which modified this rule to expand the amounts that may be withdrawn as hardship distributions. Beginning in tax years that begin after December 31, 2018, the following amounts may also be distributed as hardship distributions (1) amounts contributed by the employer to a profit sharing or stock bonus plan, (2) qualified nonelective contributions (QNECs), (3) qualified matching contributions (QMACs) and (3) earnings on any of these types of contribution.<a href="#_ftn6">7</a>Planning Point: The changes enacted by BBA 2018 are not all mandatory, meaning that plan sponsors have the option of modifying their plans to implement the new rules.Plan sponsors operating safe harbor 401(k)s may wish to proceed with caution in implementing the changes, as Treasury has yet to issue guidance on whether the regulatory safe harbor will be satisfied if the plan retains (1) the six-month waiting period for contributions following a hardship distribution or (2) the requirement that the participant first take a plan loan before a hardship distribution is available.Plans must also consider the "leakage" problem in allowing participants to withdraw QNECs or QMACs, or in permitting hardship distributions before plan loans (which must be repaid). The determinations of whether the participant has "an immediate and heavy financial need" and whether other resources are "reasonably available" to meet the need are to be made on the basis of all relevant facts and circumstances. Beginning for hardship distributions taken on or after January 1, 2020, the employee must provide a written representation stating that the employee does not have cash or other liquid assets reasonably available to satisfy the need (under BBA 2018). An example of "an immediate and heavy financial need" is the need to pay funeral expenses of a family member. A financial need will not fail to qualify as an immediate and heavy financial need merely because it was foreseeable or voluntarily incurred by the employee.<a href="#_ftn7">8</a>Under the SECURE Act 2.0, beginning in 2023, employers are permitted to rely on written self-certification from employees stating that (1) the hardship exists, (2) the amount requested does not exceed the amount needed to cover permitted expenses and (3) the employee does not have a reasonably available alternative source of funding.A distribution will be deemed to be made on account of "an immediate and heavy financial need" if it is made on account of any of the following: <ol id="rte-f7408700-68d5-11f1-8c81-8f68f6edb9b1" start="1"><li>"medical expenses" incurred by the employee, spouse, or dependents that would be deductible as itemized deductions under section 213(d) without regard to the 7.5 percent (10 percent in prior years<a href="#_ftn8">9</a>) of AGI floor;</li><li>the purchase (excluding mortgage payments) of the employee's principal residence;</li><li>payment of tuition, related educational fees, and room and board expenses for the next 12 months of post-secondary education for the employee, spouse, children, or dependents (note that the educational expenses must be for education incurred in the following 12 months, the IRS has ruled that a participant cannot take a hardship distribution to repay student loans incurred for past education);</li><li>payments necessary to prevent eviction of the employee from his or her principal residence or foreclosure on the mortgage on his or her principal residence;</li><li>funeral or burial expenses for the employee's parent, spouse, children, or other dependents (as defined prior to 2005); and</li><li>expenses for the repair or damage to the employee's principal residence that would qualify for the casualty deduction under IRC Section 165 (without regard to the 10 percent floor).<a href="#_ftn9">10</a></li></ol>This list may be expanded by the IRS but only by publication of documents of general applicability.<a href="#_ftn10">11</a> Apparently, to be the taxpayer's "principal residence" for this purpose, the home must be the residence of the employee, not merely that of his or her family.<a href="#_ftn11">12</a>Planning Point: While the rules governing plan hardship distributions were not directly changed by the 2017 tax reform legislation, many plans that follow safe harbor standards and allow participants to withdraw funds to cover losses that are deductible as casualty losses may need to reevaluate their plan provisions.This is because, for 2018025, individuals may only treat losses sustained in a federal disaster area as deductible casualty losses under IRC Section 165.Unless subsequent guidance is released to change the safe harbor rules governing hardship distributions, plans may need to change the terms of their plan to comply with the new Section 165 rules. A distribution is not necessary to satisfy such an immediate and heavy financial need (and will not qualify as a hardship withdrawal) to the extent the amount of the distribution exceeds the amount required to relieve the financial need. The amount of an immediate and heavy financial need may include any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution.<a href="#_ftn12">13</a>The distribution also will not be treated as necessary to satisfy an immediate and heavy financial need to the extent the need can be satisfied from other resources that are reasonably available. However, the BBA 2018 eliminated the requirement that a plan participant first take any available plan loan before the distribution could qualify as a hardship distribution.<a href="#_ftn13">14</a>A distribution may be treated as necessary if the employer reasonably relies on the employee's representation that the need cannot be relieved: <ol id="rte-f7408701-68d5-11f1-8c81-8f68f6edb9b1" start="1"><li>through reimbursement or compensation by insurance or otherwise,</li><li>by reasonable liquidation of the employee's assets,</li><li>by cessation of elective contributions or employee contributions,</li><li>by other distributions or nontaxable loans from any plans (the requirement that a participant first take any available plan loan was eliminated by the BBA 2018, but the requirement that the employee consider any ESOP dividend distributions was retained), or</li><li>by loans from commercial sources.