401k Requirements

<div class="Section1"><br /> <br /> <em><em>Editor&rsquo;s Note:</em></em> Under the SECURE Act 2.0, SIMPLE plan sponsors may allow employees to elect to treat employer contributions to SIMPLE accounts as Roth contributions (beginning in 2023 and thereafter).<br /> <br /> Of all the types of qualified plans that are permitted under the IRC, the SIMPLE 401(k) may be the least attractive to a plan sponsor. These plans retain all the eligibility, documentation, and reporting requirements of a qualified plan but are subject to the lower limits and other restrictions of a SIMPLE IRA. A SIMPLE 401(k) plan allows an eligible employer to satisfy the actual deferral percentage test for 401(k) plans ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3802">3802</a>) by meeting the plan design requirements described below, instead of performing annual ADP testing.<a href="#_ftn1" name="_ftnref1">¹</a> For a comparison of the features of a SIMPLE 401(k) plan to those of a safe harbor 401(k) plan, <em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3777">3777</a>.<br /> <br /> An eligible employer is one that had no more than 100 employees earning at least $5,000 of compensation from the employer for the preceding year.<a href="#_ftn2" name="_ftnref2">²</a> An eligible employer that establishes a SIMPLE 401(k) plan for a plan year and later ceases to be eligible generally will be treated as eligible for the following two years. If the failure to remain eligible was due to an acquisition, disposition, or similar transaction, special rules apply.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> In addition to all the requirements of IRC Section 401(k), a SIMPLE 401(k) plan must meet the contribution and other requirements of SIMPLE IRAs. Those requirements include a contribution requirement, an exclusive plan requirement, and a vesting requirement ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3706">3706</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3709">3709</a>).<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The SIMPLE 401(k) contribution requirement includes the following: (1) eligible employees must be able to make salary deferral contributions to the plan, (2) the amount to which the election applies may not exceed $16,500 in 2025 (projected) ($16,000 in 2024, $15,500 in 2023; $14,000 in 2022; $13,500 in 2020-2021), and (3) the employer must make matching contributions or nonelective contributions under one of the formulas described below.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> A SIMPLE 401(k) plan also may permit catch-up salary deferral contributions by participants who have attained age 50 by the end of the plan year.<a href="#_ftn6" name="_ftnref6">⁶</a> The limit on catch-up contributions to SIMPLE 401(k) plans is the same as for SIMPLE IRAs. The maximum catch-up contribution is the lesser of $3,500 (in 2023-2024; $3,000 in 2015-2022) or the excess (if any) of the participant&rsquo;s compensation over any other elective deferrals for the year made without regard to the catch-up limits.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> <hr><br /> <br /> <strong><strong>Planning Point:</strong></strong> Beginning in 2024, employers may increase the contribution limits to SIMPLE plans.&nbsp; If the employer has 25 or fewer employees with at least $5,000 in compensation in the preceding year, the employee annual deferral limit to SIMPLE plans will increase to 10% of the limit that would otherwise apply for 2024 (the amount will be indexed in later years).&nbsp; The increase also applies to the annual catch-up contribution limit.&nbsp; Employees with between 26 and 100 employees with at least $5,000 in compensation may elect to apply the increased limits if they provide additional employer contributions (either a 4% matching contribution or a 3% employer contribution).<br /> <br /> <hr><br /> <br /> A SIMPLE 401(k) plan must satisfy a universal availability requirement for availability of catch-up contributions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3761">3761</a>).<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> Under the matching formula option for SIMPLE 401(k) plans, the employer must match employee salary deferral contributions dollar-for-dollar up to 3 percent of the employee&rsquo;s compensation.<a href="#_ftn9" name="_ftnref9">⁹</a> (Earlier guidance stated that matching of catch-up contributions was not required.)<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> Under the second option, the employer makes a contribution of 2 percent of compensation on behalf of each employee who is eligible to participate and who has at least $5,000 in compensation from the employer for the year, provided notice of the election is given prior to the 60 day election period.