Pension And Profit Sharing

<p>Starting with the 2025 tax year, the SECURE Act 2.0 requires employers that establish new 401(k) or 403(b) plans to auto-enroll employees in the savings plans. </p><p>The minimum auto-enrollment contribution rate will range from 3% to 10%. Each year, the minimum contribution rate will then increase by 1% until the rate reaches 15%. </p><p>The IRS has released proposed regs confirming that there is no delay--meaning that new plans are currently subject to the auto-enrollment rule starting in 2025. The rules contained in the proposed regulations will be effective six months after the date that final regulations are published. In the meantime, a reasonable, good faith interpretation of the law is required. </p><p>The regulations clarify that there is no provision that excludes any class of participant from auto-enrollment, meaning that long-term part-time employees must also be automatically enrolled if they are otherwise eligible and the plan is subject to the rule. Participants with an affirmative election to opt out of auto-enrollment on file do not have to be automatically enrolled in the plan. The preamble to the proposed regulations clarifies that when plans did not automatically enroll participants who were already participating in the plan, yet did not make an affirmative election, they must automatically enroll the participant by the first plan year when final regulations are effective (presumably, 2027). The participant's default deferral rate must be calculated as though they had been auto-enrolled since 2025. </p><p><b>Under the law, small business employers who normally employ 10 or fewer employees and new businesses are exempt from the auto-enrollment requirement.&nbsp; The proposed regulations clarify that self-employed individuals, independent contractors and corporate directors do not count toward the&nbsp; 10-employee threshold (only common law employees must be included).</b></p>

<p><b><i>Editor's Note</i></b><i>: </i>The SECURE Act 2.0 Roth catch-up contribution mandate, discussed below, is effective January 1, 2026. The final regulations on the Roth catch-up mandate created some confusion over whether the IRS had again delayed the requirement. The IRS decided to delay the effective date of the final regulations themselves, so the regulations are not effective until January 1, 2027. The preamble to the regulations do, however, specifically state that the regulations are not extending or modifying the existing transition period. Beginning with the 2026 tax year, employers are required to comply with the Roth mandate on a reasonable, good faith basis until the effective date of the regulations themselves.</p><p>Catch-up contributions are defined as additional elective deferrals by an eligible participant in an applicable employer plan, as defined in IRC Section 414(v) and regulations thereunder. Elective deferral for this purpose refers to the amounts described in IRC Section 402(g)(3) ( Q <a href="javascript:void(0)">3760</a>), but also includes amounts deferred to eligible Section 457 governmental plans.<a href="#_ftn1">¹</a> The provisions allowing catch-up contributions are among the retirement amendments of EGTRRA 2001 that became permanent under the Pension Protection Act of 2006 ("PPA 2006").<a href="#_ftn2">²</a></p><p>For purposes of IRC Section 414(v), an applicable employer plan means: </p><ol class="rte2-style-ol" id="rte-288f9ac1-989e-11f0-a1db-bf30aee79229" start="1"><li>employer plans qualified under IRC Section 401(a) ( Q <a href="javascript:void(0)">3838</a>);</li><li>Section 403(b) tax sheltered annuities ( Q <a href="javascript:void(0)">4047</a>);</li><li>eligible Section 457 governmental plans (457(b) plans);</li><li>salary reduction simplified employee pensions (i.e., SAR-SEPs ( Q <a href="javascript:void(0)">3705</a>)); and</li><li>SIMPLE IRAs ( Q <a href="javascript:void(0)">3706</a>).<a href="#_ftn3">³</a></li></ol><p>For this purpose, qualified plans, Section 403(b) plans, SAR-SEPs, and SIMPLE IRAs that are maintained by a controlled group of corporations, a group of trades or businesses under common control, or members of an affiliated service group ( Q <a href="javascript:void(0)">3935</a>) are considered one plan. In addition, if more than one eligible Section 457 governmental plan is maintained by the same employer, the plans will be treated as one plan.<a href="#_ftn4">⁴</a></p><p>Catch-up contributions permitted under IRC Section 414(v) do not apply to a catch-up eligible participant for any taxable year in which a higher catch-up amount is permitted under IRC Section 457(b)(3) during the last three years prior to the plan's normal retirement year ( Q <a href="javascript:void(0)">3584</a>).<a href="#_ftn5">⁵</a></p><p><em>Dollar limit</em>. A plan may not permit additional elective deferrals for any year in an amount greater than the lesser of (1) the indexed amount listed below or (2) the excess (if any) of the participant's compensation as defined in IRC Section 415(c)(3) ( Q <a href="javascript:void(0)">3868</a>, Q <a href="javascript:void(0)">3728</a>) over any other elective deferrals for the year made without regard to the catch-up limits.<a href="#_ftn6">⁶</a> An employer that sponsors more than one plan must aggregate the elective deferrals treated as catch-up contributions for purposes of the dollar limit.<a href="#_ftn7">⁷</a> An individual participating in more than one plan is subject to one annual dollar limit for all catch-up contributions during the taxable year.<a href="#_ftn8">⁸</a></p><p>The indexed dollar limit on catch-up contributions to SIMPLE IRAs and SIMPLE 401(k) plans is $3,500 in 2023-2025 and $3,000 in 2015-2022. The SECURE Act 2.0 increased the catch-up contribution limit to $5,000 for taxpayers aged 60, 61, 62 or 63 for tax years beginning after 2024.<a href="#_ftn9">⁹</a></p><p>The indexed dollar limit on catch-up contributions to all other 401(k) plans and to Section 403(b) plans,eligible Section 457 plans, and SAR-SEPs is $8,000 in 2026,&nbsp;$7,500 in 2023-2024 and $6,500 in 2020-2022. </p><p>The SECURE Act 2.0 increased the catch-up contribution limit to the greater of (1) $10,000 or (2) 150% of the regular catch-up limit for 2024 for taxpayers aged 60, 61, 62 or 63 for tax years beginning after 2024 (up from $6,500 in 2020-2022 and $7,500 in 2023 to 2024).<a href="#_ftn10">¹⁰</a> For 2025, the $10,000 catch-up contribution limit was indexed to $11,250.<a href="#_ftn10">¹¹</a>The amount remains at $11,250 for 2026.</p><p><b>Planning Point:</b> Only taxpayers who are aged 60,61,62 or 63 on December 31 of the year of contribution qualify for the enhanced catch-up contribution amount. If the individual reaches age 64 during the year, they no longer qualify for the enhanced contribution. If they make the enhanced contribution, it's treated as an excess contribution. If the excess amount (plus associated earnings) is withdrawn by the April 15 tax filing deadline, the individual pays tax on the excess amount in the year of deferral and the earnings are taxed in the year of distribution. If the individual misses the April 15 deadline, the excess is taxed both in the year of deferral and the year of distribution (a double-taxation situation results).