</li></ol>Notwithstanding these provisions, an employee need not "take counterproductive actions" (such as a plan loan that might disqualify the employee from obtaining other financing) if the effect would be to increase the amount of the need.<a href="#_ftn14">15</a>The final regulations governing hardship distributions also provide that with respect to employee representations of financial hardship, the employee can reasonably represent that he or she has no cash or liquid assets reasonably available to satisfy the relevant financial need if the only cash or liquid assets available to that employee are necessary to pay some other expense (such as rent) in the near future.<a href="#_ftn15">16</a> Employees can also make representations of financial need over the phone if the employer records the call.<a href="#_ftn16">17</a> Plan documents were required to be amended by December 31, 2021 to provide for the new written representation provision, although the rule is effective beginning in 2020.<a href="#_ftn17">18</a>Plan sponsors are also entitled to impose a minimum distribution amount for hardship distributions so long as the requirement is not found to be discriminatory.<a href="#_ftn18">19</a>Regulations state that a distribution will be deemed to be "necessary" to meet a financial need (deemed or otherwise) if the employee has obtained all other distributions and nontaxable loans (prior to 2019) currently available under all of the employer's plans and, prior to 2019, the employee is prohibited from making elective contributions and employee contributions to the plan and all other plans of the employer for a period of at least six months after receipt of the hardship distribution.<a href="#_ftn19">20</a>The regulations have been modified to eliminate the prohibition on contributions during the six month period following receipt of a hardship distribution, although the final regulations have clarified that the new rule applies only to contributions to qualified plans. Plan documents must be amended by December 31, 2021 to account for this new rule, which became effective beginning in 2020.<a href="#_ftn20">21</a> Nonqualified plans, including those subject to IRC Section 409A, may continue to suspend deferrals for six months following the hardship distribution.<a href="#_ftn21">22</a>The IRS has released internal guidance that it will use when examining a 401(k) plan to evaluate whether hardship distributions have been properly substantiated. The new guidance clarifies that, as part of the verification process for determining whether the participant has an immediate and heavy financial need, the employer or plan sponsor must review either the source documents supporting that need (such as contracts or foreclosure notices), or a summary of those documents. If only a summary is provided, an IRS agent reviewing the case will look to whether a notice was provided to the withdrawing participant before he or she is entitled to the hardship withdrawal. The notice must contain a statement that provides the following information: <ol id="rte-f740ae10-68d5-11f1-8c81-8f68f6edb9b1" start="1"><li>the distribution is taxable,</li><li>additional taxes could apply,</li><li>the amount of the distribution cannot exceed the participant's "immediate and heavy financial need,</li><li>the distribution cannot be made from earnings on elective contributions or qualified nonelective contributions or matching contributions (QNECs and QMACs) (the prohibition on making the distribution from QNECs, QMACs, and earnings was eliminated for tax years beginning after December 31, 2018)<a href="#_ftn22">23</a>, and</li><li>all source documents must be retained and provided to the employer or administrator upon request at any time.</li></ol>The guidance also provides that specific information should be obtained by the plan administrator to substantiate a summary. If the summary is incomplete or inconsistent on its face, the IRS examining agent may ask for source documents.<a href="#_ftn23">24</a><hr align="left" size="1" width="33%"></hr> <a href="#_ftnref1">1</a>. Notice 20242. <a href="#_ftnref1">2</a>. Treas. Reg. § 1.401(k)-1(d)(3)(i). <a href="#_ftnref2">3</a>. IRC § 402(c)(4). See also IRC § 401(k)(2)(B). 4. See Treas. Reg. § 1.401(k)-1(g). <a href="#_ftnref4">5</a>. See Pub. L. 10980, § 826. <a href="#_ftnref5">6</a>. Treas. Reg. § 1.401(k)-1(d)(3)(ii). <a href="#_ftnref6">7</a>. IRC § 401(k)(14)(A). <a href="#_ftnref7">8</a>. Treas. Reg. § 1.401(k)-1(d)(3)(iii)(A). <a href="#_ftnref8">9</a>. The year-end spending package that became law late in 2019 extended the 7.5 percent threshold through 2020 and the SECURE Act made it final. 10. Treas. Reg. § 1.401(k)-1(d)(3)(iii)(B). <a href="#_ftnref10">11</a>. Treas. Reg. § 1.401(k)-1(d)(3)(v). <a href="#_ftnref11">12</a>. See ABA Joint Committee on Employee Benefits, Meeting with IRS and Department of Treasury Officials, May 7, 2004 (Q&A-18). <a href="#_ftnref12">13</a>. Treas. Reg. § 1.401(k)-1(d)(3)(iv)(A). <a href="#_ftnref13">14</a>. IRC § 401(k)(14)(B). <a href="#_ftnref14">15</a>. Treas. Reg. § 1.401(k)-1(d)(3)(iv)(C), (D). <a href="#_ftnref15">16</a>. See Preamble to the Final Regulations, 84 FR 49651. <a href="#_ftnref16">17</a>. See Preamble to the Final Regulations, 84 FR 49651. <a href="#_ftnref17">18</a>. Rev. Proc. 2020-9. <a href="#_ftnref18">19</a>. See Preamble to the Final Regulations, 84 FR 49651. See also Treas. Reg. § 1.401(k)-1(d)(3)(iv). <a href="#_ftnref19">20</a>. Treas. Reg. § 1.401(k)-1(d)(3)(iv)(E). <a href="#_ftnref20">21</a>. Rev. Proc. 2020-9. <a href="#_ftnref21">22</a>. P.L. 115-123 (Bipartisan Budget Act), Section 41113. <a href="#_ftnref22">23</a>. P.L. 115-123 (Bipartisan Budget Act), Section 41114. <a href="#_ftnref23">24</a>. The substantiation guidelines are available at <a href="https://www.irs.gov/pub/foia/ig/spder/tege-04-0217-0008.pdf">https://www.irs.gov/pub/foia/ig/spder/tege-04-0217-0008.pdf</a> (last accessed April 27, 2022).

