Tag Archives: Brandy Cross

RMDs 2020: To infinity and beyond!

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed and signed into law on December 20, 2019, is the first piece of legislation to affect required minimum distributions (RMDs) since the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), which eliminated RMD requirements for 2009.

Beginning in 2020, there are two significant mandatory RMD changes to qualified plans and traditional IRAs:

  • A mandatory increase—to age 72 from age 70-1/2—for the required beginning date for mandatory distributions (effective for distributions required to be made after December 31, 2019, for employees or participants who attain age 70-1/2 after December 31, 2019).
  • A requirement that defined contribution (DC) plan (and IRA) distributions generally be made to non-spouse beneficiaries within 10 years of the death of the account holder (effective for RMDs to beneficiaries who die after December 31, 2019).

These changes do not affect participants currently in pay status. For example, if a participant born prior to June 30, 1949, turned 70-½ prior to December 31, 2019, that person is required to continue RMDs and must have the first RMD for 2019 paid no later than April 1, 2020. RMDs will also continue in 2020 and 2021.

Note that, if an active participant turned 70-½ in 2019 but was not required to take an RMD under the plan document; then that person’s RMD must follow the law and the Internal Revenue Service (IRS) regulations in effect prior to the enactment of SECURE and RMDs will begin in the year of retirement regardless of age. Participants who turn 70-½ in 2020 or later are under the new age 72 regulation.

While not related to SECURE, note that the life expectancy tables used to calculate the RMDs have changed. The revised life expectancies are longer; therefore, the amounts participants and beneficiaries are required to receive, as RMDs will be lower. This change will not go into effect until 2021 at the earliest and is likely to result in a lower tax liability for RMD recipients (except for Roth accounts, for which distributions are tax-exempt).

These changes are mandatory under SECURE and are required to be implemented effective January 1, 2020. Milliman is currently reviewing procedures, and updating our recordkeeping systems to account for the legislative change.

The SECURE Act does give plan sponsors a two-year delay in amending the plan document. Amendments are not required before the last day of the plan year that begins on or after January 1, 2022.

Please contact your Milliman consultant for additional details.

Considerations: Is adding after-tax contributions in your 401(k) plan always a good idea?

Cross-BrandySince the Internal Revenue Service (IRS) loosened the distribution restrictions on after-tax and pretax amounts when rolling over funds from a 401(k) plan, many advisors and consultants are encouraging participants to consider making additional traditional after-tax contributions to their 401(k) plans, and in turn, encouraging plan sponsors to add traditional after-tax back to their plans.

After the IRS Notice (2014-54), a participant can now specifically direct the pretax and after-tax amounts of any distributions or conversions without the limitation of having to take a proration of pretax and after-tax amounts.

Recent articles on the subject point out that a participant could potentially deposit substantial after-tax contributions above the individual deferral limit of $18,000 (for 2015). The after-tax contributions would be limited only by the Section 415 annual addition limit of $53,000 (or $59,000 for those over age 50). This 415 limit includes all contributions to the plan including pretax deferrals, Roth deferrals, after-tax contributions, and all employer contributions.

This could mean significant savings and future tax advantages for the participant. If the plan allows for in-service withdrawals or in-plan Roth distributions, employees could then choose to annually distribute the after-tax contributions to a Roth account, thus sheltering any earnings on the contribution from further taxation, instead of letting the earnings continue to grow inside the pretax account to be later subject to taxation upon withdrawal.

This sounds fantastic for the participant, but it feels too good to be true. What is missing? What isn’t being considered? How do these potentially large contributions affect the plan?

As a compliance manager, I believe that the largest missing component in this discussion is the nondiscrimination testing. Some articles I’ve seen on the topic mention nondiscrimination testing, and some don’t. But even when they do, it’s an afterthought. All 401(k) plans are subject to some form of testing.

Where might large after-tax contributions make testing difficult?

It stands to reason that the participants with the ability to take advantage and be most interested in making additional large after-tax contributions would be highly compensated employees (HCEs). Whether an HCE because of compensation or because of ownership and attribution (such as the spouse of an owner not needing the wages), this is the group most likely to be able to fund these contributions.

Many 401(k) plans need to be tested for nondiscrimination of the average deferral rate (ADR) and average contribution rate (ACR) of HCEs as compared with the ADR and ACR rates of non-highly compensated employees (NHCEs). They are referred to as the 401(k) ADP and 401(m) ACP tests. The 401(k) ADP test assesses pretax and Roth contributions, while the 401(m) ACP test looks at the employer matching contributions and employee after-tax contributions.

