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Retirement Plans Technical Memorandum

What Impact Does the CARES Act Have on Retirement Plans?

The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law by President Trump on March 27, 2020.  It is 880 pages.  This article provides a summary of the some of the key provisions relating to retirement plans.

1. Covid-19 Related Distributions

The CARES Act provides that section 72(t) of the Internal Revenue Code shall not apply to coronavirus-related distributions from certain qualified retirement plans.  This means that a plan participant will not be subject to the 10% penalty for early withdrawal, as long as the aggregate amount of the withdrawal does not exceed $100,000.  The term “aggregate” refers to all plans maintained by the participant’s employer and any member of a controlled group.

Eligible retirement plans include:

  • IRAs
  • Tax-qualified retirement plans
  • Tax-deferred section 403(b) plans
  • Section 457(b) governmental sponsored deferred compensation plans

The exemption from section 72(t) is effective for distributions made during 2020 – calendar year 2020, not plan year 2020.  In addition, the exemption is available only to a plan participant:

  • Who is diagnosed with Covid-19
  • Whose spouse or dependent is diagnosed with Covid-19
  • Who is furloughed or laid off, has work hours reduced or is unable to work due to lack of childcare or is otherwise unable to work due to Covid-19

An employer is required to confirm that the participant meets one of these conditions but can rely on the participant’s certification.

The participant can elect whether to repay the distribution or to have the distribution included in income.  If the participant elects to repay the distribution, it must be repaid in full within three years after the date the distribution is received.  A participant who elects to not repay the distribution is taxed on the distribution ratably over three taxable years beginning with the year of the distribution.

2. Plan Loans

The CARES Act increases the amount of loans that a “qualified individual” can take from a retirement plan.  Beginning on March 27, 2020, for a 180-day period, the loan amount is increased to the lesser of $100,000 or 100% of the participant’s nonforfeitable accrued benefit under the plan.  Prior to this change, the amounts were $50,000 and 50%, respectively.

The CARES Act also changes the terms of loan repayments.  If the due date of any loan repayment occurs between March 27, 2020, and December 31, 2020, the due date is extended for one year.  Subsequent due dates are extended for one year as well.

An employer may need to amend its plan document in order to provide these enhanced rights to its employees.

3. Required Minimum Distributions

The CARES Act provides a temporary waiver of required minimum distributions for participants who turn age 72 in calendar year 2020.

4. Minimum Required Contributions

The CARES Act delays the due date of any employer-contribution to a defined benefit plan required to be made during calendar year 2020 to January 1, 2021.  However, any delayed payment accrues interest from the original due date to the date of payment.  In addition, an employer may elect to treat the plan’s adjusted funding target attainment percentage (“AFTAP”) for the last plan year ending before January 1, 2020, as the AFTAP for the plan year, which includes calendar year 2020.

5. Filing Deadlines

The CARES Act gives the Department of Labor the right to extend any filing deadline under ERISA for a period of one year as a result of the Covid-19 pandemic.

6. Education Assistance

The CARES Act amends section 127(c) of the Internal Revenue Code to include repayment of an employee’s qualified education loan in the definition of non-taxable “educational assistance”.  The payments must be made before January 1, 2021, and are limited to $5,250.

7. Plan Amendments

Some of the provisions of the CARES Act are voluntary, not mandatory.  For example, the provisions regarding coronavirus-related distributions and increased loan amounts apply only if the plan document permits such distributions and loans in the first place.  As a result, a Plan Sponsor may need to amend its plan document in order to afford its plan participants the ability to access such distributions and loans.

A Plan Sponsor can administer the plan in accordance with the necessary amendments, even before the amendments are actually adopted.  However, the amendments must be adopted by the last day of the first plan year beginning on or after January 1, 2022.

8. PBGC

The PBGC has announced the extension of filing deadlines, including premium payments.  Any filing due after April 1, 2020, can be delayed until July 15, 2020.  While this is not part of the CARES Act, it is something that affects defined benefit pension plans.

Some of these provisions will require further guidance, and we will update you as that guidance is issued.  If you have any questions how the CARES Act affects your qualified retirement plan, contact RMC Group.

*Revised April 21, 2020

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Retirement Plans

5 Reasons to have a Qualified Retirement Plan – Even If You are a Sole Proprietor

You are a successful business owner. You put a lot of hard work into building your business, and you are finally reaping the benefits. However, there may come a time when you’ll want to step back and triumphantly wash your hands of the business. How do you intend to plan for your financial needs in retirement? 

