Are you an “Independent” Corporate and/or Bank Owned Life Insurance Consultant? Do you remember the Ramsey Study Group in the late 2000’s?
Well, if you want to be part of a group of “like minded” producers who wish to learn and share knowledge with some of the brightest and best in the business, then plan on being in New Orleans, November 5th to 7th, for a fast paced knowledge summit specific to the advanced planning market of corporations and banks. Meeting will be held at the Hotel Monteleone where the latest changes to products, services, and admin platforms will be discussed. Cost savings ideas on existing plans, as well the latest designs and tax law updates will be shared.
Speakers: Mel Todd (COLI Consulting Group), Peter Ricchutti (Professor Tulane Business School), Bud Schiff (Alvarez and Marsal), Dylan Major (Pangburn Group) and MANY more.
Reducing or Suspending 401(k) Safe Harbor Contributions Mid-Year under Notice 2020-52 and some options you might explore on a NQDC basis for potential refunds from the plan.
July 30, 2020
A client recently called and asked the following questions: “Under what circumstances, if any, can the business that has a standard 401(k) safe harbor plan, reduce or eliminate the company’s mandatory safe harbor contribution during the plan year? Is there any relief granted because of the impact of Covid-19?”
The following outlines the circumstances under which sponsors of 401(k) [and 403(b)] safe harbor plans may reduce or eliminate employer safe harbor contributions mid-year under normal circumstances, and under the special circumstances outlined in IRS Notice 2020-52 granted as a result of the Covid-19 pandemic.
Under normal circumstances, and according to final Treasury Regulations, a sponsor of a 401(k) safe harbor plan may amend the plan during the current year to reduce or suspend the company’s safe harbor contribution—either the matching or nonelective contribution—under the following limited circumstances.
A removal or reduction of a safe harbor contribution mid-year is permitted if the employer either
Included a statement in the safe harbor notice given to participants before the start of the plan year that the employer
May reduce or suspend contributions mid-year;
Will give participants a supplemental notice (described below) regarding the reduction or suspension; and
Will not reduce or suspend employer contributions until at least 30 days after receipt of the supplemental notice.
COVID-19 Relief Any Plan Amended Between March 13, 2020, and August 31, 2020
Any sponsor of a safe harbor plan may amend its plan between March 13, 2020, and August 31, 2020, to reduce or suspend safe harbor contributions (either match or nonelective) without condition. However, special rules related to the supplemental notice apply as explained next.
Supplemental Notice
Typically, if a reduction or suspension of safe harbor contributions will occur, a 30-day advance notice rule applies. This supplemental notice must explain 1) the consequences of the suspension or reduction of contributions; 2) how participants may change their deferral elections as a result; and 3) when the amendment takes effect.
COVID-19 Relief for Supplement Notice for Nonelective Contributions
Sponsors who reduce or suspend 401(k) safe harbor nonelective contributions will satisfy the 30-day supplemental notice requirement, provided the sponsor
Gives the notice to employees no later than August 31, 2020, and
Adopts the required plan amendment no later than the effective date of the reduction or suspension of safe harbor nonelective contributions.
There is no relief on the timing of the supplemental notice under Notice 2020-52 for sponsors who reduce or suspend safe harbor matching contributions. Sponsors must give 30 days notice via a supplemental notice to participants before the reductions can take place.
Other Procedural Requirements
Typically, an employer that suspends or reduces safe harbor contributions must also
Give participants a reasonable opportunity after they receive the supplemental notice and before the reduction or suspension of employer contributions to change their contribution elections;
Amend the plan to apply the actual deferral percentage (ADP) and/or actual contribution percentage (ACP) Tests for the entire plan year; and
Allocate to the plan any contributions that were promised before the amendment took effect.
Pursuant to Notice 2020-52, a plan sponsor may choose to reduce or suspend 401(k) safe harbor contributions for highly compensated employees (HCEs) alone. In such cases, the plan sponsor must provide an
Updated safe harbor notice and
Opportunity for participants to update their elections, determined as of the date of issuance of the updated safe harbor notice.
Conclusion
In the past, the ability of sponsors to amend their 401(k) [or 403(b)] safe harbor plans to reduce or suspend employer matching or nonelective safe harbor contributions mid-year was limited. The IRS expanded those opportunities under IRS Notice 2020-52 in order to provide relief in light of the Covid-19 pandemic.
As part of this change however, you might wish to consider a 409A (discretionary) deferred compensation plan for participants who might be subject to any “refunds” from the plan not meeting the “Top Hat” percentages at the end of the year. If the participants are given the ability to amend their qualified plan contributions as part of the employer reduction, they can redirect those funds that the participants wanted for retirement back into their account and avoid current taxation.
Ever wanted the “perfect” plan where the company gets a current deduction when the money is paid into the plan, the cash grows tax deferred, and then the participant get the money “tax free”? Well look no further. There is a plan like that available. You just have to be willing to discriminate.
It’s called a Restricted Executive Bonus plan and combines to different benefits in one. It has to be done carefully to meet IRS guidelines, but is 100% legal. Nice thing is, it’s not carrier or product specific, and has the flexibility as to what type of asset you want in the plan.