Let’s work an example. If it is true that the participants who will likely take advantage will be the HCEs, these larger after-tax contributions could negatively affect the results of the ACP test.

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It’s PPA restatement time! … wait, what’s PPA restatement?

Cross,-Brandy_mugShotLet’s start from the beginning.

If your qualified defined contribution (DC) retirement plan uses a base plan document with most of the basic features of the plan and an adoption agreement that allows you to select some specific plan features (as opposed to having an individually drafted plan document where there is just one document written specifically for the provisions of your plan), then you have a preapproved plan document.

Almost a decade ago, the Internal Revenue Service (IRS) determined that all preapproved plans would have to be restated periodically — every six years to be exact. This would allow them to pull in all of the law changes in the previous six years and hopefully make the plans easier to read, administer, and review.

The first cycle was referred to as the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) restatement, which was to be completed no later than April 30, 2010.

In early 2014, the IRS released the approval letters to sponsors of preapproved plans for the second cycle, referred to as the Pension Protection Act of 2006 (PPA) restatement. The PPA restatement brings in required changes from that legislation, as well as all subsequent regulatory changes — including Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART) and Worker, Retiree and Employer Recovery Act of 2008 (WRERA).

All plans that use a preapproved plan document must be restated before April 30, 2016. Failure to amend by this date will require the plan to submit an application to the IRS, through its Voluntary Compliance Program (VCP), to correct this error. IRS VCP fees as well as preparation fees will apply, and could be hefty depending on the size of the plan.

Milliman is in the process of working with plan sponsors utilizing our preapproved DC plan document services to complete the restatement prior to the above deadline.

Now is an excellent time for every plan sponsor to review the plan provisions to ensure they are in line with actual plan operations, as well as to ensure that the plan is meeting the goals and needs of the plan sponsor and plan participants.

Reviewing the plan provisions with your Milliman consultant at the time of restatement is both beneficial and cost-effective.

Some items that the plan sponsor should be reviewing include:

Eligibility: Are participants entering the plan when they should? Once eligible, is there anything that can be done to encourage participation in the plan? Should auto enrollment or other provisions be considered to get participants into the plan faster?

Plan design/contributions: Do the plan design and contributions elected and allowed under the plan meet the needs and goals of plan sponsors and participants? Each plan, plan sponsor, and participant population is unique. Visit with your consultants and advisors to see if there is anything you could be doing differently.

New provisions: Are there new provisions added in recent years, such as in-plan Roth conversions, or changes to base document language, such as the use of forfeitures and ERISA recapture accounts, that might make sense to review against the way your plan is operating?

Compensation: Is the correct compensation being provided to your plan’s recordkeeper or administrator? Plans should take this time to review the compensation definition in the plan document to make sure that it matches the compensation used by the payroll systems to determine contributions and benefits. The IRS finds compensation errors one of the most frequent errors made in qualified retirement plans.

When the restatement process is complete, you should receive a new signature-ready adoption agreement, a copy of the base plan document, and the IRS approval letter of the preapproved plan document, as well as an updated Summary Plan Description. You will want to make sure to maintain copies of all plan documents, including superseded versions for the life of the plan, plus six years.

Remember, changes to the plan document are fiduciary decisions, and should be reviewed carefully with your consultant and plan’s legal counsel.

Happy PPA restatement!





Compensation checkup…

It hardly seems possible that we are halfway through the fourth quarter of 2011.

While many employers are handing out open enrollment materials, and employees are setting up those end-of-the-year checkups, it got me thinking…what is an annual checkup that plan sponsors should consider for their retirement plans? The answer is easy: COMPENSATION.

The Internal Revenue Service (IRS) has identified “Inaccurate Definition of Compensation” as one of the “Top Eleven” common 401(k) plan errors (see item #3 here). Using the incorrect definition of compensation in contribution calculations is a common operational failure, and the plan sponsor may need to make a corrective contribution to the plan, plus earnings, to correct the error.

Plan compensation can easily become an overlooked item in the annual checklist. Many plan sponsors submit compensation information to the record-keepers with each payroll, while others submit a predetermined report annually. But does that compensation match the plan’s definition?

It is very easy for a plan sponsor to get lulled into a false sense of security when it comes to the compensation used to determine plan benefits. Many have a “set it and forget it” approach when it comes to plan compensation. However, as we approach the end of the year (bonus season for many companies) this would be a good time to dust off the plan document and take a closer look at the plan’s compensation definition. And see if that definition matches operations.

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