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> Under SECURE Act 2.0, beginning in 2024, employers may make additional nonelective contributions to all eligible employees with at least $5,000 in compensation from the employer for the year. The additional contributions must be established as a uniform percentage of compensation. The contribution cannot exceed the lesser of (1) 10% of the employee&rsquo;s compensation or (2) $5,000 per participant (the amount will be indexed for inflation).<br /> <br /> The plan also must provide that no other contributions (other than rollover contributions) may be made to the plan other than those described above.<a href="#_ftn12" name="_ftnref12">¹²</a> This is the &ldquo;exclusive plan requirement.&rdquo; This requirement is met if no contributions were made, or no benefits accrued, for services during the year under any qualified plan of the employer on behalf of any employee eligible to participate in the cash or deferred arrangement, other than the contributions made to the SIMPLE 401(k) plans.<a href="#_ftn13" name="_ftnref13">¹³</a> The receipt of a reallocation of forfeitures under another plan of the employer will not cause a SIMPLE 401(k) participant to violate this requirement.<a href="#_ftn14" name="_ftnref14">¹⁴</a><br /> <br /> All contributions to a SIMPLE 401(k) plan must be nonforfeitable.<a href="#_ftn15" name="_ftnref15">¹⁵</a><br /> <br /> Employees generally must have the right to terminate participation at any time during the year, although the plan may preclude the employee from resuming participation until the beginning of the next year.<a href="#_ftn16" name="_ftnref16">¹⁶</a> Furthermore, each employee eligible to participate must have 60&nbsp;days before the first day of any year (and 60 days before the first day the employee is eligible to participate) to elect whether to participate in the plan or to modify his or her deferral amount. The foregoing requirements are met only if the employer notifies each eligible employee of such rights within a reasonable time before the 60 day election period.<a href="#_ftn17" name="_ftnref17">¹⁷</a><br /> <br /> A SIMPLE 401(k) plan that meets the requirements set forth in IRC Section 401(k)(11) is not subject to the top-heavy rules ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3917">3917</a>) provided that the plan allows only the contributions required under IRC Section 401(k)(11).<a href="#_ftn18" name="_ftnref18">¹⁸</a> SIMPLE 401(k) plans are subject to the other qualification requirements of a 401(k) plan, including the $350,000 compensation limit (as indexed for 2025 projected), $345,000 for 2024), the IRC Section 415 limits ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3728">3728</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3868">3868</a>), and the prohibition on state and local governments operating a 401(k) plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3753">3753</a>).<a href="#_ftn19" name="_ftnref19">¹⁹</a> The IRC Section 404(a) limit on the deductibility of contributions to 25 percent of compensation ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3750">3750</a>) is increased in the case of SIMPLE 401(k) plans to the greater of 25 percent of compensation or the amount of contributions required under IRC Section 401(k)(11)(B).<a href="#_ftn20" name="_ftnref20">²⁰</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; 401(k)(11); Treas. Reg. &sect; 1.401(k)-4(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&sect; 401(k)(11)(D)(i), 408(p)(2)(C)(i).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&sect; 408(p)(10), 401(k)(11)(D)(i), 408(p)(2)(C)(i)(II); Treas. Reg. &sect; 1.401(k)-4(b)(2).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&sect; 401(k)(11)(A), 401(k)(11)(D)(i).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect; 401(k)(11)(B); Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect; 414(v).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; IRC &sect; 414(v)(2)(A); Notice 2017-64, Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; IRC &sect; 414(v)(3)(B); Treas. Reg. &sect; 1.414(v)-1(e).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; Treas. Reg. &sect; 1.401(k)-4(e)(3).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; REG-142499-01, 66 Fed. Reg. 53555 (Oct. 23, 2001).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp; IRC &sect; 401(k)(11)(B)(ii); Treas. Reg. &sect; 1.401(k)-4(e)(4).<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp; IRC &sect; 401(k)(11)(B)(i)(III); Treas. Reg. &sect; 1.401(k)-4(e)(1).