</p><p>Post SECURE Act 2.0, if the taxpayer has wages of at least $145,000 from the employer sponsoring the plan in the prior year, the catch-up contribution must be treated as a Roth contribution (the $145,000 limit is also indexed for inflation, to $150,000 in 2026). Congress intends to clarify that it only intended this change for taxpayers earning less than the applicable amount for the prior year can continue to make Roth or pre-tax catch-up contributions. </p><p>The IRS provided transition relief so that catch-up contributions satisfied the SECURE 2.0 provisions until 2026 even if they were non-Roth contributions made on behalf of high-earning taxpayers.<a href="#_ftn11">¹²</a> The IRS clarified that if an employee who is subject to the Roth catch-up requirement elects to make catch-up contributions on a pre-tax basis, the plan sponsor can disregard that election and treat the catch-up as a Roth contribution. When multiple employers sponsor the same 401(k) and an employee has wages from more than one of those employers, the amounts will generally not be aggregated for purposes of determining whether the employee is subject to the Roth mandate. </p><p>However, in final regulations, final regulations released in 2025 now provide that if the employee's common law employer uses a common paymaster in accordance with IRC Section 3121(s), the plan may provide that the employee's common law employer is aggregated with one or more other employers using that common paymaster.Those aggregated employers may then be treated as a single employer sponsoring the plan for purposes of determining Roth catch-up eligibility. Employers that are part of a controlled group or affiliated service group are also permitted to aggregate compensation across multiple entities for purposes of determining whether a participant is required to make Roth catch-up contributions.</p><p>The IRS has also confirmed that it remains optional for employers to offer a Roth savings option. If the plan itself does not offer a Roth savings option, an individual who is subject to the Roth catch-up requirement will not be permitted to make catch-up contributions at all (meaning that employers must track which employees are subject to the catch-up rule regardless of their choice).</p><p>However, pursuant to the proposed regulations, if employees who are subject to the Roth catch-up requirement are permitted to make Roth catch-up contributions, all catch-up eligible employees must be permitted to make Roth catch-up contributions.<a href="#_ftn11">¹³</a></p><p>The IRS also clarified that only FICA wages from the employer are counted in determining whether the employee is subject to the Roth catch-up requirement. Self-employment income is not counted. Similarly, if the employee had no FICA wages from the employer in the prior year (i.e., they were a new hire), they are not subject to the Roth catch-up requirement even if their wages in the current year exceed the threshold. The wage threshold is not prorated for an employee's first year of employment, so the employee's FICA wages must have exceeded the full threshold for the prior year to become subject to the Roth catch-up requirement.<a href="#_ftn11">¹⁴</a></p><p>The applicable FICA wages must come from the individual's common law employer. When multiple employers sponsor the plan, wages from one employer are not aggregated with the wages from another employer sponsoring the plan.<a href="#_ftn11">¹⁵</a></p><p>Employees who are subject to the Roth catch-up requirement will not be required to make an affirmative election to have their catch-up contributions treated as Roth contributions. Contributions from employees who have made elections to defer on a pre-tax basis will automatically be treated as Roth catch-up contributions if the employee is subject to the requirement and the employer has adopted the deemed election rule. </p><p>Pursuant to the deemed election rule, however, the employee must be given an opportunity to make a different election (in other words, they must be given the opportunity to stop making catch-up contributions altogether). The final regulations retained these provisions.</p><p>The regulations also confirm that plans will not violate the universal availability rule by allowing individuals subject to the Roth catch-up requirement to make those Roth contributions.&nbsp;The final regulations also confirmed that plans do not violate the universal availability requirement by allowing for super catch-up contributions, assuming that all participants are entitled to contribute up to the statutory limit that applies to each participant.</p><p>However, the regulations clarify that if any plan within a controlled group permits super catch-up contributions, all plans within that controlled group must permit super catch-up contributions to avoid violating the universal availability requirement.</p><p>The regulations have also provided correction methods to correct failures to adhere to the Roth catch-up requirements. The W-2 method allows the employer to transfer the catch-up contribution from the traditional 401(k) to the Roth account and report the contributions on the employee's W-2. Employers can also use a direct rollover between the traditional and Roth accounts within the plan and report the contribution on Form 1099-R. Under the proposed regulations, the employer would have been required to apply the same correction method to all plan participants for the plan year in question. In response to comments, the final regulations removed this requirement and instead require a plan apply the same correction method for similarly situated participants.</p><p>To use these correction methods, however, the employer must have adopted effective procedures to comply with the Roth catch-up requirement. Specifically, the employer must have adopted the deemed Roth catch-up election provision.<a href="#_ftn11">¹⁶</a></p><p><hr></hr></p><p><strong><strong>Planning Point:</strong></strong> As the SECURE Act 2.0 is drafted, once a taxpayer reaches age 64, the lower catch-up contribution limit will once again apply. Additionally, note that the $145,000 limit is a new limit that is not related to the existing definitions for highly-compensated employees. Plans will be required to track this new limit to determine whether any given participant's catch-up contributions must be treated as Roth contributions (the income limit that applies in the definition for highly-compensated employees is $160,000 in 2025-2026). </p><p><hr></hr></p><p><strong><strong>Planning Point:</strong> </strong>Employers who wish to offer high-earning employees a catch-up contribution option must first contact their plan recordkeeper to request the changes, understanding that it can take months for an amendment to be processed and implemented by the recordkeepers and recordkeepers may also limit the number of changes and amendments that they will process in any given year because of staffing constraints. Given the number of employers who will be interested in amending their plans to permit Roth catch-up contribution options, it's important to act early to avoid delays. </p><p><hr></hr></p><p><em>Eligible participant</em>. An eligible participant with respect to any plan year is a plan participant who would attain age 50 before the end of the taxable year and with respect to whom no other elective deferrals may be made to the plan for the plan (or other applicable) year as a result of any limit or other restriction.<a href="#_ftn12">¹⁷</a> For this purpose, every participant who will reach age 50 during a plan year is treated as having reached age 50 on the first day of the plan year, regardless of the employer's choice of plan year and regardless of whether the participant survives to age 50 or terminates employment prior to his or her birthday.