March 13, 2024

3793 / What is an eligible investment advice arrangement?

<div class="Section1"> ERISA contains a general prohibition against providing services to a plan for a fee. It is a prohibited transaction unless exempted either in the law or by regulations. There is a statutory exemption for investment advice rendered by a fiduciary advisor under an “eligible investment advice arrangement.” These requirements are designed to allow the plan fiduciary to meet the obligations under ERISA in the hiring of an investment advisor.<a href="#_ftn1" name="_ftnref1">1</a> The provisions discussed here generally are effective with respect to advice provided after December 31, 2006. On October 25, 2011, the Employee Benefits Security Administration of the U.S. Department of Labor issued final regulations implementing a statutory exemption from ERISA’s prohibited transaction rules that allows fiduciary advisors to offer plan participants and beneficiaries investment advice for a fee under eligible investment advice arrangements.<a href="#_ftn2" name="_ftnref2">2</a> The exemption, discussed below, was mandated by the Pension Protection Act of 2006 and is available for transactions occurring on or after December 27, 2011 that provide sufficient safeguards to ensure there is no conflict of interest. The final rules do not affect the applicability of the DOL’s prior guidance on the application of the prohibited transaction rules and existing prohibited transaction exemptions to investment advice arrangements. The Final Regulations The statutory exemption allows fiduciary investment advisors to receive compensation from investment vehicles that they recommend if either (1) the investment advice is based on a computer model certified as unbiased which applies generally accepted investment theories, or (2) the advisor is compensated on a “level-fee” basis (i.e., fees do not vary based on investments selected by the participant). The final regulations provide detailed guidance to advisors on compliance with these conditions. The regulations also show advisors how to comply with other conditions and safeguards in the statutory exemption, including: <ul> <li>requiring that a plan fiduciary (independent of the investment advisor or its affiliates) authorize the advice arrangement;</li> <li>imposing recordkeeping requirements for investment advisors relying on the exemption;</li> <li>requiring that computer models be certified in advance as unbiased and meeting the exemption’s requirements by an independent expert;</li> <li>establishing qualifications and a selection process for the investment expert who must perform the above certification;</li> <li>clarifying that the level-fee requirement does not permit investment advisors (including their employees) to receive compensation from any party (including affiliates) that varies on the basis of the investments that participants select;</li> <li>establishing an annual audit of both computer model and level-fee advice arrangements, including the requirement that the auditor be independent from the investment advice provider;</li> <li>requiring disclosures by advisors to plan participants.<a href="#_ftn3" name="_ftnref3">3</a></li> </ul> Fee Disclosures In February 2012, the DOL issued final regulations on fee disclosure<a href="#_ftn4" name="_ftnref4">4</a> and provided a Sample Guide to Initial Disclosures.<a href="#_ftn5" name="_ftnref5">5</a> In its final rule, the DOL extended the deadline for disclosures to July 1, 2012. In May 2012, the DOL issued a Field Assistance Bulletin providing guidance on frequently asked questions about participant-level disclosure requirements.<a href="#_ftn6" name="_ftnref6">6</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3794">3794</a> for information about establishing an eligible investment advice arrangement and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3795">3795</a> for a detailed discussion of who is a fiduciary advisor for purposes of an eligible investment advice arrangement. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC §§ 4975(d)(17), 4975(f)(8). <a href="#_ftnref2" name="_ftn2">2</a>.  DOL Reg. § 2550.408g-1. <a href="#_ftnref3" name="_ftn3">3</a>.  DOL Reg. § 2550.408g-1. <a href="#_ftnref4" name="_ftn4">4</a>.  DOL Reg. § 2550.408b-2. <a href="#_ftnref5" name="_ftn5">5</a>.  Available at https://www.dol.gov/sites/dolgov/files/EBSA/employers-and-advisers/plan-administration-and-compliance/retirement/sample-guide-for-service-provider-disclosures-under-408b2.pdf <a href="#_ftnref6" name="_ftn6">6</a>.  Field Assistance Bulletin 2012-2 (May 7, 2012). </div></div>