<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp; IRC &sect; 401(k)(11)(C); Treas. Reg. &sect; 1.401(k)-4(c).<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.&nbsp; Treas. Reg. &sect; 1.401(k)-4(c)(2).<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>.&nbsp; IRC &sect; 401(k)(11)(A)(iii).<br /> <br /> <a href="#_ftnref16" name="_ftn16">16</a>.&nbsp; Treas. Reg. &sect; 1.401(k)-4(d)(2)(iii).<br /> <br /> <a href="#_ftnref17" name="_ftn17">17</a>.&nbsp; IRC &sect;&sect; 401(k)(11)(B)(iii), 408(p)(5)(B), 408(p)(5)(C); Treas. Reg. &sect; 1.401(k)-4(d)(3).<br /> <br /> <a href="#_ftnref18" name="_ftn18">18</a>.&nbsp; IRC &sect; 401(k)(11)(D)(ii); Treas. Reg. &sect; 1.401(k)-4(h).<br /> <br /> <a href="#_ftnref19" name="_ftn19">19</a>.&nbsp; Rev. Proc. 97-9, 1997-1 CB 624; Notice 2023-75.<br /> <br /> <a href="#_ftnref20" name="_ftn20">20</a>.&nbsp; IRC &sect; 404(a)(3)(A)(ii).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> For a taxpayer who has reached age 55, but has not yet reached age 59½, the tax advantages of allowing the funds to remain in the 401(k) are clear. If the taxpayer were to roll the funds into an IRA, a 10 percent penalty tax would apply to any withdrawals made before the taxpayer reaches age 59½ (in addition to the otherwise applicable ordinary income tax rate), unless another exception such as disability or a series of substantially equal periodic payments applies. A taxpayer who leaves employment once reaching age 55 can withdraw funds from the 401(k) without incurring the 10 percent penalty for early withdrawals.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> If a taxpayer plans to work past the age when distributions become mandatory (age 73), the taxpayer can avoid the required distributions by leaving the funds in the employer-sponsored 401(k). Unless the plan requires earlier distributions, as long as the taxpayer continues to work and does not own 5 percent or more of the company, he or she can avoid taking distributions from a 401(k). Distributions from an IRA are required to begin when the taxpayer turns 73, regardless of whether he or she has actually retired.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Further, if a taxpayer holds stock in the employer within the 401(k) plan, the taxpayer may qualify for favorable tax treatment if the stock is left in the 401(k). After distribution from the 401(k) to a non-qualified account, a sale of the employer stock may qualify for taxation at the taxpayer’s long-term capital gains tax rate under the net unrealized appreciation rules, rather than the ordinary income tax rate that would apply to the appreciation on the stock if it was rolled into the IRA and later sold and the sales proceeds distributed.<br /> <br /> Taxpayers may wish to keep funds in an employer-sponsored 401(k) after leaving employment because it may be possible to borrow against those funds, though these loans are limited and must be repaid relatively quickly. A loan against an IRA balance is not an option (penalties and taxes would apply to the IRA as though it were a distribution). Using an IRA as collateral for a loan is also treated as a distribution, subject to taxes and penalties.<br /> <br /> If the 401(k) offers attractive investment options, the taxpayer may wish to keep the funds invested in the 401(k). Further, if the 401(k) has lower fees than available in an IRA, the taxpayer may benefit from leaving the funds in the 401(k). Because recently enacted disclosure rules require 401(k) plan sponsors to disclose administrative expenses and fees to participants, there is evidence to suggest that 401(k) fees may be decreasing.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 72(t).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.408-8, A-3.<br /> <br /> </div>

<div class="Section1"><br /> <br /> Under prior law, Congress and the IRS had to proactively take action to provide relief for taxpayers after natural disasters.  The SECURE Act 2.0 created a permanent hardship withdrawal for qualified natural disasters.<br /> <br /> If the disaster qualifies as a federally declared disaster, taxpayers can access up to $22,000 in retirement funds per disaster without application of the 10 percent early withdrawal penalty.  Further, the tax liability generated by the retirement account withdrawal can be spread over three years--and taxpayers can be given the option to repay the funds within three years of the withdrawal.<br /> <br /> The maximum loan amount for individuals experiencing a qualified disaster was also increased to $100,000.<br /> <br /> The expanded rules apply to any federally declared disaster occurring on or after January 26,<br /> 2021. Federally declared disasters are those designated by FEMA at  <a href="https://www.fema.gov/disaster/declarations">https://www.fema.gov/disaster/declarations</a>.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> These provisions are optional.  Taxpayers should check their specific plan terms to determine whether the plan sponsor has included the expanded hardship distribution option.<br /> <br /> <hr /><br /> <br /> &nbsp;<br /> <br /> </div>

