Author: ericgregory

Innovative 401(k) Plan Benefit for Employees with Student Loan Repayments

Many recent college graduates find it difficult to make contributions to their employer’s 401(k) plan as they have significant student loan repayments which take precedence in their budget.  By failing to make 401(k) deferrals, these employees may miss out on employer matching contributions as well as earnings on the deferrals and match. The IRS has issued a recent Private Letter Ruling (PLR 201833012) that may allow these employees to receive an employer contribution that is conditioned on making a certain level of student loan repayment rather than making a deferral contribution to the plan.   Under the student loan repayment (“SLR”) program: All employees are eligible and can voluntarily enroll in the program. An employee can opt out of the program on a prospective basis. If an employee enrolls in the program, the employer will make an “SLR nonelective contribution” at the end of the plan year equal to 5% of the employee’s eligible compensation for each pay period in which the employee made a student loan repayment at least equal to 2% of the employee’s eligible compensation. If the employee does not make a student loan payment in a pay period but makes an elective deferral of at least 2% of his/her eligible compensation in the pay period, the employer will make a “true-up” matching contribution at the end of the plan year. The employee must be employed on...

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IRS Releases Draft W-4 to Comply with Tax Law Changes: Four Things Employers Need to Know Now

The Tax Cuts and Jobs Act (“TCJA”) has created many changes for individuals and employers, including the way that employers calculate wage withholding for their employees. Employers need to be aware of the new methodologies for calculating individual income tax withholding, and need to prepare for the use of new forms. To that end, the IRS has published an “early release draft” of the 2019 IRS Form W-4, which incorporates a number of these changes and institutes a new withholding regime. Background on W-4s W-4s are the document that employees complete so that their employers can determine the amount of tax to withhold each pay period. Employees accurately completing a W-4 will help them from having either a large income tax balance due at tax time or from overpaying taxes and receiving a large refund. It is not to be confused with Form W-2, given to employees at the end of the year with total amounts of wages earned, federal and state taxes withheld, and contributions to Social Security for a given year. Changes on the New Draft Form W-4 A significant change ushered in by the TCJA was the elimination of personal exemptions for tax years 2018 through 2025. The exemptions were the basis upon which the W-4 system of taking allowances was based. This means that the W-4 has to employ a modified regime for determining withholding....

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IRS Permits the Use of Forfeitures for QNECs, QMACs and Safe Harbor Contributions

Many employers had long assumed that they could fund contributions to qualified plans made to avoid violating nondiscrimination rules from employee forfeiture accounts. Recently, the IRS finalized helpful new guidance to employers clarifying that forfeitures can be used fund these contributions. QNECs, QMACs and Safe Harbor Contributions Tax-qualified defined contribution plans (e.g., 401(k) and profit sharing plans) may not discriminate in favor of highly compensated employees (“HCEs”). There are two nondiscrimination tests that specifically apply to 401(k) plans: (1) the Actual Deferral Percentage (“ADP”) test, which applies to employee salary deferrals; and (2) the Actual Contribution Percentage (“ACP”) test, which applies to employer matching contributions, if any, and employee after-tax contributions. These non-discrimination tests are complex and can be difficult to administer. If the employer fails one or both of these tests, one option it has is to make a qualified non-elective contribution (“QNEC”) or a qualified matching contribution (“QMAC”) to increase the average percentage deferrals or match for non-highly compensated employees (“NHCEs”) in comparison to the HCEs. Additionally, employers can implement a “safe harbor” plan design to avoid ADP and ACP testing altogether. Safe harbor plans are exempt from this testing, so long as the employer makes a matching or non-elective contribution under one of the pre-approved safe-harbor formulas. All of these contributions are subject to certain nonforfeitability and distribution requirements. Treasury Regulations: Forfeitures Seemingly Not Permitted It...

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Signs Point to Yes: The IRS Advisory Committee Drops Hints That the Qualified Retirement Plan Determination Letter Program Might Return in Some Form

For many years, plan sponsors could regularly get a determination letter from the IRS to ensure that their individually-designed qualified retirement plan met all of the requirements for favorable tax treatment. However, in 2017 the IRS ended that practice. Since that time, plan sponsors have had no mechanism by which to confirm that their plans continued to satisfy all of the qualification requirements. Recent publications from the IRS and its Advisory Committee, however, suggest that the program might come back in some form. Issues for Employers without the Determination Letter Program Without the determination letter program, employers are required to be more vigilant that their individually-designed plans are regularly reviewed by benefits counsel. For decades, determination letters served as a “backstop” for employers to ensure compliance with the Internal Revenue Code, which helps guarantee the current deductibility of employer contributions and tax-free growth of plan investments held in trust. Qualification is also important to third parties. Auditors and investment managers would typically examine favorable determination letters. Companies involved in mergers and acquisitions would typically present a favorable determination letter to demonstrate qualification requirement compliance. Since the program has not been in place, it has been more difficult to obtain assurance that a plan meets the qualification requirements. Signs of Change Early in 2018, the IRS published Notice 2018-24, which requested comments on possibly re-opening the program for individually-designed plans....

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Qualified Transportation Fringe Benefits No Longer Deductible for Employers

In the past, employers have been able to deduct expenses related to “qualified transportation fringe benefits” (“QTFBs”) such as qualified parking, transit passes, transportation in commuter highway vehicles, or qualified bicycle commuting reimbursements. Pub. L. No. 115-97, commonly referred to as the “2017 Tax Act” or the “Tax Cuts and Jobs Act” (“TCJA”), however, has repealed the ability of employers to deduct the costs associated with QTFBs after December 31, 2017. Ramifications for For-Profit Employers QTFBs are no longer deductible for employers when provided under a salary reduction arrangement (“SRA”), where the employee has the choice between the actual receipt of compensation and the QTFB benefits. Employees, conversely, may still make elections under an SRA or otherwise exclude QTFBs from their income. Employees, however, can no longer exclude qualified bicycle commuting reimbursements from income for tax years 2018 through 2025. This means that most employers have less of an incentive to provide QTFBs. Employers may provide additional compensation to employees that would be deductible so long as it is “ordinary and necessary” under Code Section 162. Ramifications for Non-Profit Employers Tax-exempt organizations must include as unrelated business taxable income (“UBTI”) any amounts paid by the organization for any QTFBs. This is effectively a 21% tax on these amounts. This will give rise to a requirement to file a Form 990-T for smaller non-profit organizations that otherwise would not be...

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The HR Blog is published by Dickinson Wright PLLC to inform the public of important developments within the firm and practice areas. The content is informational only and does not constitute legal or professional advice. We encourage you to consult a Dickinson Wright attorney if you have specific questions or concerns relating to any of the topics covered in this blog.

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