401(k) Options That Plan Sponsors Should Pass On

My latest article on JDSupra.com can be found here.

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IRS issues Emergency Savings Account guidance

The Internal Revenue Service (IRS) issued Notice 2024-22, which provided initial guidance on emergency savings accounts linked to 401(k) plans, which were established under the SECURE 2.0 Act. Effective for plan years beginning after December 31, 2023, it allows 401(k) plans to offer (but do not require) “pension-linked emergency savings accounts” (PLESAs) to non-highly compensated employees as part of their plans.

A PLESA is a separate, designated Roth (after-tax) account that is included in a non-highly compensated employee’s regular 401(k) plan account. The purpose is to help enable and encourage employees to save for financial emergencies, separate and apart from Hardship distributions from the plan. Employees must be eligible for but do not need to contribute to the underlying plan in order to contribute to the PLESA. A PLESA may accept only employee contributions. A PLESA is subject to a maximum balance of $2,500 (as adjusted), or a lesser plan-set limit. Distributions are not subject to the 10% early distribution excise tax (unlike hardship distributions). A PLESA might be combined with an automatic contribution arrangement (optional). The PLESA has to provide that employee contributions to the PLESA be matched by the employer (if the plan has matching contributions), and made at the same rate as to those made to the employee’s underlying plan account. Recordkeeping must separately account for contributions to the PLESA and earnings.

Based on experience, I doubt that most small and medium-sized plans will implement this change because in terms of recordkeeping and work, the $2,500 maximum balance doesn’t outweigh the work in allowing the provision.

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The student loan match

I graduated from school in 1998. 2023 was the year that all my loans were paid off, loans that were just made for law school, and my one-year Tax LLM program. So I understand how terrible student loans can be.

One facet of SECURE 2.0 that got people talking is the provision to allow a 401(k) match based on a participant’s student loan payment rather than deferrals.

Again, for most small and medium-sized plans, I truly doubt they will implement this change. Many plans don’t offer a match and I think for those that do, any hurdles put in their place by the Internal Revenue Service is going to cut down on interest.

A survey showed that more than 60% of plan sponsors will not add the provision. Only about 5% will add, while about 19% are considering it.

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Fidelity adds annuity option

Fidelity is offering a new solution, that will allow employees to convert all or a portion of their retirement savings—from a 401(k), 403(b), or 457(b)—into an immediate income annuity.

I will be honest, I will not recommend any of my plan sponsor clients to offer an annuity option. Why? I hate volunteering people to do things and if a plan offers an annuity option, they have to vet the annuity provider and the products being offered.

I want participants to take their money in a lump sum and leave. What they want to do with their money is their business and I don’t want plan sponsors to have more on their plate.

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Reduce expenses and then re-allocate for forfeitures

The practice of forfeitures in 401(k) plans was to reallocate or reduce contributions. Then language allowed to pay for plan expenses.

The litigation against large plan sponsors that have used forfeitures to reduce contributions has given me a chilling effect. While reducing contributions has been allowed since the beginning of the time, I’d be afraid if the court would opine that it’s a prohibited transaction. That is why I’d use forfeitures to pay expenses, and then reallocate.

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The problem with Bitcoin ETFs

Until they say otherwise, the Department of Labor (DOL) doesn’t want to see crypto in 401(k) plans. I think the door for Bitcoin in 401(k) plans opens a little bit because the ETFs will probably smooth over the volatility of Bitcoin and issues regarding cyber theft (since Bitcoin directly, gets stashed in a virtual wallet).

The problem is until the DOL changes its mind, what do you do with participants who have self-directed brokerage accounts and want access to ETFs? Do you restrict access? I would, but the problem is most plan sponsors don’t want to say no, especially when these brokerage accounts are usually used by the plan sponsor’s higher-ups.

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Why would any employer do this?