<a href="#_ftn13">¹⁸</a></p><p><em>Universal availability</em>. A plan will not satisfy the nondiscrimination requirements of IRC Section 401(a)(4) unless all catch-up eligible participants who participate in any applicable plan maintained by the employer are provided with the effective opportunity to make the same election with respect to the dollar limits described above.<a href="#_ftn14">¹⁹</a> This is known as the universal availability requirement. A plan will not fail to satisfy this requirement merely because it allows participants to defer an amount equal to a specified percentage of compensation for each payroll period and permits each catch-up eligible participant to defer a pro rata share of the dollar catch-up limit in addition to that amount.<a href="#_ftn15">²⁰</a></p><p>For purposes of the universal availability requirement, all plans maintained by employers that are treated as a single employer under the controlled group, common control, or affiliated service group rules ( Q <a href="javascript:void(0)">3933</a>, Q <a href="javascript:void(0)">3935</a>) generally must be aggregated.<a href="#_ftn16">²¹</a> Exceptions to the aggregation rule apply to Section 457 plans and certain newly acquired plans.<a href="#_ftn17">²²</a></p><p>Catch-up contributions are excluded from income in the same manner as elective deferrals.<a href="#_ftn18">²³</a> The calculation of the elective deferrals that will be considered catch-up contributions generally is made as of the end of the plan year by comparing the total elective deferrals for the plan year with the applicable plan year limit.<a href="#_ftn19">²⁴</a> Elective deferrals in excess of the plan, ADP, or IRC limits, but not in excess of the amount limitations described above, will be treated as catch-up contributions as determined on the last day of the plan year.<a href="#_ftn20">²⁵</a></p><p>An employer may make, but is not required to make, matching contributions on catch-up contributions. If an employer does so, the contributions must satisfy the ACP test of IRC Section 402(m) ( Q <a href="javascript:void(0)">3804</a>).<a href="#_ftn21">²¹</a> Reporting requirements for catch-up contributions are set forth in Announcement 2001-93.<a href="#_ftn22">²⁶</a></p><p><hr align="left" size="1" width="33%"></hr></p><p><a href="#_ftnref1">1</a>. IRC §§ 414(v)(5)(B), 414(u)(2)(C) (USERRA rights); Treas. Reg. § 1.414(v)-1(g)(2). </p><p><a href="#_ftnref2">2</a>. P.L. 109-280, § 811. </p><p><a href="#_ftnref3">3</a>. IRC § 414(v)(6). </p><p><a href="#_ftnref4">4</a>. IRC § 414(v)(2)(D). </p><p><a href="#_ftnref5">5</a>. IRC § 414(v)(6)(C); Treas. Reg. § 1.414(v)-1(a)(3). </p><p><a href="#_ftnref6">6</a>. IRC § 414(v)(2)(A). </p><p><a href="#_ftnref7">7</a>. Treas. Reg. § 1.414(v)-1(f)(1). </p><p><a href="#_ftnref8">8</a>. Treas. Reg. §§ 1.402(g)-2(b), 1.414(v)-1(f)(3). </p><p><a href="#_ftnref9">9</a>. IR-2015-118 (Oct. 21, 2015), Notice 2016-62, Notice 2017-64, Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75, Notice 2024-80, Notice 2023-75.</p><p><a href="#_ftnref10">10</a>. IR-2015-118 (Oct. 21, 2015), Notice 2016-62, Notice 2017-64, Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75, Notice 2024-80, Notice 2023-75.</p><p><a href="#_ftnref11">11</a>. Notice 2023-62 </p><p><a href="#_ftnref12">12</a>. IRC § 414(v)(5). </p><p><a href="#_ftnref13">13</a>. Prop. Treas. Reg. §1.414(v)-2(a)</p><p><a href="#_ftnref14">14</a>. Prop. Treas. Reg. §1.414(v)-2(a).</p><p><a href="#_ftnref15">15</a>. Prop. Treas. Reg. §1.414(v)-2(b).</p><p><a href="#_ftnref16">16</a>. Prop. Treas. Reg. §1.414(v)-2(c).</p><p><a href="#_ftnref13">17</a>. <em>See </em>Treas. Reg. § 1.414(v)-1(g)(3). </p><p><a href="#_ftnref14">18</a>. IRC § 414(v)(4)(A); Treas. Reg. § 1.414(v)-1(e). </p><p><a href="#_ftnref15">19</a>. Treas. Reg. § 1.414(v)-1(e). </p><p><a href="#_ftnref16">20</a>. IRC § 414(v)(4)(B). </p><p><a href="#_ftnref17">21</a>. Treas. Reg. § 1.414(v)-1(e)(2) and (3). </p><p> 22. See IRC § 402(g)(1)(C). </p><p><a href="#_ftnref19">23</a>. Treas. Reg. § 1.414(v)-1(b)(2). </p><p> 24. Treas. Reg. § 1.414(v)-1(c). </p><p> 25. T.D. 9072, 2003-2 C.B. 527. </p><p><a href="#_ftnref22">26</a>. 2001-44 IRB 416. </p>

<span style="font-weight: 400;">Under the 2024 final RMD regulations, the surviving spouse will automatically be treated as the participant (without the need to make a special election) if all of the following are true: (1) the surviving spouse is the sole beneficiary, (2) the original participant died before their required beginning date and (3) the surviving spouse will receive payments under the life expectancy rule (rather than the ten-year rule).<a href="#_ftn1" name="_ftnref1">¹</a></span><span style="font-weight: 400;">  </span><br /> <br /> <span style="font-weight: 400;">If the original participant died after their required beginning date, the surviving spouse must make a separate election to be treated as though they were that participant.<a href="#_ftn1" name="_ftnref1">²</a></span><span style="font-weight: 400;">  </span><br /> <br /> <span style="font-weight: 400;">This election is only available when the surviving spouse's first RMD would be in 2024 or later.  If the original participant would have reached their required beginning date in 2024 or later, the spousal election is permitted.</span><br /> <br /> <span style="font-weight: 400;">Whenever an election to be treated as the original participant is in effect, the Uniform Lifetime Table factor will be used to determine the amount of the surviving spouse's RMDs up until the year of the surviving spouse's death.  Generally, this will result in smaller annual RMDs when compared to use of the Single Life Table.</span><br /> <br /> <span style="font-weight: 400;">Also assuming an election to be treated as the original participant is in effect, upon the surviving spouse's death, that spouse's beneficiary must continue to receive distributions based on that spouse's remaining life expectancy using the Single Life Table if the surviving spouse dies on or after the date they have begun to receive required distributions.  The factor is determined using the surviving spouse's remaining life expectancy in their year of death (based on age), and then reducing that by one for each subsequent year.  The surviving spouse's beneficiary has ten years to empty the account (i.e., they are not treated as an eligible designated beneficiary).</span><br /> <br /> <span style="font-weight: 400;">The proposed regulations also propose that, although the spousal election allows the spouse to be treated as the participant for purposes of the RMD regulations, that treatment does not apply in all situations.  It would, however, apply so that the spouse would not be subject to the 10% early withdrawal penalty for pre-age-59 ½ distributions.  The surviving spouse's RBD would also be determined by reference to the original participant's age, rather than the surviving spouse.  The proposed regulations also provide that when determining the account balance for RMD purposes, all amounts held in a designated Roth account and any other account under the plan are included for purposes of calculating the RMD for the year.<a href="#_ftn1" name="_ftnref1">³</a></span><br /> <br /> 1.   Treas. Reg. §§ 1.401(a)(9)-3(d), 1.401(a)(9)-3(e).<br /> <br /> 2.  Treas. Reg. § 1.401(a)(9)-5(g)(3)(i).<br /> <br /> 3.  Prop. Treas. Reg. § 1.401(a)(9)-5(g)(3)(ii).

