April 2021 Newsletter

Print Friendly, PDF & Email


401(k) Plan Tax Credit Summary

Eligible employers may be able to claim a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan (like a 401(k) plan.) A tax credit reduces the amount of taxes you may owe on a dollar-for-dollar basis.

 

If you qualify, you may claim the credit using Form 8881 PDF, Credit for Small Employer Pension Plan Startup Costs.

 

Eligible employers

You qualify to claim this credit if:

  • You had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year;
  • You had at least one plan participant who was a non-highly compensated employee (NHCE); and
  • In the three tax years before the first year you’re eligible for the credit, your employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.

Amount of the credit

The credit is 50% of your eligible startup costs, up to the greater of:

  • $500; or
  • The lesser of:
  • $250 multiplied by the number of NHCEs who are eligible to participate in the plan, or
  • $5,000.

Eligible startup costs

You may claim the credit for ordinary and necessary costs to:

  • Set up and administer the plan, and
  • Educate your employees about the plan.

Eligible tax years

You can claim the credit for each of the first three years of the plan and may choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective.

No deduction allowed

You can’t both deduct the startup costs and claim the credit for the same expenses. You aren’t required to claim the allowable credit.

 

 

Auto-enrollment Tax Credit

 

An eligible employer that adds an auto-enrollment feature to their plan can claim a tax credit of $500 per year for a three-year taxable period beginning with the first taxable year the employer includes the auto-enrollment feature.

Retirement Plan Committee Activities

A retirement plan committee consists of co-fiduciaries who are responsible for all plan management activities that have been delegated to them by their plan’s named fiduciary.

 

ERISA states that the committee must act exclusively in the best interests of plan participants, beneficiaries and alternate payees as they manage their plan’s administrative and management functions. Many committees meet regularly in order to have sufficient opportunity to deal with the myriad of fiduciary functions.

 

All fiduciary level decisions must employ ERISA’s procedural prudence which includes documented expertise on the topic being considered and periodic review to ensure the decision remains prudent. In terms of investment selection and monitoring, qualitative and quantitative considerations should be included in the decision making process. Quantitative issues involve performance metrics and price, while qualitative issues involve the management approach, process, personnel and more. Due to the importance to both participants and plan fiduciaries, the committee must ensure that the plan’s qualified default investment alternative reflects the needs and risk tolerance of the participant demographic.

 

As there are many other important activities for committees, it makes sense to establish an annual calendar of topics to consider at upcoming meetings. Agenda items may include: plan goal setting & review, fiduciary investment review, fiduciary education/documentation, participant demographics/retirement readiness, fee reasonableness & structure, plan design analysis, TDF suitability, client advocacy, participant financial wellness, legal, regulatory & litigation activities, employee education, provider analysis, reporting and disclosure requirements. detailed minutes and documenting the processes for each of its decisions is also best practice for fiduciaries.

 

The Department of Labor [DOL] is now asking plan sponsors to provide documentation of a comprehensive and ongoing fiduciary training program for all plan fiduciaries. 

Ten Reasons to Roll Into Your Employer’s Plan Versus an IRA

This month’s employee memo informs participants about the benefit of joining their employers plan versus an IRA. Do you have retirement plan assets with a former employer’s plan that you’re not sure what to do with? Review the pros and cons of consolidating into your current employer’s retirement plan versus an individual retirement account (IRA).

  1. Performance results may differ substantially.

As an institutional buyer, a retirement (401(k), 403(b), 457, etc.) plan may be eligible for lower cost versions of most mutual funds. Cost savings with institutional share classes can be considerable and can have significant impact on long-term asset accumulation, which benefits you. One recent study by the Center for Retirement Research indicated that the average return retirement plan participants experienced was nearly 41 percent greater than investors. Share class savings likely contributed to this result.

  1. The IRA rollover balance may be too small to meet minimum investment requirements.

Many of the low expense mutual fund share classes available to investors outside of retirement plans have minimum investments requirements in excess of $100,000. Some are $1 million or more. As a result, the average retirement plan participant who rolls a balance into an IRA may not have access to certain investments and/or will often end up investing in one of the more expensive retail share classes.

  1. IRA investment advisors may not be fiduciaries.

In a 401(k) or 403(b) plan (and even many 457 plans), both the employer and the plan’s investment advisor may be required to be a fiduciary. This means that investment decisions they make must be in the best interests of plan participants. This is the golden rule of fiduciary behavior and if not explicitly followed can lead to heavy economic impact to those organizations.

  1. Stable value funds are not available.

While money market funds are available to IRA investors, they do not have access to stable value funds or some guaranteed products that are only available in qualified plans. Historically money market funds yields have often been below that of stable value or guaranteed interest fund rates.

  1. IRAs typically apply transaction fees.

Many IRA providers require buy/sell transaction fees on purchases and sales. Retirement plans typically have no such

transaction costs.

  1. Qualified retirement plans (like 401(k), 403(b), and 457) offer greater protection of assets against creditors.

Retirement plan account balances are shielded from attachment by creditors if bankruptcy is declared. In addition, retirement balances typically cannot be included in judgments.

  1. Loans are not available in IRAs.

Loans from an IRA are not allowed by law, unlike many qualified retirement plans which may allow for loans. Although we do not generally recommend you take loans from your retirement plan, as they may hinder savings potential, some individuals prefer having such an option in the even they run into a financial emergency. Also, as a loan is repaid through payroll deduction, participants pay themselves interest at a reasonable rate.

  1. Retirement plan consolidation is simple and convenient.

It is easier and more convenient for you to manage your retirement plan nest eggs if it is all in the same plan rather than maintaining multiple accounts with previous employers or among multiple plan and IRAs.

  1. Retirement savings via payroll deductions are convenient and consistent.

The convenience of payroll deductions is very helpful for consistent savings and achieving the benefit of dollar cost averaging.

  1. For present retirement savings strategies, retirement plans can provide greater savings than IRAs.

The law allows you to make a substantially larger contribution to many retirement plans than you can save with an IRA. Although personal circumstances may vary, it may be a good idea for you to rollover your balance in a former employer’s retirement plan into your current employer’s plan rather than an IRA. Your savings potential will not be as limited as with an IRA.

Print Friendly, PDF & Email

Related Posts

September 2021 Newsletter

September 2021 Newsletter

When It Comes to Financial Wellness… the Time Is Now While one could say it’s always a good idea to focus on well-being of any type — whether that’s physical, mental, or financial wellness — there’s perhaps never been a more important time to help employees improve...

August 2021 Newsletter

August 2021 Newsletter

Generational Influences and Behavioral Finance Understanding generational attitudes toward investing and the cognitive biases that can lead participants astray is key to helping employees of all ages improve their financial wellness and prepare for a secure and...

July 2021 Newsletter

Bitcoin: Coming to a 401(k) plan near you?  Our 2018 report on Bitcoin (BTC), and the conclusions therefrom, remain relevant today. In short, the prudence in adding Bitcoin to a retirement plan is questionable, at best. Please see our past Retirement Times...

Share

Share this post.