When Does A Loan Default Occur, and How Do I Handle It ?
(Regarding Loans From Retirement Plans)
A loan default occurs if a participant's loan repayment is not made by the due date of any payment. If the missed loan repayment is not received by the last day of the calendar quarter following the calendar quarter in which the loan repayment was due (referred to as "cure period"), the loan is deemed distributed.
(i.e. a loan is due by Feb.1, and payment is not rec'd by Feb. 1 the loan is in default. If the missed
payment is not then made by June 30, the loan will be deemed distributed)
loan whose "cure period" has not expired.
Inform participant that full repayment of current outstanding delinquent payments are due by such in such date (whichever day quarter ends on 3/31, 6/30, 9/30, or 12/31) Collect the payments either through payroll deductions or personal check from the participant and include these amounts in the next contribution due before the end of the calendar quarter following the calendar quarter in which repayments were missed.
LOAN WHOSE "CURE PERIOD" HAS EXPIRED
Loan amount is deemed distributed, please contact the designated plan representative to proceed with the proper paperwork and documentation.
AN EMPLOYER WITH A DEFINED BENEFIT PENSION PLAN WOULD LIKE TO KNOW IF A PLAN CAN REIMBURSE THE EMPLOYER FOR PLAN EXPENSES SUCH AS ANNUAL ADMINISTRATION FEES AND AMENDMENTS HE/SHE RECENTLY PAYED?
If the plan document allows, the plan may reimburse the employer for current year plan expenses paid by the employer (prior year expenses cannot be reimbursed).
1099 REPORTS NET DISTRIBUTIONS - IF DISTRIBUTIONS COME OUT OF PARTICIPANTS ACCOUNTS, SHOULD THE 1099-R REFLECT THE AMOUNT INCLUDING THE FEE OR LESS THE FEE?
The 1099-R is for the net amount. The distribution fee is a plan expense allocated to the plan participant.
Who is eligible to receive the $500 credit for adopting a qualified retirement plan?
One of the policy goals of the Secure 2.0 Act of 2022 (SECURE 2.0) was to increase coverage of American workers in employer sponsored retirement plans. Studies have shown that employees are much more likely to save for retirement if they participate in an employer-sponsored plan rather than having to do it on their own through an IRA. To encourage small employers to offer a plan, Congress has provided for a new plan startup tax credit since 2002. The recent passage of SECURE 2.0 builds on the changes made by the original SECURE Act (SECURE 1.0) to significantly increase the amount that may be claimed as a credit by a small employer starting a new plan. As explained in this article, the rules are complicated, but for the smallest employers, the credit can pay for most, if not all, of the plan startup, administration, and retirement- related education expenses for the first three years.
Background
The desire of Congress to encourage retirement plan sponsorship by small employers began with the Economic Growth and Tax Relief Act of 2001 (EGTRRA). It was believed that the costs of setting up a new plan was a substantial impediment to new plan formation, particularly for smaller employers. An incentive in the form of a tax credit was adopted to help small employers offset the expenses incurred in establishing and administering a new plan.
The credit, as initially enacted, was modest. Under EGTRRA, a small employer establishing a new plan could claim a tax credit of up to the lesser of $500 or 50% of the startup, plan administration and participant education expenses. The credit was and remains available for the first three tax years beginning with the year in which the plan was established. The credit remained at this modest level for the next 18 years.
That all changed, however, with the passage of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE 1.0) and SECURE 2.0. Under these laws, there are three different tax credits available to small employers who start a new retirement plan. The credit for startup costs was significantly increased for the smallest employers (i.e., 50 or fewer employees) by SECURE 2.0 that may in many cases cover the first three years of eligible plan expenses. Please contact Sonia or Diane for more detailed information.
Auto Enrollment - Are there different types of automatic contribution arrangements for retirement plans?
Yes, besides the basic automatic contribution arrangement, a plan sponsor can choose an eligible automatic enrollment arrangement (EACA) or a qualified automatic enrollment arrangement (QACA).
1. An EACA is a type of automatic contribution arrangement that must uniformly apply the plan's default percentage to all employees after providing them with a required notice. It may allow employees to withdraw automatic enrollment contributions (with earnings) by making a withdrawal election as required by the terms of the plan (no earlier than 30 days or later then 90 days after the employee's first automatic enrollment contribution was withheld from the employees wages.) Employees are 100% vested in their automatic enrollment contributions.
2. A QACA is an automatic contribution arrangement with special "safe harbor" provisions that exempt a 401(K) plan from annual actual deferral percentage (ADP) and actual contribution percentage (ACP) non discrimination testing requirements. A QACA must specifiy a schedule of uniform minimum default percentages starting at 3% and gradually increasing with each year that an employee participates. Under a QACA an employer must make a minimum of either:
a matching contribution of 100% of an employee's contribution up to 1% of compensation, and a 50% matching contribution for the employee's contribution above 1% of compensation and up to 6% of compensation; or
a non elective contribution of 3% of compensation to all participants, including those who choose not to contribute any amount to the plan.
Under a QACA, employees must be 100% vested in the employer's matching or nonelective contributions after no more then 2 years of service. A QACA may not distribute the required employer contributions due to an employee's financial hardship.