<div class="Section1"><br /> <br /> <em>Editor’s Note:</em> Many were confused about whether the Consolidated Appropriations Act of 2021 (the CAA) extended the tax relief for coronavirus-related distributions (CRDs) discussed below. The law did <em>not</em> extend the CARES Act CRD provisions into 2021. The law provided the same type of tax relief for non-COVID-19 disasters, such as wildfires and hurricanes. The CARES Act relief provided for qualified plan loans was also extended for victims of non-COVID-19 disasters. Additionally, RMDs were not suspended for 2021. 2021 RMDs were calculated using the year-end account balance just like any other year.<br /> <br /> The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allowed taxpayers to take up to $100,000 in distributions from an employer-sponsored retirement plan (401(k), 403(b) or defined benefit plan) or an IRA without the distribution becoming subject to the 10 percent early distribution penalty (the 25 percent early distribution penalty that applies to early distributions from SIMPLE IRAs was also waived). Unless the participant elected otherwise, the coronavirus-related distribution (CRD) was included in income ratably over three years, beginning with the tax year of distribution.<br /> <br /> The actual amount of the CRD did not need to be tied to the amount the participant requires to satisfy the COVID-19-related financial need. The amount was also a per-taxpayer rule, not a per-plan rule, meaning that distributions from all plans were considered when determining whether they qualified for favorable tax treatment.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Plan sponsors had discretion as to whether they chose to implement any of the CARES Act relief provisions. However, the employee could elect favorable tax relief on a personal tax return regardless of whether the employer chose to implement these options.<br /> <br /> <hr /><br /> <br /> Note, however, that plans were not required to accept rollover contributions, which could create problems for participants in taking advantage of the three-year repayment option.<br /> <br /> The CARES Act also provided repayment options to allow employees to repay CRDs during the three-year tax period beginning with the tax year of distribution (whether in a lump sum or installments over time). Although the repayment can be made to any type of plan that will accept the repayment, in which case it will be treated as a nontaxable rollover via direct transfer (and will not be counted as a rollover that would trigger the “one rollover per year rule”). Only distributions that qualify for penalty-free distribution relief (i.e., amounts up to $100,000) are eligible for repayment. Distributions paid to account beneficiaries (except for surviving spouses) are not eligible for recontribution (although these distributions <em>can</em> be treated as qualifying coronavirus-related distributions).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Employer-sponsored plans, however, are only able to accept rollovers from participants (and sometimes new hires). Therefore, if an employee took their entire account balance as a CRD and later stopped working for the employer, the person was no longer a participant or new hire. That former employee would, therefore, be required to re-contribute the funds to an IRA or to a plan sponsored by a new employer that accepts rollovers.<br /> <br /> <hr /><br /> <br /> When the employee took only part of the balance, employers should exercise more caution—because it’s unclear whether that former employee would continue to be treated as a plan participant. It’s important for the plan to have a non-discriminatory policy in place when deciding whether or not to accept these re-contributions (for example, by not accepting any rollovers from non-employees).<br /> <br /> The penalty waiver was effective for distributions made on or after January 1, 2020 and before December 31, 2020.<br /> <br /> The waiver was available for any “coronavirus affected individual,” which included both those who were diagnosed (or had a spouse diagnosed) with the virus and those who suffered financial consequences caused by layoffs, work reduction or being unable to work because of the need to provide child care.