March 13, 2024

3795 / Who is a fiduciary advisor for purposes of an eligible investment advice arrangement?

<div class="Section1"> A "fiduciary advisor" for purposes of this provision is a person who provides investment advice to the participant or beneficiary and is one of the following: (1) a Registered Investment Advisor ("RIA") under the Investment Advisers Act of 1940 or state law in which the fiduciary maintains its principal office and place of business; (2) a bank or similar financial institution, but only if the advice is provided through a trust department that is subject to periodic examination and review by federal or state banking authorities; (3) an insurance company qualified to do business under the laws of a state; 4) a person registered as a broker or dealer under the Securities Exchange Act of 1934; (5) an affiliate of any of the persons described in (1) through (4); or (6) an employee, agent, or registered representative of a person described in (1) through (5) who satisfies the requirements of applicable insurance, banking, and securities laws relating to the provision of the advice.<a href="#_ftn1" name="_ftnref1">1</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 4975(f)(8)(J)(i); DOL Reg. § 2550.408g-1(c)(2)(i). </div>

March 13, 2024

3797 / What restrictions apply to distributions from 401(k) plans?

<div class="Section1"> Amounts held by the trust that are attributable to employer contributions made pursuant to the election to defer may not be distributed to participants or beneficiaries prior to: (1)  the employee’s death, disability, or severance from employment; (2)  certain plan terminations, without the establishment or maintenance of another defined contribution plan; (3)  in the case of a profit sharing or stock bonus plan, the employee’s reaching age 59½; (4)   experiencing financial hardship ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3798">3798</a>) (for years beginning before January 1, 2019, limited to distributions from a profit sharing or stock bonus plan and not permitted from other plans); (5)  in the case of a qualified reservist distribution, the date of the reservist’s order or call;<a href="#_ftn1" name="_ftnref1">1</a> or (6)  Under the SECURE Act, withdrawals of up to $5,000 for up to one year following the birth or legal adoption of a child. Adopted children generally include children under age 18, but can also include someone who has reached age 18 but is physically or mentally disabled and incapable of self-support.<a href="#_ftn2" name="_ftnref2">2</a> These occurrences are referred to as “distributable events.” Amounts may not be distributable merely by reason of completion of a stated period of participation or the lapse of a fixed number of years.<a href="#_ftn3" name="_ftnref3">3</a> The cost of life insurance protection as per Table 2001 or the insurer’s qualifying lower published term rates ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3948">3948</a>) provided under the plan is not treated as a distribution for purposes of these rules. Neither is the making of a loan that is treated as a deemed distribution even if the loan is secured by the employee’s elective contributions or is includable in the employee’s income under IRC Section 72(p). The reduction of an employee’s accrued benefit derived from elective contributions (i.e., an offset distribution) by reason of a default on a loan is treated as a distribution ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3953">3953</a>).<a href="#_ftn4" name="_ftnref4">4</a> The IRS has privately ruled that a transfer of 401(k) elective deferrals or rollovers to purchase service credits would not constitute an impermissible distribution from the plan and are not a violation of the separate accounting requirement.<a href="#_ftn5" name="_ftnref5">5</a> Restrictions on distributions of elective contributions generally continue to apply even if the amounts are transferred to another qualified plan of any employer.<a href="#_ftn6" name="_ftnref6">6</a> Amounts transferred to a 401(k) plan by a direct rollover from another plan do not have to be subject to these restrictions.<a href="#_ftn7" name="_ftnref7">7</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3780">3780</a> for discussion of in-plan Roth distributions. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3787">3787</a> for a discussion of penalty-free rollovers from 401(k) plan accounts into Roth 401(k) accounts. Final regulations state that rollover amounts may be excepted from the timing restrictions on distributions applicable to a receiving plan, provided there is a separate accounting for such amounts.<a href="#_ftn8" name="_ftnref8">8</a> If an eligible retirement plan separately accounts for amounts attributable to rollover contributions to the plan, distributions of those amounts are not subject to the restrictions on permissible timing that apply, under the applicable requirements of the Internal Revenue Code, to distributions of other amounts from the plan. Accordingly, the plan may permit the distribution of amounts attributable to rollover contributions at any time pursuant to an individual’s request. Thus, for example, if the receiving plan is a money purchase pension plan and the plan separately accounts for amounts attributable to rollover contributions, a plan provision permitting the in-service distribution of those amounts will not disqualify the plan.<a href="#_ftn9" name="_ftnref9">9</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 72(t)(2)(G)(iii). See IRC § 401(k)(2)(B)(1); Treas. Reg. § 1.401(k)-1(d)(1). <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 72(t)(2)(H)(iii)(II). <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 401(k)(2)(B). <a href="#_ftnref4" name="_ftn4">4</a>.  Treas. Reg. § 1.401(k)-1(d)(5)(ii). <a href="#_ftnref5" name="_ftn5">5</a>.  Let. Ruls. 200335035, 199914055. <a href="#_ftnref6" name="_ftn6">6</a>.  Treas. Reg. § 1.401(k)-1(d)(2). <a href="#_ftnref7" name="_ftn7">7</a>.  Treas. Reg. § 1.401(k)-1(d)(5)(iv). <a href="#_ftnref8" name="_ftn8">8</a>.  Treas. Reg. § 1.401(k)-1(d)(5)(iv); see Rev. Rul. 2004-12, 2004-7 IRB 478. <a href="#_ftnref9" name="_ftn9">9</a>.  Rev. Rul. 2004-12, 2004-7 IRB. </div></div>