Late in 2020, the DOL finalized a rule that would limit consideration of environmental, social and governance (ESG) factors when retirement plan fiduciaries are selecting plan investments without violating their fiduciary duties. Plan fiduciaries are obligated to act solely in the interest of plan participants and beneficiaries when making investment decisions. Under the final rule, the DOL said that plan fiduciaries must select investments based on pecuniary, financial factors and that it would apply an "all things being equal test"--meaning that fiduciaries were not prohibited from considering or selecting investments that promote or support non-pecuniary goals, provided that they satisfy their duties of prudence and loyalty in making the selection. This rule was seen as limiting fiduciaries' ability to consider ESG factors in investing. However, earlier in 2021, the EBSA announced that it would not enforce this Trump-era rule, so that plan fiduciaries may once again consider ESG factors in making investment decisions.<br /> <br /> On November 22, 2022, the DOL released a new final rule on ESG investing.  The rule retains many prior elements, yet is generally expected to make it easier for plan fiduciaries to consider ESG factors in determining investment strategy. According to the rule, a plan fiduciary's determination with respect to an investment or investment strategy must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis. The DOL further states that the analysis should use appropriate investment horizons consistent with the plan's investment objectives and should account for the funding policy of the plan established under ERISA. Under the final rule, however, fiduciaries will not be prohibited from considering collateral benefits aside from investment returns when there is an essential "tie" in the context of the investment analysis. Fiduciaries will also not violate their duty of loyalty merely because they take participant preferences into account when building their menu of otherwise prudent investment options.  The new rule does not contain any separate standard for QDIAs.<br /> <br /> This ESG investing rule continues to generate controversy, so practitioners should pay close attention to developments in this area.

Under pre-SECURE 2.0 law, two spouses who each have ownership interest in separate businesses often ran into problems trying to pass nondiscrimination testing due to the family attribution rules.  This often limited the flexibility of businesses offering retirement benefits solely due to state community property laws or the existence of minor children—and unintended consequence.  SECURE 2.0 created two important exceptions that can now help closely held business owners offer retirement plans without running afoul of the IRS.<br /> <br /> The government prohibits business owners from establishing retirement plans that primarily benefit highly compensated employees (HCEs) while excluding other less highly compensated individuals.  To prevent businesses from using multiple entities to provide benefits primarily to HCEs and pass the anti-discrimination tests, the law treats certain related entities as a single entity for nondiscrimination testing purposes.<br /> <br /> These "controlled group" rules evaluate the ownership structure of related entities.  If enough common ownership exists, the entities are deemed to be a single business for retirement plan testing purposes.  Similarly, when applying the law, individuals may be deemed to own business interests owned by certain family members—including spouses and minor children.<br /> <br /> Under pre-SECURE 2.0 law, one spouse was always deemed to own the business interests that were owned by their spouse unless a spousal exception applied.<br /> <br /> Under IRC Section 414, the spousal exception applies if all of the following are true: (1) the spouse has no direct interest in their spouse's business, (2) the spouse does not participate in management of their spouse's business, and is not a director, officer or employee of that business, (3) no more than 50% of that business' income is passive (meaning derived from rents, royalties, dividends, interest and annuities), and (4) the spouse's ownership interests are not subject to restrictions on the spouse's ability to dispose of them that favor the other spouse or their minor children.<br /> <br /> Ignoring the attribution rules can expose the sponsoring business to steep penalties and potential disqualification.<br /> <br /> Couples who live in community property states were previously unable to qualify for the spousal exception.  In community property states, each spouse is deemed to own 50% of their spouse's assets acquired during the marriage.  SECURE 2.0 overrides and disregards community property laws for purposes of the Section 414 spousal exception.<br /> <br /> Example: Assume David and Judy are a married couple residing in Texas, a community property state.  During the marriage, each spouse established their own separate business (each owning 100% of the interests in their respective business).  The two businesses are completely unrelated.  However, under pre-SECURE 2.0 law, David was treated as owning 50% of Judy's business and vice versa under Texas law.  The couple was unable to qualify for the spousal exception because they could not satisfy the "no direct interest" requirement.<br /> <br /> Post-SECURE 2.0, no controlled group is deemed to exist because Texas' community property laws are disregarded.  Beginning in 2024, David and Judy can each establish individual retirement plans for their business.  Each plan can be structured to pass the nondiscrimination testing rules considering only the individual company's employees.<br /> <br /> Under pre-SECURE 2.0 law, minor children (under age 21) were treated as though they owned 100% of their parents' business assets when determining whether a controlled group existed.  Therefore, if two individuals each owned separate businesses, a child in common would be deemed to own 100% of each parent's business.  That's true regardless of whether the two parents were ever married.<br /> <br /> Considering the example above, assume David and Judy had a seven-year-old child, Meredith.  Pre-SECURE 2.0, Meredith was deemed to own 100% of David's business and 100% of Judy's business.  David and Judy were unable to qualify for the Section 414 spousal exception solely because of Meredith's existence.<br /> <br /> SECURE 2.0 changed the rules to disaggregate ownership of two businesses where common ownership was based solely on the existence of a minor child.