SECURE 2.0 allows employers the opportunity to offer matching contributions and profit-sharing contributions on an after-tax basis for participants who elect such treatment. Why would any employer offer that? I require separate accounting by the TPA and there is this aspect of payment of taxes that has to be addressed since a participant pays taxes on the contributions and gets tax-free earnings.

Notice 2024-2 from the Internal Revenue Service let us know about the tax reporting aspect of these designated Roth employer contributions. Originally, I thought it would be added to the W-2 and taxed, but I suppose the IRS didn’t want to give more headaches to payroll companies, the same group who successfully complained enough that the IRS delayed the implementation of Roth catch-up contributions for Highly Compensated Employees.

Designated Roth matching contributions and designated Roth nonelective contributions to a plan must be reported using Form 1099-R for the year in which the contributions are allocated to the individual’s account. The total amount of designated Roth matching contributions and designated Roth nonelective contributions that are allocated in that year are reported in boxes 1 and 2a of Form 1099-R, and code “G” is used in box 7. That means that no taxes will be withheld from a participant’s paycheck to pay for these contributions, possibly causing an amount due to the government. It seems a lot of jumping around and working for a provision that won’t be that popular.

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Tell the employees the truth

I always say the two worst things you can give people are false praise and false hope. One of the reasons that I started my own law practice is because I was an employee and for the most part, I didn’t like how I saw employers treat employees especially when it came to acting towards them by giving them sort of fake praise and then taking action against them.

It happened really early when I worked at a Boston law firm as a law clerk when I was completing my studies as an LLM student. There was this paralegal there who clearly was way in over her head. I never worked with her, but she looked like a deer in headlights, so it was Christmas season and she was getting her end-of-the-year review. She said that her work was excellent and she got a raise. Within two weeks, she was fired for being incompetent.

What’s the point of saying someone is doing a great job when they’re not? I’m sure people will say that the law firm was going to fire her anyway and so what’s the point of telling her that she really needed to improve? I have an expression that I don’t like to look bad and I believe that the law firm looked bad in her eyes, looked bad in the eyes of other employees (there was another paralegal who was really upset by it), and the leadership looked like a bunch of liars. I always say your word is your bond and if you go back on your word, people will never see you the same way again.

Employees won’t improve if you don’t tell them they need to improve. Getting rid of employees and hiring new ones can be an absolute ordeal, so it’s a good idea to salvage what you have. But you can’t salvage something where the employee thinks they’re doing a great job because you told them. Mixed signals aren’t a good idea when managing employees. Morale is an important aspect too. So when you’re firing an employee you’ve told what a great job they’re doing, it will impact the employees that are left.

So if you have staff and they’re not up to par, tell them. Give them an opportunity to get better because not having them see it coming is great on Survivor, it’s not great in the workplace.

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These Things You Can’t Afford To Neglect About Your 401(k) Plan

My latest article for JDSupra.com can be found here.

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Why would any employer do this?

SECURE 2.0 allows employers the opportunity to offer matching contributions and profit-sharing contributions on an after-tax basis for participants who elect such treatment. Why would any employer offer that? I require separate accounting by the TPA and there is this aspect of payment of taxes that has to be addressed since a participant pays taxes on the contributions and gets tax-free earnings.

Notice 2024-2 from the Internal Revenue Service let us know about the tax reporting aspect of these designated Roth employer contributions. Originally, I thought it would be added to the W-2 and taxed, but I suppose the IRS didn’t want to give more headaches to payroll companies, the same group who successfully complained enough that the IRS delayed the implementation of Roth catch-up contributions for Highly Compensated Employees.

Designated Roth matching contributions and designated Roth nonelective contributions to a plan must be reported using Form 1099-R for the year in which the contributions are allocated to the individual’s account. The total amount of designated Roth matching contributions and designated Roth nonelective contributions that are allocated in that year are reported in boxes 1 and 2a of Form 1099-R, and code “G” is used in box 7. That means that no taxes will be withheld from a participant’s paycheck to pay for these contributions, possibly causing an amount due to the government. It seems a lot of jumping around and working for a provision that won’t be that popular.

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