March 13, 2024

3792 / Can a plan restrict the types of 401(k) contributions that can be converted to a Roth 401(k)?

Yes. A plan that adopts an amendment permitting in-plan rollovers from traditional 401(k) accounts to Roth 401(k) accounts can, subject to otherwise applicable nondiscrimination requirements, restrict the types of contributions that can be rolled over. Further, the plan amendment can limit the frequency of these rollovers.<a href="#_ftn1">1</a>For example, otherwise nondistributable amounts may be permissibly rolled over, it is up to the plan itself to determine whether it will allow these rollovers. For administrative convenience, a plan may provide that it will only permit rollovers of otherwise distributable amounts or that nondistributable amounts can only be rolled over at certain intervals. Post SECURE Act 2.0, employees are entitled to elect to have their employer matching contributions made to a Roth account instead of electing a traditional pre-tax contribution. For reporting purposes, the IRS treats Roth employer matches as though they were in-plan rollovers (meaning that the IRS treats the contribution as though the employee elected to convert traditional funds to a Roth account). The same is true for SEP IRAs and SIMPLE IRAs—the IRS continues to treat the transaction as though the funds were contributed to the IRA and immediately converted to the Roth in a taxable transaction. The 1099-R will be issued with respect to the year the employer matching contribution is actually deposited into the account. Because employers have until their tax filing deadline to deposit the funds, that means the 1099-R may be issued for the year after the year to which the contribution relates.<hr align="left" size="1" width="33%"></hr> <a href="#_ftnref1">1</a>. Notice 2013-74, Q&A-6, 2013-52 IRB 819.

March 13, 2024

3797 / What restrictions apply to distributions from 401(k) plans?