<div class="Section1"><br /> <br /> The 2019 Tax Certainty and Disaster Relief Act extended the rules governing qualified disaster distributions from retirement accounts, discussed below for victims of disasters that occurred in 2018 through 60 days after enactment of the bill (December 20, 2019). The distribution itself must be made within 180 days after enactment of the law to qualify. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>. <em><em>See also</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of how the CARES Act expanded the retirement plan distribution rules for 2020 in response to the COVID-19 pandemic.<br /> <br /> The 2017 tax reform legislation,<a href="#_ftn1" name="_ftnref1">¹</a> the 2017 Disaster Tax Relief and Airport and Airway Extension Act,<a href="#_ftn2" name="_ftnref2">²</a> and the Bipartisan Budget Act of 2018,<a href="#_ftn3" name="_ftnref3">³</a> include special tax relief for taxpayers affected by certain presidentially declared disasters that occurred in 2016 and 2017.<br /> <br /> A 2016 qualified disaster is a major disaster that was declared in 2016 by the president. A 2016 qualified disaster distribution is any distribution received from an eligible retirement plan in 2016 or 2017 if the recipient&rsquo;s main home was located in a 2016 qualified disaster area and the recipient sustained an economic loss from the disaster.<br /> <br /> A 2017 qualified disaster is limited to Hurricane Harvey and Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, and the California wildfires. To be a 2017 qualified disaster distribution, the following requirements must be met:<br /> <br /> 1. The distribution was made:<br /> <p style="padding-left: 40px;">a. After August 22, 2017, and before January 1, 2019, for Hurricane Harvey or Tropical Storm Harvey (both referred to as Hurricane Harvey);</p><br /> <p style="padding-left: 40px;">b. After September 3, 2017, and before January 1, 2019, for Hurricane Irma;</p><br /> <p style="padding-left: 40px;">c. After September 15, 2017, and before January 1, 2019, for Hurricane Maria; or</p><br /> <p style="padding-left: 40px;">d. After October 7, 2017, and before January 1, 2019, for California<br /> wildfires.</p><br /> 2. The recipient&rsquo;s main home was located in a disaster area listed below on the date or any date in the period shown for that area.<br /> <p style="padding-left: 40px;">a. August 23, 2017, for the Hurricane Harvey disaster area.</p><br /> <p style="padding-left: 40px;">b. September 4, 2017, for the Hurricane Irma disaster area.</p><br /> <p style="padding-left: 40px;">c. September 16, 2017, for the Hurricane Maria disaster area.</p><br /> <p style="padding-left: 40px;">d. October 8, 2017 to December 31, 2017, for the California wildfire disaster area.</p><br /> 3. The recipient sustained an economic loss because of Hurricane Harvey, Hurricane Irma, Hurricane Maria, or the California wildfires<br /> <br /> None of the Acts define economic loss. Examples of economic loss include loss, damage, or destruction of real or personal property; loss related to displacement from a home; and loss of livelihood due to temporary or permanent layoff.<a href="#_ftn4" name="_ftnref4">⁴</a> There is no requirement that the amount of the qualified disaster distribution relate to the amount of the taxpayer&rsquo;s economic loss from the disaster or be made on account of the disaster.<br /> <br /> The Acts provide special rules for distributions from retirement accounts (qualified plans, 403(a)s, 403(b)s, governmental 457(b)s, and traditional, SEP, SIMPLE, and Roth IRAs). Distributions from retirement accounts made because of a qualified disaster are exempt from the 10 percent early distribution penalty (or 25 percent early distribution penalty for certain SIMPLE IRA distributions) if the penalty would otherwise be imposed under IRC<br /> Section 72(t). Qualified disaster distributions are treated as meeting the applicable plan&rsquo;s distribution requirements. The amount that may be treated as a qualified disaster area distribution is limited to $100,000 (the amount for any given year must be reduced by the amounts treated as 2016 disaster area distributions in prior years).<br /> <br /> If a taxpayer is affected by multiple qualifying disasters, the $100,000 limit is applied separately to each disaster distribution. Taxpayers may recognize income attributable to a qualified disaster distribution over a three-year period beginning with the year the qualified disaster distribution was made (unless an election to the contrary is made).<br /> <br /> In addition, taxpayers are also permitted a three-year period from the day after the distribution is received to make a repayment of qualified disaster distributions that is eligible for tax-free rollover treatment to an eligible retirement plan or made on account of a hardship. These repayments may be made at once or via a series of payments and will essentially be treated as though they were rollovers made within the 60-day window. A repayment to an IRA is not considered a rollover for purposes of the one-rollover-per year limitation for IRAs. The following types of distributions cannot be repaid:<br /> <ul><br /> <li>Qualified disaster distributions received as a beneficiary other than as a surviving spouse</li><br /> <li>Required minimum distributions</li><br /> <li>Periodic payments other than from an IRA that are for 10 years or more, the recipient&rsquo;s life or life expectancy or the joint lives or life expectancies of the recipient and their beneficiary.</li><br /> </ul><br /> Plans that make such a distribution also are protected against potential disqualification. Plans that permit qualified 2016 disaster distributions must be amended by the last day of the plan year beginning on or after January 1, 2018. Plans that permit qualified 2017 disaster distributions must be amended by the last day of the plan year beginning on or after January 1, 2019.<br /> <br /> Taxpayers who received certain distributions from retirement plans to buy or construct a principal residence but did not buy or construct the residence because of Hurricane or Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, or the California wildfires had the opportunity to recontribute the distributions to an eligible retirement plan. The distributions had to be repaid before March 1, 2018 for repayments as a result of a hurricane or July 1, 2018 for repayments due to the California wildfires. A distribution that was not repaid before the applicable date may be taxable for 2017 and subject to the 10 percent additional tax on early distributions (or the 25 percent additional tax on certain SIMPLE IRA distributions).<br /> <br /> Individuals affected by a qualified disaster (as extended by the 2019 law) qualify for relaxed rules on loans from qualified plans. The plan administrator may increase the regular $50,000 limit on plan loans to $100,000 and the 50 percent of vested benefit limit to 100 percent. For individuals affected by a hurricane, the loan must have been made between September 29, 2017 and December 31, 2018. For someone affected by the California wildfires, the loan must have been made during the period beginning February 9, 2018 and ending on December 31, 2018. In addition, loan payments due during a specified period ending on December 31, 2018 may be suspended for one year by the plan administrator. The period begins on:<br /> <ul><br /> <li>August 23, 2017 if the recipient&rsquo;s home was located in the Hurricane Harvey disaster area</li><br /> <li>September 4, 2017 if the recipient&rsquo;s home was located in the Hurricane Irma disaster area</li><br /> <li>September 16, 2017 if the recipient&rsquo;s home was located in the Hurricane Maria disaster area; or</li><br /> <li>October 8, 2017 if the recipient&rsquo;s home was located in the California wildfire disaster area.</li><br /> </ul><br /> Casualty losses associated with a qualified 2016 or 2017 disaster are deductible regardless of whether total losses exceed 10 percent of the taxpayer&rsquo;s adjusted gross income (AGI), so long as the loss exceeds $500 per casualty. Taxpayers who do not itemize their deductions may increase their standard deduction by the net qualified disaster loss.