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Retirement Plans Technical Memorandum

Notice 2020-50 Expands Rights Under the CARES Act

On June 19, 2020, the IRS issued Notice 2020-50, expanding the relief for Coronavirus-Related Distributions (CRDs) from qualified retirement plans provided by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

What are Coronavirus-Related Distributions?

Section 2202(a) of the CARES Act provides special tax treatment for certain distributions from qualified retirement plans.  Generally, distributions from a qualified retirement plan are taxable in the year in which they are made and are also subject to an additional tax of ten percent (10%), if the participant is younger than 59½ years old.  The CARES Act provides that a CRD may be included in the recipient’s taxable income ratably over a three-year period, rather than entirely in the year of distribution.  In addition, the CARES Act exempts CRDs from the 10% tax on early distribution.  So, what is a CRD?

A Coronavirus-Related Distribution is essentially any distribution from a qualified retirement plan made to a “Qualified Individual” on or before December 31, 2020.

Who is a Qualified Individual?  

Section 2202(a)(4) of the CARES Act defines a “Qualified Individual” as any individual:

  • who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 19 (referred to collectively as COVID-19) by a test approved by the CDC;
  • whose spouse or dependent is diagnosed with COVID-19; or
  • who experiences adverse financial consequences as a result of:
  • being quarantined, furloughed or laid off, or having work hours reduced due to COVID-19;
  • being unable to work to lack of childcare; or
  • the closing or reduction of hours of a business owned or operated by the individual due to COVID-19.

At the time that the CARES Act was passed, some observers noted that the definition of Qualified Individual was incomplete.  Certain persons who could be adversely affected by the COVID-19 pandemic were left out of the definition.  For example, what about a person whose spouse was unable to work due to lack of childcare?

Notice 2020-50 to the Rescue!

In Notice 2020-50, the IRS expands the group of persons who are Qualified Individuals and can take advantage of the provisions of the CARES Act.  Notice 2020-50 provides that a Qualified Individual includes an individual who experiences adverse financial consequences as a result of:

  • the individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
  • the individual’s spouse of a member of the individual’s household being quarantined, furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
  • closing or reducing hours of a business owned or operated by the individual’s spouse of a member of the individual’s household due to COVID-19.

Rarely does the IRS expand on a taxpayer’s rights.  However, in Notice 2020-50, the IRS corrected what many observers saw as shortcomings of the CARES Act.

Other Important Provisions of Notice 2020-50

  1. The CARES Act requires an employee to certify to her employer that she is in fact a Qualified Individual. The employer can rely on the certification by the employee, unless the employer has “actual knowledge to the contrary”.  There was some confusion whether this imposed a duty on the employer to investigate the truth of the employee’s certification.  Notice 2020-50 says that this requirement “does not mean that the administrator has an obligation to inquire into whether an individual has satisfied the conditions . . .”  Rather, an employer may not rely solely upon the certification of the employee only if the employer “already possesses sufficiently accurate information to determine the veracity of a certification”.   In addition, Notice 2020-50 provides sample language for an acceptable certification.
  2. As stated above, the CARES Act provides somewhat of a tax holiday to a Qualified Individual. While a distribution from a qualified retirement plan is generally includable in taxable income in the year of distribution, the CARES Act permits a Qualified Individual to include a CRD in taxable income ratably over a three-year period.  Notice 2020-50 clarifies that this is an election on the part of the Qualified Individual.  The Qualified Individual may choose instead to include the entire CRD in taxable income in the year of receipt.  However, this election may not be changed.  All CRDs must be treated in the same manner as reflected on the Qualified Individual’s 2020 tax return.
  3. The CARES Act also permits a Qualified Individual to recontribute a CRD to a qualified retirement plan. Unlike the tax treatment of a CRD, whether a CRD will be recontributed to a qualified retirement plan, or the manner in which it will be recontributed, does not have to be determined before the filing of the Qualified Individual’s 2020 tax return.  Notice 2020-50 says that the decision can be made at any time during the three-year period and provides for the filing of amended returns to reflect the recontribution of all or a portion of the CRD,

In Notice 2020-50, the IRS expanded many of the rights created by the CARES Act.  This does not often happen.

To learn how your qualified retirement plan is impacted by the CARES Act or Notice 2020-50, call your RMC representative.

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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

Life Insurance for Advisors

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[Transcript]

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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Retirement Plans

Proposed Changes to IRA Minimum Distribution Rules

On May 23, 2019, the U.S. House of Representatives approved legislation that relaxes the rules for mandatory minimum distributions for retirement savers. Currently, an individual is required to take minimum distributions from an IRA at age 70 1/2.  If the legislation, as passed by the House, is passed by the Senate and signed into law by the President, the age, at which retirees must start withdrawing from their individual retirement account(s), will increase to 72.

Here is an example to illustrate how the legislation, if enacted into law, would affect an individual’s required minimum distribution. The value of the IRA at the close of business on December 31st of the prior year is divided by the age on the table below. The minimum distribution for a 72 year old with an IRA value of $100,000 would be 100,000/ 25.6 (age 72), giving this person a payout of $3,906.25.