<div class="Section1"> Amounts held by the trust that are attributable to employer contributions made pursuant to the election to defer may not be distributed to participants or beneficiaries prior to: (1) the employee’s death, disability, or severance from employment; (2) certain plan terminations, without the establishment or maintenance of another defined contribution plan; (3) in the case of a profit sharing or stock bonus plan, the employee’s reaching age 59½; (4) experiencing financial hardship ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3798">3798</a>) (for years beginning before January 1, 2019, limited to distributions from a profit sharing or stock bonus plan and not permitted from other plans); (5) in the case of a qualified reservist distribution, the date of the reservist’s order or call;<a href="#_ftn1" name="_ftnref1">1</a> or (6) Under the SECURE Act, withdrawals of up to $5,000 for up to one year following the birth or legal adoption of a child. Adopted children generally include children under age 18, but can also include someone who has reached age 18 but is physically or mentally disabled and incapable of self-support.<a href="#_ftn2" name="_ftnref2">2</a> These occurrences are referred to as “distributable events.” Amounts may not be distributable merely by reason of completion of a stated period of participation or the lapse of a fixed number of years.<a href="#_ftn3" name="_ftnref3">3</a> Planning Point: Under SECURE 2.0, plans can elect to include an automatic cash-out provision to distribute small retirement plan balances when the employee separates from service. Qualified plans are not required to contain cash-out provisions that provide for immediate distribution of a participant's benefits without the participant's consent upon termination of participation if the value of the benefit is less than the statutory limit (under SECURE 2.0, $7,000 starting in 2024). Plans do have the option of adding a cash-out threshold if the threshold is not more than $7,000. If the threshold established is less than $1,000, the plan can merely cut a check for the participant's balance. If the threshold is $1,000 or higher, the plan must automatically roll the amounts over into an IRA in the former employee's name (unless the former employee makes an election to receive the amount directly or have the amounts rolled over into another eligible retirement plan). ____________________________________________________________ The cost of life insurance protection as per Table 2001 or the insurer’s qualifying lower published term rates ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3948">3948</a>) provided under the plan is not treated as a distribution for purposes of these rules. Neither is the making of a loan that is treated as a deemed distribution even if the loan is secured by the employee’s elective contributions or is includable in the employee’s income under IRC Section 72(p). The reduction of an employee’s accrued benefit derived from elective contributions (i.e., an offset distribution) by reason of a default on a loan is treated as a distribution ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3953">3953</a>).<a href="#_ftn4" name="_ftnref4">4</a> The IRS has privately ruled that a transfer of 401(k) elective deferrals or rollovers to purchase service credits would not constitute an impermissible distribution from the plan and are not a violation of the separate accounting requirement.<a href="#_ftn5" name="_ftnref5">5</a> Restrictions on distributions of elective contributions generally continue to apply even if the amounts are transferred to another qualified plan of any employer.<a href="#_ftn6" name="_ftnref6">6</a> Amounts transferred to a 401(k) plan by a direct rollover from another plan do not have to be subject to these restrictions.<a href="#_ftn7" name="_ftnref7">7</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3780">3780</a> for discussion of in-plan Roth distributions. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3787">3787</a> for a discussion of penalty-free rollovers from 401(k) plan accounts into Roth 401(k) accounts. Final regulations state that rollover amounts may be excepted from the timing restrictions on distributions applicable to a receiving plan, provided there is a separate accounting for such amounts.<a href="#_ftn8" name="_ftnref8">8</a> If an eligible retirement plan separately accounts for amounts attributable to rollover contributions to the plan, distributions of those amounts are not subject to the restrictions on permissible timing that apply, under the applicable requirements of the Internal Revenue Code, to distributions of other amounts from the plan. Accordingly, the plan may permit the distribution of amounts attributable to rollover contributions at any time pursuant to an individual’s request. Thus, for example, if the receiving plan is a money purchase pension plan and the plan separately accounts for amounts attributable to rollover contributions, a plan provision permitting the in-service distribution of those amounts will not disqualify the plan.<a href="#_ftn9" name="_ftnref9">9</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>. See IRC § 72(t)(2)(G)(iii); Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3677">3677</a>.See IRC § 401(k)(2)(B)(1); Treas. Reg. § 1.401(k)-1(d)(1). <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 72(t)(2)(H)(iii)(II). <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 401(k)(2)(B). <a href="#_ftnref4" name="_ftn4">4</a>. Treas. Reg. § 1.401(k)-1(d)(5)(ii). <a href="#_ftnref5" name="_ftn5">5</a>. Let. Ruls. 200335035, 199914055. <a href="#_ftnref6" name="_ftn6">6</a>. Treas. Reg. § 1.401(k)-1(d)(2). <a href="#_ftnref7" name="_ftn7">7</a>. Treas. Reg. § 1.401(k)-1(d)(5)(iv). <a href="#_ftnref8" name="_ftn8">8</a>. Treas. Reg. § 1.401(k)-1(d)(5)(iv); see also Rev. Rul. 2004-12, 2004-7 IRB 478. <a href="#_ftnref9" name="_ftn9">9</a>. Rev. Rul. 2004-12, 2004-7 IRB. </div></div>

March 13, 2024

3794 / How is an eligible investment advice arrangement established?