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Section 11028, 2017 Tax Act, P.L. 115-97.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Title V, Disaster Tax Relief and Airport and Airway Extension Act of 2017, P.L. 115-63.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Subdivision 2, Title I, Bipartisan Budget Act of 2018, P.L. 115-123.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; 2017 IRS Publication 976, Disaster Relief.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> An employee normally will have no cost basis if a plan is noncontributory and does not provide life insurance protection.<br /> <br /> If life insurance protection has been provided under a cash value policy, the employee usually will have some cost basis, namely, the aggregate one year term costs that have been taxed to the employee, even though the plan is noncontributory.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A self-employed person who is an owner-employee cannot include in his or her cost basis the annual one year costs of life insurance protection under Table 2001 or previously under P.S. 58 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3948">3948</a>), even though these costs were not deductible.<a href="#_ftn2" name="_ftnref2">²</a> No self-employed person, whether or not an owner-employee, can include in cost basis the cost of any health insurance features under the plan.<br /> <br /> A common law employee&rsquo;s cost basis consists of:<br /> <p style="padding-left: 40px;">(1)&nbsp; total nondeductible contributions made by the employee if the plan is contributory and amounts contributed by an S corporation for years beginning before January&nbsp;1, 1984, on behalf of a more-than-5-percent shareholder-employee in excess of the excludable amount;</p><br /> <p style="padding-left: 40px;">(2)&nbsp; the sum of the annual one year term costs of life insurance protection under Table 2001 or previously P.S. 58 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3948">3948</a>) that have been includable as taxable income if payment is being received under the contract that provided the life insurance protection( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3952">3952</a>);</p><br /> <p style="padding-left: 40px;">(3)&nbsp; any other employer contributions other than excess deferrals ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3760">3760</a>) that already have been taxed to the employee, such as where a nonqualified plan was later qualified;</p><br /> <p style="padding-left: 40px;">(4)&nbsp; certain employer contributions attributable to foreign services performed before 1963; and</p><br /> <p style="padding-left: 40px;">(5)&nbsp; the amount of any loans included in income as taxable distributions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3953">3953</a>).</p><br /> In addition, although amounts attributable to deductible employee contributions are not part of basis, it would seem they should be included in basis if benefits are received under the contract to the extent that they have been taxable to the employee because they were used to purchase a life insurance contract ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3952">3952</a>). This cost basis must be reduced by any amounts previously distributed to the employee that were excludable from gross income as a return of all or part of the employee&rsquo;s basis.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> A self-employed person&rsquo;s cost basis consists of (1) the nondeductible 50 percent of contributions made before 1968, after subtracting the cost of incidental benefits, if any, such as waiver of premium and health insurance benefits, and, in the case of an owner-employee, the costs of life insurance protection under Table 2001 or previously P.S. 58 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3948">3948</a>), (2) contributions on behalf of owner-employees under the three year average rule for determining contributions to level premium insurance and annuity contracts in excess of the deductible limit, in effect for years beginning before 1984, and (3) nondeductible voluntary contributions, if any, to a contributory plan.<br /> <br /> In addition, any amounts taxed to an individual because they were attributable to deductible voluntary employee contributions used to purchase life insurance, if benefits are received under the contract, probably should be included.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;61(a)(1); Treas. Reg. &sect;&nbsp;1.61-2(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;72(m)(2); Treas. Reg. &sect;&nbsp;1.72-16(b)(4).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;72(f); Treas. Reg. &sect;&sect;&nbsp;1.72-8, 1.72-16(b)(4), 1.402(a)-1(a)(6), 1.403(a)-2. <em><em>See also</em></em> Rev. Rul. 72-149, 1972-1 CB 218.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> If a beneficiary has no cost basis for the payments, each payment will be fully taxable as ordinary income when received. The beneficiary&rsquo;s cost basis generally is the same as the employee&rsquo;s cost basis ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3973">3973</a>). In the case of decedents dying before August&nbsp;21, 1996, the $5,000 death benefit exclusion was included in the beneficiary&rsquo;s cost basis.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> If the beneficiary does have a cost basis, payments are subject to the rules that follow, depending on whether the death benefits come from life insurance proceeds.<br /> <br /> If death benefit payments do not come from life insurance proceeds, the beneficiary is taxed as the employee would have been taxed had the employee lived and received the periodic payments ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3968">3968</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3969">3969</a>). The beneficiary&rsquo;s cost basis, rather than the employee&rsquo;s cost basis, is used. Depending on the annuity starting date, an exclusion ratio may have to be determined; if so, the beneficiary&rsquo;s cost basis is used as the investment in the contract (for an explanation of the basic annuity rule and its application to various types of payments <em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="527">527</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="552">552</a>). For annuities with a starting date on or before November&nbsp;19, 1996, if a beneficiary elected the simplified safe harbor method for taxing annuity payments ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="613">613</a>) and increased the investment in the contract by any employee death benefit exclusion allowable, the beneficiary had to attach a signed statement to his or her income tax return stating that the beneficiary was entitled to such exclusion in applying the safe harbor method.<a href="#_ftn2" name="_ftnref2">²</a> After such date, if the annuitant is under age 75, the simplified method is required, rather than optional.<a href="#_ftn3" name="_ftnref3">³</a> When more than one beneficiary is to receive payments under a plan, the cost basis, including the $5,000 exclusion, if available, is apportioned among them according to each beneficiary&rsquo;s share of the total death benefit payments.<br /> <br /> If death benefit payments do come from life insurance proceeds, the proceeds are divided into two parts: the amount at risk, which are proceeds in excess of the cash surrender value immediately before death, and the cash surrender value.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The portion of the payments attributable to the amount at risk is taxable under IRC Section&nbsp;101(d) as life insurance proceeds settled under a life income or installment option, as the case may be ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="71">71</a>). The amount at risk generally is prorated over the payment period, whether for a fixed number of years or for life, and the prorated amounts are excludable from the beneficiary&rsquo;s gross income as a return of principal.<br /> <br /> Where payments are for life, the beneficiary&rsquo;s life expectancy generally is taken from IRS unisex annuity tables V and VI.