<br /> <br /> Later IRS guidance expanded the list of qualifying individuals to include:<br /> <ol><br /> <li>A plan participant whose pay was reduced due to COVID-19 (regardless of whether hours were reduced or whether the individual was laid off).</li><br /> <li>A plan participant who was planning to start a new job if the start date was pushed back (or the offer was rescinded entirely) due to COVID-19.</li><br /> <li>A plan participant whose spouse or member of the plan participant’s household suffered a qualifying effect.<a href="#_ftn3" name="_ftnref3">³</a></li><br /> </ol><br /> “Members of the participant’s household” included roommates or anyone who shared the participant’s primary residence. For example, if the participant’s live-in partner owned a business that was shut down due to COVID-19, the participant was eligible for the plan distribution<br /> relief.<br /> <br /> Employers could rely upon employees’ certifications that they satisfied conditions related to the hardship distribution unless the employer had actual knowledge to the contrary. The IRS provided a sample employee certification document in Notice 2020-50.<br /> <br /> Similarly, plan loan rules were expanded to increase the available loan limit from $50,000 to $100,000 during the 180-day period beginning March 27, 2020. The due date for repaying loans taken before December 31, 2020 was delayed one year. RMDs for the 2020 tax year were waived.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Notice 2020-50.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Notice 2020-50, <em><em>see</em> </em>Section 2(D).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  Notice 2020-50.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  Pub. Law 116-136.<br /> <br /> </div>

<div class="Section1"><br /> <br /> A 60-day extension now applies in all cases involving federally declared disasters. Under IRS rules, the 60-day extension will apply automatically (although Treasury often provides for longer extension periods). As of November 15, 2021, the changes also clarify what will happen if multiple disasters occur within the same disaster area within a 60 day period. If that’s the case, a separate 60 day period will apply to each disaster declaration. The IRS has also clarified that the 60-day period will now end 60 days after the later of (1) the earliest incident date or (2) the date FEMA declares the disaster.<br /> <br /> Qualified disaster areas generally include any area the President declares as such. The term “qualified disaster area” does not include the California wildfire disaster area, as defined in the 2018 Bipartisan Budget Act.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Relatedly, Section 7508A(d) was added to the Internal Revenue Code in 2019 to codify a 60-day postponement of certain tax-sensitive acts in situations involving a disaster.<br /> <br /> For this purpose, IRS final regulations released in 2021 clarify that a “federally declared disaster” includes both a major disaster and emergencies declared under Sections 401 or 501 of the Stafford Disaster Relief and Emergency Assistance Act.<br /> <br /> The regulations also clarify that “time-sensitive acts” include those acts that the Treasury secretary determines should be postponed. In the case of certain pensions and employee benefit plans, they also include acts described in IRC Section 7508A(d)(4), such as contributions, distributions and rollovers. The final regulations apply to federally declared disasters after December 21, 2019.<br /> <br /> <hr /><br /> <br /> In general, the benefits of taking a distribution under the SECURE Act’s expansion of the disaster relief option are:<br /> <ul><br /> <li>The taxpayer is exempt from the penalty on early distributions,</li><br /> <li>The taxpayer is exempt from withholding requirements on the distribution,</li><br /> <li>The taxpayer can elect to treat the distribution as having been distributed over a three-year period (or within the single year of distribution, and</li><br /> <li>The taxpayer is able to repay the distribution within three years of receiving the distribution.<a href="#_ftn1" name="_ftnref1">¹</a></li><br /> </ul><br /> Individuals affected by a qualified disaster 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. These same benefits were provided for the 2020 tax year in response to the COVID-19 pandemic.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  The Taxpayer Certainty and Disaster Relief Act of 2019, § 202.<br /> <br /> </div>