<div class="Section1"> An eligible investment advice arrangement may be established in either of two ways: (1) the arrangement may provide that any fees (including commissions or other compensation) received by the fiduciary for investment advice, or with respect to the sale, holding, or acquisition of any security or other property for purposes of investment of plan assets, do not vary depending on the basis of any investment option selected, or (2) the arrangement may use a computer model that meets specified criteria, described below, in connection with the provision of investment advice by a fiduciary advisor to a participant or beneficiary.<a href="#_ftn1" name="_ftnref1">1</a> The use of either method requires the plan fiduciary to comply with the statutory requirements of this exemption. Those requirements include: (1) that the advisor must act as an independent fiduciary; (2) proper authorization to provide the services; (3) compliance with an audit requirement; (4) disclosure of all relevant information including meeting certain standards for presentation of information; (5) the maintenance of proper records; and (6) that the fees charged the plan are reasonable.<a href="#_ftn2" name="_ftnref2">2</a> The fee leveling requirement is met if the fees, commissions, or any revenue sharing by the advisor do not vary based upon the recommendations provided. This applies to the affiliate of the advisor.<a href="#_ftn3" name="_ftnref3">3</a> Computer Model The computer model must: (1) apply generally accepted investment theories that take into account the historic returns of different asset classes over defined periods of time; (2) use relevant information about the participant, such as age, life expectancy, retirement age, risk tolerance, other assets or sources of income, and preferences as to certain types of investments; (3) use prescribed objective criteria to provide asset allocation portfolios comprised of investment options offered under the plan; (4) operate in a manner that is not biased toward investments offered by the fiduciary advisor, or a person in material affiliation or contractual relationship with the fiduciary advisor; and (5) take into account all investment options under the plan in specifying how a participant's account should be invested and not be inappropriately weighted with respect to any investment option.<a href="#_ftn4" name="_ftnref4">4</a> The person who develops or markets the computer model or investment advice program may be treated as a fiduciary advisor under certain circumstances.<a href="#_ftn5" name="_ftnref5">5</a> The utilization of the computer model must be certified by an "eligible investment expert" as meeting the foregoing criteria, and the only advice provided under the arrangement can be that generated by the computer model and any transaction requested by the participant.<a href="#_ftn6" name="_ftnref6">6</a> The arrangement also must be audited annually and must meet detailed written disclosure requirements. Records of compliance must be maintained for six years.<a href="#_ftn7" name="_ftnref7">7</a> An eligible investment advice arrangement must be expressly authorized by a plan fiduciary other than the person offering the investment advice. Notifications required for participants and beneficiaries must be written in a clear and conspicuous manner, calculated to be understood by the average plan participant.<a href="#_ftn8" name="_ftnref8">8</a> The DOL is directed to issue a model form for this purpose.<a href="#_ftn9" name="_ftnref9">9</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 4975(f)(8)(B). <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 4975(f)(8)(D) through (I). <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 4975(f)(8)(B)(i)(I). <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 4975(f)(8)(C)(ii); DOL Reg. § 2550.408g-1(b)(4). <a href="#_ftnref5" name="_ftn5">5</a>. IRC § 4975(f)(8)(J)(i). <a href="#_ftnref6" name="_ftn6">6</a>. IRC § 4975(f)(8)(C)(iii), 4975(f)(8)(C)(iv). <a href="#_ftnref7" name="_ftn7">7</a>. IRC § 4975(f)(8)(I). <a href="#_ftnref8" name="_ftn8">8</a>. IRC § 4975(f)(8)(H)(i). <a href="#_ftnref9" name="_ftn9">9</a>. IRC § 4975(f)(8)(H)(ii) </div>

March 13, 2024

3796 / What is a combination defined benefit/401(k) plan?