UNIFORM LIFETIME – TABLE III

For use by:

  • Unmarried owners,
  • Married owners whose spouses aren’t more than 10 years younger, and
  • Married owners whose spouses aren’t the sole beneficiaries of their IRAs

Otherwise, Table I or Table II may apply

Age Distribution Period Age Distribution Period
70 27.4 93 9.6
71 26.5 94 9.1
72 25.6 95 8.6
73 24.7 96 8.1
74 23.8 97 7.6
75 22.9 98 7.1
76 22.0 99 6.7
77 21.2 100 6.3
78 20.3 101 5.9
79 19.5 102 5.5
80 18.7 103 5.2
81 17.9 104 4.9
82 17.1 105 4.5
83 16.3 106 4.2
84 15.5 107 3.9
85 14.8 108 3.7
86 14.1 109 3.4
87 13.4 110 3.1
88 12.7 111 2.9
89 12.0 112 2.6
90 11.4 113 2.4
91 10.8 114 2.1
92 10.2 115 and over 1.9

 

In addition, the bill removes the age limit at which a taxpayer must stop contributing to a plan. If you have any questions about the proposed or current law, or have questions on retirement planning in general, contact RMC Group today at 239-298-8210 or [email protected]

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Retirement Plans

Different Types of Retirement Plans

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[Transcript]

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

What happens if you live too long?

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[Transcript]

So why retirement plans?

Why do businesses want to put their money there?

Their hard-earned money…

First of all everybody knows Americans, just in general are not saving it up for retirement.

We’re always worried about dying too soon…

But what happens if we live too long?

What then?

What do we do?

We don’t have the resources in our retirement years.

This is why a retirement plan is fabulous!

Put money away now in your peak earning years.

Businesses can put this money away all on a tax-favored basis so they save now and plan for tomorrow.

And for this reason defined benefit plans and defined contribution plans are fabulous planning options for business clients.

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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!

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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].

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Retirement Plans

401(k)’s are Killing Business Owners Retirement

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Right now one of the biggest secrets is that 401(k)’s right now are killing business owners retirement.

See the problem is that most business owners are looking at defined benefit plans like 401(k), SEP, simples of those type of things.

In 2019 they are limited by only being able to contribute $19,000 and another $6,000 if you’re over age 50.

In a simple plan, it’s limited even further by $13,000.

So what happens is the owner who’s at risk who is making sure that everybody has employment is being treated as the most junior as the most junior staff is.

Seems a little unfair…

With a defined benefit plan, you can set a plan up so that that business owner is getting the lion’s share of the benefit and what those plans can offer is the largest tax deduction.

Currently available under the IRS codes you can help defer reduce or even eliminate some of your stock market risk, you can use those benefits to buy estate planning tools, and as of 2019 you can guarantee an income of up to $225,000 a year guaranteed for life.

It’s a much better way of offering things to an employer instead of a 401(k).

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Retirement Plans

Planning for Retirement: What Retirees Fear and Do Not Understand

Saving for retirement is important. If you start early, save consistently, and regularly monitor your investments, you hope you will have accumulated enough for retirement.  But how much is really enough?

A study in BMO Wealth Management, “The Aging Economy: Improving with Age,” found that many Americans have significant concerns about their retirement years.  They fear that health and financial woes will impact the security of their retirement years or that they will become a burden on their families.

The study found that the primary retirement concern is outliving their savings.  Today, the average life expectancy is 76 for men and 81 for women.  As people live longer, their retirement savings must also last longer.  According to the study, 44% of respondents fear that they will run out of money.  This is a valid concern.  Only 10% of retirees have adequate savings to maintain their pre-retirement lifestyle.  Even those who think they have enough savings may not.  Inflation can erode the value of savings, meaning that you will need more money each year just to maintain the same standard of living. At current trends, inflation will destroy 50% of retirement savings every 22 years.

Another concern is taxes.  A recent survey by the Nationwide Retirement Institute found that 37% of retirees had not considered how taxes would impact their retirement when planning and 70% of retirees either had no knowledge or were only somewhat knowledgeable about taxes. Since retirement income will be reduced by taxes, it is important to understand the impact of taxes, when planning for retirement.

A third concern is medical and long-term care expenses.  Even with Medicare, a retiree will fact increased costs for gap coverage and out-of-pocket expenses.  In addition, long-term care may be needed if either you or your spouse becomes unable to manage everyday activities. Long-term care is expensive, and the cost is growing at a rate faster than inflation. With people living longer, the likelihood of needing long-term care increases. Planning for retirement means that you must account for medical expenses and long-term care in your retirement budget. To illustrate, the Employee Benefit Research Institute determined that a 65 year old couple with median prescription drug expenses would need $296,000 in savings to have a 50% chance of having enough money to cover their health expenses in retirement. If they wanted 90% odds of covering these costs, they would need $400,000 in savings.

How can you overcome these retirement concerns?  Call the RMC Group.  We work with advisors and their clients to develop the most effective retirement program to meet the needs and goals of people planning for retirement.  Our approach to retirement planning is comprehensive and process-driven.  We guide our clients to a better retirement strategy.  We begin with an analysis of the client’s needs and goals. During this process, we examine each factor impacting retirement and will you and your client design, implement and administer the right retirement plan to achieve your client’s financial goals and retirement needs.

To learn more about our pension or retirement planning process, contact RMC today at 239.298.8210 or [email protected].