Tag: Newsletter – February 2019

Nonqualified Plans: Understanding the Fundamentals

Since the passage of The Employee Retirement Income Security Act of 1974 (ERISA), companies have found it difficult to provide their top executives with a retirement accumulation program that matches the level of benefits the average employee will receive.

The Gap is Real

This information is from the Principal Financial Group® Replacement Ratio Calculator with source information from the Annual Statistical Supplements to the Social Security Bulletin (www.ssa.gov). It is intended to demonstrate the potential impact of Social Security and 401(k) plan benefits at various income levels. For more information on your individual circumstances, please speak with your financial or tax professional.

Nonqualified deferred compensation plans can serve an important function in helping to fill the significant gap between the combined amount of a worker’s social security retirement benefits plus his/her qualified retirement benefits and the amount of retirement savings he or she will need in order to replace current income.

Regulatory Limits on Qualified Plans Drive the Need for Nonqualified Plans
• 401(k) limits executive contributions to $19,000 (2019)
• The maximum compensation eligible for qualified 401(k) or pension plan benefits is $280,000 (2019)

As a result, many employers have established nonqualified plans to supplement their broad-based plans and, therefore, provide competitive retirement accumulation for executives.

Nonqualified Plans Function as an Employer/Employee Agreement
• A nonqualified plan is, fundamentally, a contractual agreement (plan document) between an employer and one or more key personnel
• The company makes an unsecured promise to pay benefits subject to all the terms of the “agreement”
• A participating employee can never be more than a general, unsecured creditor of the employer as to the benefits (if current taxation of that benefit is to be avoided)

The Need for Executive Benefits
Employees deserve retirement security—to be allowed to perform their jobs creatively and enthusiastically, without the burden of retirement security hanging over their heads.
Employers need to be able to attract and retain quality management talent; to create management incentives; and to restore retirement income shortfalls for key executives, balancing risk with reward for directors.

This article is shared with permission from Fulcrum Partners. Click here for more information.

Hardship Withdrawals – IRS Issues Proposed Regulation Reflecting Statutory Changes

This past November, the IRS issued proposed regulations to effectuate changes made for hardship withdrawals in the Bipartisan Budget Act of 2018. Comments were due by Jan. 14, 2019. Although the statutory changes are effective beginning in 2019, the proposed regulations do not require any changes in how hardships are administered until 2020. Plan documents must be amended to reflect changes to the safe harbor rules. Most recordkeepers updated their systems so participants are no longer suspended from making contributions following a hardship distribution, but they have not set a time frame for when plan sponsors can expect to receive the necessary amendments. The deadline for amendments will be the end of the second calendar year beginning after the hardship changes appear on the IRS’ Required Amendments List. The proposed regulations include some changes that go beyond what is required to conform to the statutory changes. While the changes generally make hardship distributions more accessible, the IRS makes it clear that plan sponsors are free to add their own restrictions, such as limiting the sources eligible for hardship distributions.

Current Law
Prior to age 59½, in-service distribution of elective deferrals is limited to certain events including hardship. A distribution qualifies as a hardship only if made on account of an “immediate and heavy financial need.” The amount distributed cannot exceed the amount necessary to satisfy this need. The determination of whether the participant has “an immediate and heavy financial need” must be based on “all relevant facts and circumstances.” A distribution is considered necessary to meet “an immediate and heavy financial need” only if other resources are not available to the participant. Plan sponsors may accept a participant’s representation that he/she has no alternative resources, unless the sponsor has actual knowledge to the contrary. Certain sources are not eligible for hardship distributions – post 1988 earnings, safe harbor contributions, QNECs and QMACs.