<div class="Section1"> For plan years beginning after December 31, 2009, an “eligible combined plan” (i.e., a combination defined benefit/401(k) plan) is available to employers with two to 500 employees.<a href="#_ftn1" name="_ftnref1">1</a> The assets of the plan will be held in a single trust, and the defined benefit and 401(k) components generally will be subject to their already-existing qualification requirements. The plan will be required to file only one Form 5500<a href="#_ftn2" name="_ftnref2">2</a> and will have a single plan document.<a href="#_ftn3" name="_ftnref3">3</a> The top heavy rules ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3916">3916</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3922">3922</a>) will be deemed satisfied for a combined defined benefit/401(k) plan, and the 401(k) portion will be exempt from ADP/ACP testing ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3753">3753</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3802">3802</a>).<a href="#_ftn4" name="_ftnref4">4</a> The plan’s design generally will be subject to the following requirements: (1)  The benefit requirement for the defined benefit portion will be satisfied if the annual accrued benefit of each participant is not less than 1 percent of final average pay times up to 20 years of service, or if the plan is a cash balance plan providing pay credits not less than the percentage of compensation determined under the following formula: <table style="height: 197px;" border="1" width="414" align="center"> <tbody> <tr> <td width="179"> Participant’s age as of beginning of year </td> <td width="201"> Cash balance pay credit percentage of compensation </td> </tr> <tr> <td style="text-align: center;" width="179">30 or less</td> <td style="text-align: center;" width="201">2</td> </tr> <tr> <td style="text-align: center;" width="179">30 or over, less than 40</td> <td style="text-align: center;" width="201">4</td> </tr> <tr> <td style="text-align: center;" width="179">40 or over, less than 50</td> <td style="text-align: center;" width="201">6</td> </tr> <tr> <td style="text-align: center;" width="179">50 or over</td> <td style="text-align: center;" width="201">8</td> </tr> </tbody> </table> For this purpose, “final average pay” is determined using up to five years during which the participant had the highest aggregate compensation from the employer.<a href="#_ftn5" name="_ftnref5">5</a> (2)  The contribution requirement will be met if the 401(k) plan provides for an automatic contribution arrangement and requires the employer to match 50 percent of elective deferrals of up to 4 percent of compensation.<a href="#_ftn6" name="_ftnref6">6</a> Nonelective contributions are not precluded but will not count toward satisfying this requirement.<a href="#_ftn7" name="_ftnref7">7</a> (3)  Employees must be 100 percent vested after three years of service with respect to the defined benefit portion of the plan. Matching contributions under the defined contribution portion must be nonforfeitable, including those in excess of the required match. Any nonelective contributions may be subject to a maximum three-year cliff vesting schedule.<a href="#_ftn8" name="_ftnref8">8</a> (4)  All contributions, benefits, rights, and features must be provided uniformly to all participants.<a href="#_ftn9" name="_ftnref9">9</a> (5)  The foregoing requirements must be met without taking into account permitted disparity and amounts under other plans.<a href="#_ftn10" name="_ftnref10">10</a> These criteria are the only circumstances under which a combination defined benefit/401(k) plan may constitute a single plan and trust. A 401(k) plan will be treated as an automatic contribution arrangement if it provides a default elective contribution percentage of 4 percent and meets specific notice requirements. Employees must receive a notice explaining their right not to have contributions withheld, or to have them made at a different rate, and they must have a reasonable period of time after receipt of the notice to make such elections.<a href="#_ftn11" name="_ftnref11">11</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC §§ 414(x)(2)(A), 4980D(d)(2). <a href="#_ftnref2" name="_ftn2">2</a>.  Regulations proposed in July 2016 (RIN 1210-AB63) are designed to modernize and improve the Form 5500 reporting procedures, and will generally be effective for the 2019 plan year, presumptively once they have been finalized. <a href="#_ftnref3" name="_ftn3">3</a>.  IRC §§ 414(x)(2), 414(x)(6). <a href="#_ftnref4" name="_ftn4">4</a>.  IRC §§ 414(x)(3), 414(x)(4). <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 414(x)(2)(B). <a href="#_ftnref6" name="_ftn6">6</a>.  IRC § 414(x)(2)(C). <a href="#_ftnref7" name="_ftn7">7</a>.  IRC § 414(x)(2)(C)(ii). <a href="#_ftnref8" name="_ftn8">8</a>.  IRC § 414(x)(2)(D). <a href="#_ftnref9" name="_ftn9">9</a>.  IRC § 414(x)(2)(E). <a href="#_ftnref10" name="_ftn10">10</a>.  IRC § 414(x)(2)(F). <a href="#_ftnref11" name="_ftn11">11</a>.  IRC § 414(x)(5). </div></div>

March 13, 2024

3783 / Can the owner of a designated Roth 401(k) or 403(b) account roll those funds into another retirement account?

<div class="Section1"> A rollover of a designated Roth account distribution that is not includable in income may be made only to another designated Roth account of the individual from whose account the payment or distribution was made or to a Roth IRA of the individual either through a 60-day rollover or a direct rollover. A plan receiving a designated Roth account rollover must agree to separately account for the amount that is not includable in income. Furthermore, if such a rollover is made to another plan, it must be made as a direct rollover to assure that there is proper accounting in the recipient plan. In other words, a rollover to a plan is not available if the distribution has been made directly to the employee. In that case, however, an employee would have the option of rolling over the distribution to a Roth IRA within 60 days.<a href="#_ftn1" name="_ftnref1">1</a> If a rollover is made from a designated Roth account under another plan, the five-year period for the receiving plan begins on the first day that the employee made designated Roth contributions to the other plan, if earlier.<a href="#_ftn2" name="_ftnref2">2</a> If a rollover is made from a designated Roth account to a Roth IRA, the period that the rolled over funds were in the designated Roth account does not count toward the five taxable year period for determining qualified distributions from the Roth IRA. If the Roth IRA was established in an earlier year, the five-year period for determining qualified distributions from the Roth IRA applies to distributions of rolled over amounts.<a href="#_ftn3" name="_ftnref3">3</a> Furthermore, the entire amount of any qualified distribution rolled over to a Roth IRA is treated as basis in the Roth IRA. As a result, a subsequent distribution from the Roth IRA of that amount would not be includable in the owner's gross income.<a href="#_ftn4" name="_ftnref4">4</a> <hr /> Planning Point: A client who does not have a Roth IRA and anticipates rolling over an amount from a designated Roth account to a Roth IRA should consider establishing a Roth IRA before the year the rollover is anticipated. This will start the five-year holding period. <hr /> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 402A(c)(3); Treas. Reg. § 1.402A-1, A-5. <a href="#_ftnref2" name="_ftn2">2</a>. Treas. Reg. § 1.402A-1, A-4(b). <a href="#_ftnref3" name="_ftn3">3</a>. Treas. Reg. § 1.408A-10, A-4. <a href="#_ftnref4" name="_ftn4">4</a>. Treas. Reg. § 1.408A-10, A-3(a). </div>