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> The portion of the payments attributable to the cash surrender value is taxed in the same manner as any other periodic payments from a qualified plan.<br /> <br /> <em>Example:</em> The widow of an employee who died on June&nbsp;1, 2024 elects to receive $25,000 of life insurance proceeds in 10 annual installments of $3,000 each. The cash surrender value of the policy immediately before the insured&rsquo;s death was $11,000. The employee made no contributions to the plan and the aggregate one-year term costs of life insurance protection that were taxed to the employee amounted to $940. The widow must include $1,506 of each $3,000 installment, computed in the following manner.<br /> <table border="1" align="center"><br /> <tbody><br /> <tr><br /> <td width="359">Face amount of insurance contract</td><br /> <td style="text-align: center;" width="148">$25,000</td><br /> </tr><br /> <tr><br /> <td width="359">Cash value immediately before death</td><br /> <td style="text-align: center;" width="148">11,000</td><br /> </tr><br /> <tr><br /> <td width="359">Excludable as life insurance proceeds</td><br /> <td style="text-align: center;" width="148">$14,000</td><br /> </tr><br /> <tr><br /> <td width="359">Portion of each installment attributable to life insurance proceeds (14/25 of $3,000)</td><br /> <td style="text-align: center;" width="148">$ 1,680</td><br /> </tr><br /> <tr><br /> <td width="359">Excludable as return of principal ($14,000 &divide; 10)</td><br /> <td style="text-align: center;" width="148">1,400</td><br /> </tr><br /> <tr><br /> <td width="359">Includable in gross income</td><br /> <td style="text-align: center;" width="148">$ 280</td><br /> </tr><br /> <tr><br /> <td colspan="2" width="507"></td><br /> </tr><br /> <tr><br /> <td style="text-align: center;" colspan="2" width="507">(If the beneficiary is the surviving spouse of an employee who died before October&nbsp;23, 1986, the $280 would be excludable under the $1,000 annual interest exclusion)</td><br /> </tr><br /> <tr><br /> <td colspan="2" width="507"></td><br /> </tr><br /> <tr><br /> <td colspan="2" width="507">Portion of each installment attributable to cash surrender value</td><br /> </tr><br /> <tr><br /> <td width="359">of the contract (11/25 of $3,000)</td><br /> <td style="text-align: center;" width="148">$ 1,320</td><br /> </tr><br /> <tr><br /> <td width="359">Beneficiary&rsquo;s cost basis ($940)</td><br /> <td style="text-align: center;" width="148">$ 940</td><br /> </tr><br /> <tr><br /> <td width="359">Expected return (10 x $1,320)</td><br /> <td style="text-align: center;" width="148">$13,200</td><br /> </tr><br /> <tr><br /> <td width="359">Exclusion ratio ($940/$13,200)</td><br /> <td style="text-align: center;" width="148">7.12%</td><br /> </tr><br /> <tr><br /> <td width="359">Amount excludable each year (7.12% of $1,320)</td><br /> <td style="text-align: center;" width="148">$ 93.98</td><br /> </tr><br /> <tr><br /> <td width="359">Includable in gross income ($1,320 - $93.98)</td><br /> <td style="text-align: center;" width="148">$ 1,226.02</td><br /> </tr><br /> </tbody><br /> </table><br /> The beneficiary may be entitled to an income tax deduction for any estate tax attributable to the decedent&rsquo;s interest in the plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3993">3993</a>).<a href="#_ftn6" name="_ftnref6">⁶</a> It would seem that the deduction would be prorated over the beneficiary&rsquo;s life expectancy, in the case of life income payments, or over a fixed period, in the case of installment payments ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="544">544</a>).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Rev. Rul. 58-153, 1958-1 CB 43.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Notice 88-118, 1988-2 CB 450, obsoleted by Notice 98-2, 1998-2 I.R.B. 22 below.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Notice 98-2, 1998-1 C.B. 266.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.72-16(c).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.101-7.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect;&nbsp;691(c).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> The withholding rules that apply to a distribution depend on whether it constitutes an eligible rollover distribution ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3998">3998</a>). An eligible rollover distribution from a qualified retirement plan is subject to mandatory income tax withholding at the rate of 20 percent unless the distribution is directly rolled over to an eligible retirement plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4000">4000</a>). An employee receiving an eligible rollover distribution may not otherwise elect out of this withholding requirement.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> On the other hand, a recipient may elect out of withholding with respect to distributions that do not qualify as eligible rollover distributions.<a href="#_ftn2" name="_ftnref2">²</a> The amount to be withheld on periodic payments that are not eligible rollover distributions is determined at the rate applicable to wages.<a href="#_ftn3" name="_ftnref3">³</a> Non-periodic payments that are not eligible rollover distributions are subject to income tax withholding at the rate of 10 percent.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Withholding applies to amounts paid to a beneficiary of a participant as well as to the participant. Withholding does not apply to amounts that it is reasonable to believe are not includable in income.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> The IRS has released guidance providing that when a check for a fully taxable distribution from a qualified plan is mailed to a plan participant, but not cashed, it is considered to have been &ldquo;actually distributed&rdquo; from the plan and is taxable to the participant in the year of distribution. The fact that the participant failed to cash the check is irrelevant. Further, the failure to cash the check does not change the plan administrator&rsquo;s withholding obligations with respect to the distribution and does not change the obligation to report the distribution on Form&nbsp;1099-R (assuming the distribution exceeds the applicable reporting threshold). Despite these findings, the IRS was careful to note that it continues to consider the issue of uncashed distribution checks in situations involving missing participants.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> <hr><br /> <br /> The maximum amount withheld cannot exceed the sum of the money plus the fair market value of property received other than employer securities.<a href="#_ftn6" name="_ftnref6">⁶</a> Thus, a payor will not need to dispose of employer securities to meet the withholding tax liability. Loans treated as distributions (i.e., deemed distributions) continue to be subject to withholding as non-periodic distributions at a rate of 10 percent. The IRS has stated that loans deemed to be distributions are not subject to the 20 percent mandatory withholding requirement because a deemed distribution cannot be an eligible rollover distribution. Where a participant&rsquo;s accrued benefit is reduced or offset to repay a plan loan, such as when employment is terminated, the offset amount may constitute an eligible rollover distribution.<a href="#_ftn7" name="_ftnref7">⁷</a> Withholding is not required on the costs of current life insurance protection taxable to plan participants under Table 2001 or previously P.S. 58 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3948">3948</a>).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;3405(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&sect;&nbsp;3405(a)(2), 3405(b)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;3405(a)(1).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;3405(b)(1).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Rev. Rul. 2019-19.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect;&nbsp;3405(e)(8).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; Notice 93-3, 1993-1 CB 293.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> The fair market value of any property reverting to an employer from a qualified plan is includable in the employer&rsquo;s gross income and generally is subject to a nondeductible excise tax.