Existing Safe Harbor Rules

Although not a legal requirement, the majority of plan sponsors follow the safe harbors. If a plan sponsor follows the safe harbor rules, the IRS will not challenge hardships on audit. These rules are included in virtually all prototype and volume submitter documents. There are two aspects to the safe harbor rules:

  • First, six events are deemed to qualify as “an immediate and heavy financial need:” (1) deductible medical expenses; (2) costs associated with purchase of a principal residence: (3) tuition and other expenses associated with post-secondary education; (4) payments to prevent eviction; (5) funeral expenses and (6) deductible expenses associated with repairing damage to a participant’s principal residence if deductible as a casualty loss.
  • Second, a distribution is deemed necessary to satisfy the immediate and heavy financial need if the participant has taken all other available plan distributions, including loans, and the participant is suspended from contributing for six months.

What Has Changed

  • The six month suspension of contributions is eliminated (optional for 2019).
  • The requirement to take a loan first is now optional.
  • Except for 403(b) plans, all account sources are now eligible for hardships, but sponsors may elect to limit the sources eligible.
  • Earnings remain ineligible for all 403(b) plans, along with QNECs and QMACs in custodial accounts.
  • Casualty losses related to home repairs are now deductible only if the taxpayer resides in an area declared to be a federal disaster. The proposed regulation clarifies that a participant is eligible for a hardship distribution for such losses whether or not a federal disaster is declared.
  • All expenses related to an event declared by FEMA to be a federal disaster qualify for hardship if the participant resides in or works in the disaster area.
  • Expenses incurred by the primary beneficiary that are qualifying medical, education or funeral expenses are eligible for a hardship distribution. Under prior law, this was limited to the participant, spouses and dependents.
  • The “all relevant facts and circumstances” evidentiary standard no longer applies. The participant must first take any available distributions under all plans of the sponsor. This includes non-qualified plans. And, beginning in 2020, the participant must represent in writing (or by electronic medium) that he/she has no other available resources to satisfy the need. The sponsor may accept this representation unless it has actual knowledge to the contrary.

Strategic Retirement Partners Embraces Fiduciary Excellence

Our firm was founded on the principles of integrity, professionalism and exceptional client service. We are also deeply committed to continuous improvement. Our dedication to doing what is best for you, our clients, prompted us to engage CEFEX, the Centre for Fiduciary Excellence, LLC to audit our processes.

We contacted the CEFEX organization and requested an independent analyst provide us with a comprehensive independent review. The process was rigorous and their assessment took months to complete. Now, after going through the audit and carefully evaluating our procedures, we are proud to share with you that Strategic Retirement Partners is a CEFEX certified Investment Advisor.

This certification signifies our commitment to uphold the highest level of fiduciary care and that has a direct impact on you, your plan and your employees. As a plan sponsor, the Department of Labor (DOL) identifies the following as your fiduciary responsibilities:

  • Act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
  • Act prudently in the faithful performance of all duties;
  • Follow the plan documents (unless inconsistent with ERISA);
  • Diversify plan investments; and
  • Pay only reasonable plan expenses.

By working with Strategic Retirement Partners, you can rest assured that our actions align with these responsibilities; our prudent process aims to help you limit liability and build a retirement plan that strives to improve retirement outcomes.

CEFEX is an independent global assessment and certification organization. They work closely with industry experts to provide comprehensive assessment programs designed to improve the fiduciary practices of investment advisors, stewards (retirement plans, foundations and endowments, etc.), investment managers, and other financial service providers. CEFEX confers a formal certification for those firms that are willing to undergo an independent audit and able to demonstrate that they fully conform to high standards which are substantiated in case law and fiduciary best practices.

At Strategic Retirement Partners, we follow well-defined processes, grounded in best practices, so that we can make sound, objective, and consistent decisions in service to our clients. CEFEX certification offers testament to the fact that we understand the importance of paying close attention to everything from high level strategies and policies all the way down to the details of our business practices. The CEFEX Mark seeks to make our clients confident that we are worthy of their trust.

We wanted to share news of the important recognition of our commitment to fiduciary excellence and continuous improvement. CEFEX certification is yet another way we tangibly demonstrate that serving our clients’ best interests is our highest priority.

 

 

1 Department of Labor. “Meeting Your Fiduciary Responsibilities.” DOL.gov. Sept. 2017

CEFEX and Strategic Retirement Partners are separate, unaffiliated entities.