Many business owners plan on using the sale of their business to fund their retirement. However, they usually don’t take into consideration the additional costs associated with the sale of a business. Expenses such as tax liabilities and brokers’ fees can eat away at the funds you planned on using in your retirement.

Having a qualified retirement plan through your business can help you provide for your retirement.  In addition, it can potentially save you thousands in tax liabilities and benefit both your business and the people who work for it—even if you’re the only one. 

Are these plans the right choice for your business? Before answering this question and looking at potential options, let’s define what it means to have a qualified retirement plan. 

What is a Qualified Employee Retirement Plan?

A qualified retirement plan is one that meets the criteria set forth in section 410(a) of the US federal tax code and the guidelines established by the Employee Retirement Income Security Act (ERISA). These guidelines were established in the 1970s in order to secure workers’ retirement income.

Many companies offer non-qualified plans as part of their total benefits package in the form of deferred compensation or executive bonuses, but these programs have their drawbacks. Contributions to these plans are taxed before they are deposited, reducing the overall amount you have to save.

In contrast, contributions to a qualified retirement plan may be tax-deductible by the employer.  In addition, the contributions are not taxable to the employee when made and grow tax-free until withdrawal, when they are taxed to the employee.  In order to be a qualified retirement plan, a plan must comply with the rules set forth in section 401(a) of the Internal Revenue Code.

Any company can qualify to offer some type of qualified retirement plan. The most common of these plans for single-employee businesses are defined-contribution plans, generally because business owners assume this is their best option. 

Under a defined contribution plan, an employer makes a certain contribution for its employees, and the retirement benefit depends upon the performance of the plan’s investments. The employees are not guaranteed a specific benefit. The most well-known type of defined-contribution plan is the 401(k) plan, which allows employees to make pre-tax contributions to the plan. Often an employer will match a portion of the employees’ contributions.

Despite the popularity of defined contribution plans, they’re not always the best option for single owner businesses—especially for those with no other employees, a high income, and a desire to save a lot on an ongoing basis. For this kind of business, a defined benefit plan could be the best option.

Before we discuss the five main reasons why you should have a qualified retirement plan, you need to understand the types of plans that are available to you.

What Is a Defined Benefit Plan?

A defined benefit plan is a qualified retirement plan that defines the benefit to be paid to an employee after retirement.  The employer is then required to make contributions to the plan in an amount sufficient to fund the employee’s retirement benefit. Contributions may vary from year to year.  This is different than a defined contribution plan where the annual contribution is determined by formula, but the amount of the benefit may vary depending upon investment performance.

There are limits to how much an employer can contribute to a defined benefit plan.  These limits are determined based on the ages of the employer’s employees, expected investment returns, and the overall benefit to be paid by the plan at retirement. However, a defined benefit plan has higher contribution limits than a defined contribution plan. A defined benefit plan is ideal for small businesses with few employees looking to maximize their annual contributions and retirement benefits.

Now that we’ve covered the basics, let’s explore the five reasons you need a qualified retirement plan.

Reason #1: Tax Advantage

One of the main benefits of offering a qualified retirement plan is the potential tax savings. For many business owners, the idea that they’re obligated to make annual contributions to a qualified retirement plan is a turn-off. It’s a major commitment of funds. 

However, many contributions to qualified retirement plans are tax-deductible. Whatever contribution you make annually to a qualified plan can possibly be written off, reducing your business’s overall tax burden. This is one reason that plans like 401(k) plans are popular, but it also goes for defined benefit retirement plans like pensions. 

In addition, an employee does not pay income taxes on the contribution until distribution of his benefit after retirement. This means that you, as a business owner, can take advantage of two tax savings, while managing to save sufficient funds for a comfortable retirement.

Reason #2: Attract Top Talent

If you’re looking to hire some help with your business, offering a retirement plan for employees will attract high-quality talent to your organization and give them an extra incentive to stick around.

Larger companies that don’t offer qualified retirement plans appear lackluster to potential workers because most major companies do, in fact, offer some kind of plan. On the other hand, for small businesses, a tremendous opportunity exists to elevate themselves above the competition by offering something that many smaller firms don’t.

No matter the size of your business or firm, offering retirement solutions and pension plans can make sure you have only the best talent working for you.

Reason #3: Your Employees Need It

As an employer, you already do a tremendous service to the economy by providing needed goods and services and creating jobs. You can add to that service even further by helping to solve the retirement issue many people face—just give them a concrete solution to the issue.