To learn more, give us a call or check out our Executive Bonus material. We’d be happy to design a sample for you so that you keep your best people.
Long Term Care Insurance – It’s about the Coordinated Care Provider
Everyone should have long term care insurance. For individuals over 45, this is the one benefit that you have a 70% chance of using during your lifetime. And the most important benefit is the Coordinated Care Provider that comes with it.
Have you had trouble and need to retain you key people? Did they want to feel like they had ownership but you don’t want to give up a minority interest in your company? Well, you can design a benefit for your “key” employees, that makes your best people feel like they are an owner so that they never want to leave, and you never give up control until the day that you decide to.
IRS Notice 2019-09 provides guidance intended to help “applicable tax-exempt employers” determine whether compensation paid to their most highly compensated employees will be subject to the 21 percent excise tax imposed under Code Section 4960. Notice 2019-09 is indeed helpful to those of us who have to interpret the provisions of Code Section 4960. But tax-exempt employers subject to Code Section 4960 have serious work to do in order to comply with these relatively new rules, and some tax-exempt employers will be disappointed in the results. (In general, compensation paid by a Section 501(c)(3) organization will be subject to the requirements of Code Section 4960, so we will simply reference tax-exempt employers for these purposes.)
Excise Tax Under Code Section 4960
Enacted as part of the 2017 Tax Cuts and Jobs Act, Code Section 4960 imposes a 21 percent excise tax on: (1) compensation paid by a tax-exempt employer to a “covered employee” in excess of $1 million in any year; and (2) “excess parachute payments” paid by a tax-exempt employer to a covered employee. A Section 4960 excess parachute payment is a payment made contingent upon a termination of employment, if the payment amount equals or exceeds the terminating employee’s average annual taxable compensation over the preceding five years. The tax on an excess parachute payment is due on the portion of the payment that exceeds the covered employee’s average annual compensation (not just the portion in excess of $1 million).
Covered Employees and Related Organizations
The identification of covered employees is a major topic addressed by Notice 2019-09. In general, a covered employee is an individual who is one of the five highest paid employees of the exempt organization in any taxable year beginning after December 31, 2016. There is no minimum compensation threshold that applies in determining covered employee status. And, perhaps most important, once an individual is identified as a covered employee she will remain a covered employee – forever. This means that a tax-exempt employer must identify its covered employees every year and keep track of them on an ongoing basis.
A tax-exempt employer must identify its covered employees based not only on remuneration paid by that employer, but also taking into account remuneration for services performed by the individual as an employee of any “related organization” of the employer. Under Notice 2019-09, a related organization is any entity that is under common control with a tax-exempt employer using a more-than-50 percent control test. This approach may create headaches for many tax-exempt employers, who are used to the 80 percent control test that generally applies in determining the members of a controlled group of exempt organizations. So a tax-exempt employer within an integrated health system, for example, must determine the extent to which remuneration must be imputed to an employee for services from a related organization that may only be 50 percent owned by the employer in determining covered employee status. Moreover, an individual can be deemed to be an employee of more than one tax-exempt employer. Therefore, it is possible that a single employee could be a covered employee with respect to more than one tax-exempt employer within a system. Finally, given the “forever” status of covered employees, the recordkeeping headaches will multiply when, for example, two health systems merge.
Compensation Is Considered Paid When Vested and on a Calendar Year Basis
Code Section 4960 states that compensation will count toward the $1,000,000 threshold when it ceases to be subject to a substantial risk of forfeiture (i.e., when it vests), rather than when it is paid. But Notice 2019-09 includes a helpful grandfathering rule. Specifically, amounts that were earned and vested prior to the employer’s taxable year beginning in 2018 do not count toward the threshold.
Notice 2019-09 also clarifies that the excise tax is determined on a calendar year basis, not based on the taxable year of the employer. This should reduce the administrative burden that might otherwise arise if employers were required to allocate compensation paid during a single calendar year to multiple fiscal years.
Severance Pay Below $1 million Can Be Subject to the Excise Tax
Excess parachute payments paid to a covered employee can be subject to the 21 percent excise tax even if those payments amount to less than $1 million. While conceptually similar to the “golden parachute” concept under Code Section 280G, which applies where a payment is made in connection with a change in control of a for-profit company, Notice 2019-09 takes an expansive view as to what is an excess parachute payment under Section 4960. Subject to only a few exceptions, most types of compensation triggered by an involuntary separation can potentially be considered a parachute payment. For example, payments made contingent upon complying with a non-compete are included, as is the value of benefits where vesting is accelerated, even if no actual payment is made. An involuntary separation from service for this purpose generally includes an employee’s termination of employment without cause, an employee’s failure to renew a contract, and a termination of employment by an employee for good reason. There are also special provisions defining separation from service broadly to include certain changes to the service relationship, even if an employee is still employed by the tax-exempt employer. The total payments in the nature of compensation that are contingent upon an involuntary separation from service will only be parachute payments if they are three or more times the employee’s base amount (which is the measure of taxable compensation applied under Code Section 280G). Excess parachute payments equal the portion of the parachute payments that exceeds the base amount.