<a href="#_ftn1" name="_ftnref1">¹</a> The basic rule is that the excise tax is equal to 50 percent and is imposed on the amount of reversion that is subject to income taxes. The 50 percent tax rate can be reduced to 20 percent if the employer establishes or maintains a qualified replacement plan, provides for pro rata benefit increases for generally all participants and certain beneficiaries, or is in Chapter 7 bankruptcy liquidation as of the termination date of the qualified plan. Where the entire reversion is paid to a qualified replacement plan, there is no reversion to the employer, the employer pays no income taxes on the amount of the reversion, and as a result there is no excise tax.<br /> <br /> A qualified replacement plan is any qualified plan established or maintained by the employer in connection with a qualified plan termination in which:<br /> <p style="padding-left: 40px;">(1)&nbsp; at least 95 percent of the active participants in the terminated plan who remain employed by the employer are active participants;</p><br /> <p style="padding-left: 40px;">(2)&nbsp; a direct transfer of assets is made from the terminated plan to the replacement plan equal to 25 percent of the maximum reversion that could have been received under prior law, reduced, dollar-for-dollar, by the present value of certain increases in participants&rsquo; accrued benefits, if any, made pursuant to a plan amendment adopted during the 60 day period ending on the date of termination and taking effect on that date, before any reversion occurs; and</p><br /> <p style="padding-left: 40px;">(3)&nbsp; the portion of the reversion transferred to a defined contribution replacement plan is allocated to participants&rsquo; plan accounts in the plan year in which the transfer occurs or is credited to a suspense account and allocated to participants&rsquo; accounts no less rapidly than ratably over the seven year period beginning with the year of the transfer.</p><br /> If any amount credited to a suspense account cannot be allocated to a participant&rsquo;s account within the seven year period, such amount generally must be allocated to the accounts of other participants.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The IRS has determined that where the above requirements were met, amounts transferred to a replacement plan could be used to make employer matching contributions.<a href="#_ftn3" name="_ftnref3">³</a> If the entire surplus is transferred to a 401(k) plan that meets the requirements of a qualified replacement plan, the employer&rsquo;s excise tax on the reversion will be eliminated.<a href="#_ftn4" name="_ftnref4">⁴</a> A profit sharing plan with a 401(k) feature also has been approved as a qualified replacement plan.<a href="#_ftn5" name="_ftnref5">⁵</a> None of the reversion, however, may be treated as employee salary deferrals.<br /> <br /> Any amount transferred to a qualified replacement plan is not includable in the employer&rsquo;s gross income and is not treated as a reversion. No deduction is allowed with respect to the transferred amount.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> An employer is considered to provide for pro rata benefit increases for generally all plan participants and certain beneficiaries under the terminated plan if (1) a plan amendment is adopted in connection with the termination of the plan, (2) the pro rata benefit increases have an aggregate present value of not less than 20 percent of the maximum amount that the employer would otherwise have received as a reversion, and (3) the pro rata benefit increases take effect immediately on termination of the plan.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> Where a plan is amended to increase benefits in an effort to reduce the reversion, the benefits may not be increased, and amounts may not be allocated in contravention of the qualification requirements of IRC Section&nbsp;401(a) or the IRC Section&nbsp;415 limits ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3719">3719</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3728">3728</a>, and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3868">3868</a>). Any such increases or allocations must be treated as annual benefits or annual additions under IRC Section&nbsp;415.<a href="#_ftn8" name="_ftnref8">⁸</a> The employer is determined on a controlled group basis and the Secretary of the Treasury may provide that two or more plans may be treated as one plan or that a plan of a successor may be considered.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> The tax applies to both direct and indirect reversions. An indirect reversion occurs where plan assets are used to satisfy an obligation of the employer.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> An employer maintaining a plan must pay the tax, which is due on the last day of the month following the month in which the reversion occurs.<a href="#_ftn11" name="_ftnref11">¹¹</a> Where money or property reverts to a sole proprietorship or partnership, the employer is the sole proprietor or the partners.<br /> <br /> A distribution to any employer by reason of a contribution made in error may be permitted if one of three criteria is met: a mistake of fact has occurred, the funds are being returned because of a failure of the plan to qualify initially, or the error arose from a failure of employer contributions to be deductible and the repayment is permitted by the terms of the plan document.<br /> <br /> A reversion from a multiemployer plan also will not be subject to the tax if made because of a mistake of law or the return of any withdrawal liability payment.<a href="#_ftn12" name="_ftnref12">¹²</a> ERISA exempts from the prohibited transaction rules the return of contributions or withdrawal liability payments if certain requirements are met.<a href="#_ftn13" name="_ftnref13">¹³</a><br /> <br /> A transfer of excess assets from a defined benefit plan to a defined contribution plan constitutes a reversion of assets to an employer if the assets were first transferred to the employer followed by a contribution to the defined contribution plan. Thus, excess assets are included in the employer&rsquo;s income and subject to the penalty tax.<a href="#_ftn14" name="_ftnref14">¹⁴</a><br /> <br /> Although a qualified transfer of excess pension assets ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3836">3836</a>) from a defined benefit plan to an IRC Section&nbsp;401(h) account of the plan is not treated as a reversion to the employer, any amount transferred and not used to pay for qualified current retiree health benefits must be returned to the transferor plan and generally is treated as a reversion subject to the 20 percent excise tax.<a href="#_ftn15" name="_ftnref15">¹⁵</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;4980.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;4980(d)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Let. Ruls. 200045031, 9834036, 9302027.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Let. Rul. 9837036.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Let. Ruls. 9834036, 9252035.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect;&nbsp;4980(d)(2)(B)(iii).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; IRC &sect;&nbsp;4980(d)(3).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; IRC &sect;&nbsp;4980(d)(4).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; IRC &sect;&sect;&nbsp;4980(d)(5)(D), 4980(d)(5)(E).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; <em><em>See, e.g.,</em></em> Let. Rul. 9136017.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp; IRC &sect;&nbsp;4980(c)(4).<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp; IRC &sect;&nbsp;4980(c)(2)(B). <em><em>See also</em></em> Treas. Reg. &sect;&nbsp;1.401(a)(2)-1; IRM 4.72.11.<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp; ERISA &sect;&nbsp;403(c).<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.&nbsp; Notice 88-58, 1988-1 CB 546; GCM 39744 (7-14-88).<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>.&nbsp; IRC &sect;&nbsp;420(c)(1)(B).<br /> <br /> </div></div><br />