According to a report by the Center for Financial Services Innovation, 42% of Americans aren’t saving anything at all for retirement. If more employers offered qualified, tax-deductible plans, it’s safe to assume that more people would save for retirement.

Reason #4: You Need It

As a business owner, you need retirement savings just as much as your employees do. When you offer a qualified retirement plan through your business, you can enroll as well. The retirement crisis is not just happening among workers. Somewhere around half of all small business owners only save 10% of their income for retirement. One out of four doesn’t save anything at all.

Without an established retirement plan in place, business owners are generally faced with one option: sell the business to fund retirement. This tactic comes with a lot of uncertainties, including the possibility of a lower-than-expected asking price, or having tax burdens eat into your nest egg. Without a plan, you will be under-prepared at a point when there won’t be much time to act otherwise.

Reason #5: You Can Save a Lot

While qualified retirement plans may seem pricey to set up and maintain, they come with the benefit of high limits to contributions. Individual business owners making more than $80,000 a year can save a good portion of those funds in a defined-benefit plan, making these plans ideal for high-income business owners who are nearing retirement.

You can even start saving money by just setting up a plan. For the first three years, businesses get a $500 tax credit in exchange for initiating a plan. 

For business owners, setting up a qualified retirement plan is a crucial step in preparing for a comfortable retirement. Without one, you may not have the resources available to provide for yourself if the unexpected happens. 

Now that you know why you need a qualified retirement plan, it’s time to take the next step. Contact an RMC professional today to determine the best way to set yourself up for the future.

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Retirement Plans

Who is a Candidate for a Retirement Plan?

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[Transcript]

Let’s face it our clients can always use more planning help.

Do you have profitable businesses that are looking for better solutions?

Perhaps they’ve already paid their salaries.

They’ve already done their year-end bonuses.

Maybe they’ve already done capital improvements into the business.

BUT they still have surplus profits

They’re still looking for ways to spend that money creatively and effectively and tax efficiently at the end of the year.

Do they already have enough money to live on?

What do you tell these clients?

What solutions do you present to them?

A qualified retirement plan could be a perfect solution!

Let’s take a look at some real numbers…

Perhaps it’s a 401(k) plan where the employee can defer up to $19,000 and salary on a tax efficient basis. An additional $6,000 if they’re over age 65.

Maybe they need more…

Perhaps a profit sharing plan where they can put away and this is the business putting away all in a tax favored basis that can do up to $56,000 a year…

…or maybe they need even more…

Maybe a defined benefit plan will help them.

In a defined benefit plan, let me give you an example…

For example at age 55, a business on a tax favorite basis can put away anywhere from $200,000 to $500,000 depending on the type of plan.

And that is annually!

That is huge and on the benefit side that contribution can provide a benefit of up to $225,000 a year…

And that’s every year for the rest of their life!

These are absolutely compelling benefits.

These are incredible benefits, very meaningful to the clients.

Perhaps the client wants to control their own investment.

It’s in a traditional defined benefit plan or maybe they have a lot of employees or they have multiple owner employees with bearing ages and a cash balance plan award from.

Or maybe they are interested in guarantees only and they want to eliminate all market risk and they can go with a fully insured 412(e)(3) plans.

Talk to us, talk to your clients. Allow us to help you help them!

Contact us today and learn more.

How we can help you and your clients with qualified retirement plans?

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Retirement Plans

‘Tis the Season for Qualified Retirement Plans

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The time is now.

It’s the fourth quarter…

As we like to say ‘tis the season and no I don’t mean for the holidays.

‘Tis the season for qualified retirement plans.

First and foremost, every single business out there should have some type of qualified retirement plan.

These are absolutely fabulous planning tools and your business clients they need to have these plans.

You need to introduce them to these concepts.

So there’s a lot of plans out there but we can help you find the most suitable plan for your clients.

Allow us to help you whether it’s

  • A 401(k) plan
  • or a Profit Sharing Plan
  • or some type of Defined Benefit Plan
  • or Traditional Plan
  • or how about a Cash Balance Plan
  • or even a Fully-Insured 412(e)(3) Plan

We have the right answers for your clients.

We are the experts so you do not have to be.

It’s a win-win for everybody!

For your clients, they get a fabulous retirement plan benefit for them and their business and all in a potentially tax-favored basis.

For you, you get to introduce them to this concept.

You get to be their hero!

It’s your value-added and you can do this all about growing your practice as well.

So it’s the fourth quarter…

Is it too late for these plans?

Absolutely not!