Multiple Employers Within a Tax-Exempt Controlled Group Can Each Be Subject to Tax
Notice 2019-09 confirms that separate tax-exempt members of a controlled group can each be subject to the excise tax. (Think of a health system made up of multiple hospitals and other institutional health care providers.) This means that each tax-exempt employer must separately determine which of its employees are covered employees rather than determining the five highest paid employees across the entire integrated health system. So a controlled group of tax-exempt employers could potentially have several employers with dozens of employees earning compensation that triggers the excise tax. Consistent with this idea, the Notice includes rules for allocating the excise tax among a tax-exempt employer and related organizations. A careful application of these rules will be particularly important in a health system with covered employees who provide services to, and receive compensation from, more than one related organization.
The Good News?
The IRS expects to issue further guidance regarding the application of Code Section 4960. In the meantime, tax-exempt employers may determine the applicability of the excise tax based on a “good faith, reasonable interpretation” of Code Section 4960, informed by Notice 2019-09. Accordingly, tax-exempt employers who are subject to Code Section 4960 should adopt consistent and reasonable approaches to the application of the excise tax based on all of the facts and circumstances. For tax-exempt employers that are part of a large group, we suggest a coordinated strategy starting at the parent entity and working down from there.
BRYN MAWR, Pa., Dec. 3, 2018 /PRNewswire/ — The American College of Financial Services today announced a set of newly elected officers to its Alumni Board of Advisors, who will take their positions on January 1, 2019. The Alumni Association preserves and promotes The American College’s traditions, purposes and growth by strengthening The College’s relationship with alumni and friends.
The new Alumni Board of Advisors officers are:
Kevin Baldwin
Lucas J. Quaccia
Lynnette Muleady
Matthew E. Schiff
President – Kevin Baldwin, CLU®, ChFC®, CAP®
Kevin Baldwin is the co-founder of B & L Financial Architects and has over 30 years of experience in the financial services industry. He has successfully built a career general agency for Penn Mutual, created a brokerage distribution channel for Aetna and Lincoln Financial Group, and established the National Life Academies and the Regional Rising Leaders Prospecting agent training schools. Most recently, Kevin oversaw MassMutual’s Department of Field Training and Development. Kevin earned his bachelor’s degree in history and political science from the University of Connecticut and has served on the Alumni Board for a decade.
Vice President – Lucas J. Quaccia, CLU®, CLF®, ChFC®
Luke Quaccia is a Managing Partner at New York Life, where he has worked since joining the organization in 2000 as an agent. After qualifying for Executive Council three times, Luke transitioned into his role as Partner in 2003, earned Senior Partner in 2008 and was promoted to Managing Partner of the Chicago North Shore General Office in 2009. In May 2015, he moved into his current role leading the Central California General Office. He earned his bachelor’s degree in economics from Stanford University and has served on the Alumni Board for five years.
2nd Vice President – Lynnette Muleady, MSM, CLU®
Lynnette is the Director of the Agent Development Center at State Farm and has over 17 years of financial services industry experience. Lynnette was appointed to her current role in March 2018, where she oversees a team that provides training and leadership development for future independent contract agents and interns. She earned her bachelor’s degree in international studies from Michigan State University and her master’s degree in management and leadership from the American College of Financial Services. She has served on the Alumni Board for three years.
Secretary – Matthew E. Schiff, CLU®, ChFC®
Matthew Schiff is the President of Schiff Benefits Group, LLC, where he specializes in the design, implementation, financing and ongoing administrative support of supplemental executive benefits programs. Matthew has nearly 30 years of experience in the financial services industry, and previously served as a Managing Director with NYLEX Benefits, a subsidiary and the executive benefits consulting arm of New York Life. Matthew earned his bachelor’s degree in economics from Tulane University and has served on the board for two years.
“We are excited to welcome this new leadership group for our Alumni Board of Advisors,” said George Nichols III, President and Chief Executive Officer of the American College of Financial Services. “Their expertise as forward-thinking leaders in the financial services industry will enable them to continue to fortify our alumni bonds and enhance our programs for the next generation of advisors and graduates.”
ABOUT THE AMERICAN COLLEGE OF FINANCIAL SERVICES The American College of Financial Services was founded in 1927 and is the nation’s largest nonprofit educational institution devoted to financial services. Holding the highest level of academic accreditation, The College has educated one in five financial advisors across the United States and offers two master’s degrees in management and financial services and prestigious financial planning designations such as the Retirement Income Certified Professional® (RICP®), Chartered Life Underwriter® (CLU®), Chartered Financial Consultant® (ChFC®) Wealth Management Certified Professional® (WMCP®) and education leading to the Certified Financial Planner™ (CFP®) certification. The College’s faculty represents some of the foremost thought leaders of the financial services profession. For more information, visit TheAmericanCollege.edu.
I had the honor of speaking at the annual meeting of the Million Dollar Round Table in June of 2017. Below, please find an audio copy of my presentation and what we do for our clients…..
Congratulations to our very own Jayne N. Schiff, MSFS, CLU, ChFC, CAP, REBC, MPS for being inducted into the American College of Financial Services Alumni Hall of Fame. Clink on the link below for the official press release.