We can establish plans all the way up through December 31st of this year.

That’s right 12/31!

Now we don’t recommend that you wait that long, but we do have the ability.

We’ve got the experience and we’ve got the expertise to literally do last-minute plans all the way through 12/31.

So don’t hesitate!

Please contact us now.

Let us help you introduce these concepts to your client and we can give your client an invaluable benefit that they’ll need for the rest of their life.

Categories
Retirement Plans

Maximum Pension Limits for 2020

Each year, the IRS sets limits for pension plans. These limits are reviewed annually and adjusted for inflation. The following are some important limits in effect for 2020:

  • Maximum compensation for plan purposes is $285,000
  • Maximum monthly benefit for defined benefit plans ages 62 to 65 is the lesser of 100% of compensation or $19,166.67 with an annual benefit $230,000
  • Highly Compensated Employee compensation $130,000+
  • Maximum Defined Contribution / Profit Sharing Contribution $57,000
  • Maximum SEP Contribution $57,000
  • Maximum 401(k) Contribution $19,500. Catch-up Contribution for age 50 and over $6,500
  • Maximum SIMPLE Contribution $13,500

Click here for a PDF copy of the 2020 limits.

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Retirement Plans

Life Insurance for Advisors

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So life insurance…

So many advisors, they’re afraid of it, they don’t understand it.

There are so many wonderful benefits and ways to utilize life insurance for your business clients.

Terrific planning strategies you can simply help your client, at the same time you can help enhance your practice.

It’s a wonderful planning tool, whether it’s from deferred compensation plans to keyman policies to buy sell arrangements…

How about qualified retirement plans.

These are all wonderful planning tools, wonderful strategies which utilize life insurance for your business clients.

Qualified retirement plans…do you have one?

If so talk to your clients about adding a death benefit.

It’s an absolute terrific way to add life insurance on a tax-favored basis and all at the same time provide a very meaningful benefit and a planned completion component to your plan.

No qualified retirement plan for your client.

No problem! Talk to us…

We can establish a plan for your client!

This is our expertise, this is what we do. We make it easy for you!

You establish a plan which provides a very meaningful retirement income benefit.

It could also include a death benefit and all these benefits are on a potentially tax-advantaged basis to your client.

It’s a win-win!

Your clients will absolutely love these benefits and you’re going to love it too because it’s value added for you.

At the same time, you can help enhance your practice.

Talk to us, give us a call.

Click on the link below, we’ll share some of these strategies with you where you can utilize these life insurance strategies and to benefit your client.

We look forward to talking to.

Contact us to learn more!

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Press Release

CJA Wins Multi-State Retirement Planning Specialists of the Year Award

CJA and Associates, Inc., a member of the RMC Group, has been named Multi-State Retirement Planning Specialists of the Year by U.S. Business News.

U.S. Business News “is the leading magazine for deal makers, game changers and decision makers in the U.S. business market”. Its awards are “100% based on merit” and recognize the most innovative and pioneering financial organizations and firms in the United States.

Thomas Bacharach, Northeast Regional Vice President of RMC Group commented, “On behalf of the entire CJA family of retirement plan professionals, I want to thank U.S Business News for this award. It recognizes our hard work, mastery of the subject matter, exemplary design services and commitment to our client’s retirement planning”.

CJA and Associates, Inc. is a national employee benefits company that specializes in the design and marketing of innovative insurance products and employee benefit plans for the small business and estate planning markets. CJA partners with PlanGen, a web-based illustration and presentation system, to generate fast, compliant illustrations for retirement plans. CJA also partners with First Actuarial Corporation to administer all of its retirement plans.

For more information on CJA’s award, CLICK HERE or visit www.usbusiness-news.com.

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Retirement Plans

Different Types of Retirement Plans

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So we’ve got a lot of different types of qualified plans from the Defined Contribution the 401(k)s and Profit Sharing to the Defined Benefit Plans.

The most conservative and guarantees all the benefits to fully-insured 412(e)(3) but we also have for people that want to take a little more risk and invest in the market Traditional Defined Benefit Plans and Cash Balance Plans.

So some of the times people would lean towards a Traditional Plan or a Cash Balance Plan is they want to invest in the market.

In addition, Cash Balance Plans are typically fabulous for companies with more employees and especially a number of owner employees, different partners in the group, and it’s particularly important for groups with owners that have bearing ages.

Can help equalize the contributions rather than typically in a qualified plan the employees with higher wages or the owners with higher wages are typically going to put more contributions in on behalf of a donor employee versus an owner that is a younger age and their contributions can be limited.

So Cash Balance Plans can help equalize these contributions for the owner employees.

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Retirement Plans

Section 199A Threshold Increased in 2019

The Tax Cuts and Jobs Act of 2017 (the “Act”) cut the corporate income tax rate from 35% to 21% for tax years beginning with 2018.  In addition, the Act reduced the top individual rate to 37%.  So, where does this leave a “pass-through entity”, such as an s-corporation, LLC or partnership, whose income is taxed to the entity’s owner at the owner’s individual rate?  The Act also added section 199A to the Code, which seeks to equalize the rate paid on business income, whether from a c-corporation or a pass-through entity, by providing a deduction to the owner of a pass-through entity.  The deduction reduces the owner’s taxable income from his business, thereby effectively reducing the tax rate paid by the owner.

However, this deduction is not necessarily available to every owner of a pass-through entity.  In order to take advantage of the section 199A deduction, a taxpayer must have income from a “qualified trade or business”.  The problem is that certain professions are not considered a “qualified trade or business” and would, therefore, not seem to be eligible for the section 199A deduction.  However, there is an exception for taxpayers with taxable income below a threshold amount.  Those taxpayers may be eligible for the section 199A deduction even if their income is not derived from a qualified trade or business.  The threshold amounts for 2018 were $157,500 for a single taxpayer and $315,000 for a married taxpayer.

The Act provides that the threshold amounts are indexed for inflation.  The IRS recently announced the threshold amounts for the 2019 tax year.  The threshold amount for a single taxpayer has increased to $160,700, and the threshold amount for a married taxpayer has increased to $321,400.  Further, for a single taxpayer, the deduction phases out for incomes between $160,700 and $210,700.  For a married taxpayer the deduction phases out for incomes between $321,400 and $421,400.

If you are a professional or have clients who are professionals, section 199A provides another reason to consider adopting a defined benefit pension plan.  For purposes of the section 199A deduction, taxable income is determined after allowable deductions.  For a professional with income above the threshold amount, a contribution to a defined benefit pension plan may, to the extent that the contribution is deductible, lower taxable income below the threshold amount.  So, a professional, who makes a contribution to a defined benefit pension plan, may not only reduce taxable income by the amount of the contribution, but may also be able to further reduce taxable income by becoming eligible for the section 199A deduction.  The increase in the threshold amounts makes this strategy available to even more professionals.

RMC Group has been in the pension business since 1974. Call today to learn more about our pension offerings at 239.298.8210 or email us at [email protected]. Our pension team of experts will be able to help you find the right qualified plan for your business clients!

Categories
Retirement Plans

Pension Contribution Deductions

As long as a qualified retirement plan is established by the end of an employer’s tax year, contributions to the plan may be deducted in that tax year, even if not actually paid until the following year.  The only requirement is that contributions be made before the due date of the sponsor’s tax return, including extensions.  For example, if a corporation set up a plan by December 31, 2018, it would have until September 16, 2019, to make its contribution to the plan, assuming it filed for an extension.  (September 15, 2019, is a Sunday, so the tax return is due the following Monday.)

It is important to note that a tax return can reflect only one annual contribution, even if larger amounts are actually paid to the plan during a tax year.  This could happen when an employer makes its contribution for the first plan year in September and also makes its contribution for the second plan year in December.  This is an issue particularly relevant to fully-insured 412(e)(3) plans, which are usually established with a current effective date.

To illustrate, assume that a 412(e)(3) plan has an effective date of September 1, 2018.  Also assume that the employer is making quarterly contributions to the plan. If the employer files its tax return on March 15, 2019, it will have made three quarterly payments before the return is filed, and it can deduct those contributions on its 2018 return.  If the employer makes its final quarterly contribution on June 1, 2019, but also makes the entire second year contribution on October 1, 2019, it cannot deduct the entire amount paid on its 2019 tax return.  The deduction is limited to the amount of one annual contribution, and the employer could not deduct the balance of the total payments until the following tax year.

Late winter and early spring is a great time to discuss a retirement plan with your clients.  They are in the process of preparing their 2018 tax returns and may be surprised by how much they have already paid and how much more they may owe.  A retirement plan not only helps your clients secure their retirement, but contributions to the plan may be deductible.  In addition, adopting a plan at the beginning of a year gives your clients the ability to spread out their contributions over the entire year.  To learn more about our retirement planning process, contact RMC today at 239.298.8210 or [email protected].