Keeping your clients compliant amidst tax code changes

tax code

Mid-year is a great time to review your company’s retirement plan to make sure it complies with all legal and operational requirements. This is especially true given the Tax Cuts and Jobs Act (TCJA) that was signed into law in late 2017, which changed the tax code in several ways that may impact your plan. We’ve identified a few key areas we believe deserve a second look.

Ensure you’re complying with new fringe benefit provisions

Usually plan sponsors have a generous remedial period in which to make any necessary plan amendments to comply with changes to the tax code, but not so in the case of employer-provided transportation fringe benefits and loans. Several of TCJA’s changes took effect January 1, 2018.

* Employees must include moving expenses paid for by the employer in gross income unless the employee is a member of the Armed Forces on active duty or needs to move pursuant to military order.

* Employer-sponsored commuting benefits must now be included in gross income, except for some “de minimis” fringe benefits like transit pass or parking benefits of $21 or less. This may be an especially important issue for employers in Washington, DC, New York, or other states that require employers to offer these benefits. Employees can exclude from gross income occasional overtime transportation and some transportation costs for safety concerns that are paid by the employer.

* The TCJA also expands the time period for an employee who terminates employment or separates from service with an outstanding loan to repay the loan or roll over any distribution to the due date for filing the employee’s tax return for that year (including extensions).

* For employers based in Puerto Rico and other hurricane-affected areas, the TCJA also includes disaster relief on plan distributions.

Make necessary plan amendments now to avoid operational errors in the future

The TCJA changes may necessitate plan amendments so that plans align with current legal requirements. For instance, if your plan defines compensation to exclude employer provided transportation benefits in gross income, those provisions need to be changed to comply with the TCJA. Retirement plans that do not provide hurricane relief will also need to be amended by December 31st. You may need to make similar changes to any loan provisions of your plan.

Once you’ve made the necessary changes, it’s important to ensure your payroll system is coded consistently with the plan document. If not, the result is an operational error that could be very expensive and time consuming for the employer to fix. It is also a common finding in a DOL or IRS audit, which could have other implications for your plan.

Consider reviewing plan design to best support employees

With the TCJA bringing corporate tax rates to unprecedented low levels, some employers are using their windfalls to reward employees with salary increases, matches, and bonuses. This is great news for retirement plans since these benefits translate into more efficient retirement savings.

Now that the TCJA has been in effect for about six months, it may be a good time for sponsors to review their plan designs to make sure the plan serves your goals such as helping employees boost their retirement savings, attracting and retaining talent, or maximizing tax savings. Now may be the right time to implement automatic enrollment or escalation features, start or increase the default savings rate, or allow Roth contributions. Sponsors should also consider revising the plan’s eligibility rules to encourage employees to start saving sooner. Employers can also reduce turnover through an attractive employer match programs.  You can benchmark your matching program against peers and evaluate whether the match or the scope of employee deferrals matched needs to be changed to meet your financial or cash flow needs.

There will be more legislative activity in the coming year that could affect your retirement plan, with everything from requiring after-tax contributions to expanding availability of multiple employer plans.  It is a good idea to get into the habit now of making sure your plan is ready for even more changes ahead.

Newly Proposed Bills May Help Your Plan Sponsors

bills

Tax reform isn’t the only newsworthy event affecting the benefits industry–several bills were introduced in Congress at the end of 2017 that could dramatically impact certain kinds of retirement plans. While these new proposals have an uncertain future, they all signal Congressional interest in improving retirement security. Here are some common trends news that you may see affecting your retirement plans soon.

Increase access to multiple employer plans (MEPs)

The Small Businesses Add Value for Employees Act (SAVE Act, HR 4637) removes the “common bond” requirement, thereby making it easier for small businesses to pool together, regardless of industry, and offer retirement plans to their employees while alleviating some burdens of plan administration.

The Retirement Security Act of 2017 (SB 1383) offers employers a tax credit and protects employees from losing their tax benefiits if one employer in a MEP fails to meet the participation criteria. Similarly, the Auto401k Act (HR 4523) provides relief from the “one bad apple” rule of MEPs so that all participating employers are not penalized when one employer violates the qualification rules.

Incentivize small businesses to offer retirement benefits

Through tax credits and other incentives, Congress is attempting to make retirement plans more accessible and promoting lifetime income solutions.The Retirement Plan Simplification and Enhancement Act (RPSEA; HR 4524) would increase the current automatic enrollment safe harbor cap and encourage employers to defer more than the automatic deferral floor of 3% of salary in the first year. It would also exempt retirement savings below $250,000 from complicated required minimum distribution rules and make it easier to take advantage of the saver’s credit. The SAVE Act increases the limit on elective deferrals under a simple IRA and permitting employers to make non-elective contributions for their employees of up to 10% of pay.

Reduce administrative burdens for plan sponsors

Congress is also addressing some of the lesser-known, but equally painful administrative burdens of sponsoring retirement plans. Access to a Secure Retirement Act (HR 4604) corrects some of the confusing regulations that often stop employers from including a guaranteed lifetime income product in their benefits package.

The Receiving Electronic Statements to Improve Retiree Earnings Act (RETIRE Act HR 4610) allows plan sponsors to use electronic delivery as the default distribution method for retirement plan notices and documents. A companion Senate bill is expected soon and the timing coincides with an effort by the Employee Benefits Security Administration’s project to address electronic delivery.

Staying on top of these bills can help eliminate the often confusing world of government. As Congress continues to takes steps to help plan sponsors, we will keep you updated on the way new legislation is affecting your clients. That way, as client questions come about surrounding what they hear in the news – their trusted advisor has the answers.

How Tax Reform May Impact the Investment Industry

investment industry

The Senate recently passed its version of the GOP’s tax reform legislation.

The legislation isn’t final, however, as the House and the Senate must hammer out a final version of the bill that reconciles their differences.

Until that happens, you should be aware of the major changes proposed, and how they may impact your clients.

Exemptions and deductions

Under both proposals, personal exemptions would be eliminated. Both proposals would also eliminate the state and local income tax or sales tax deduction for individual taxpayers, though the standard deduction will nearly double.

The deduction for property taxes will now be capped at $10,000 (as there was no federal cap before).

While the impact on individuals will vary by situation, this could result in many investors having less cash flow to invest in their 401(k) plans and elsewhere.

No changes to 401(k) deferrals

One provision that was discussed early on in the process was limiting employee pre-tax contributions to 401(k) retirement plans.

This ultimately was not part of the package, and the IRS has increased 401(k) contribution limits to $18,500 (with $24,500 for those 50 and over) in 2018.

For those who lose the ability to itemize deductions via the changes in the tax bill, such as the increase in the standard deduction, the ability to make pre-tax retirement contributions becomes even more valuable.

It is important to remind your clients and prospects to max out their contributions if they aren’t already doing so, if this is an appropriate strategy for their situation.

For small business owners who were on the fence about starting a small business retirement plan, the ability to contribute to one for themselves might be an even better incentive under the new tax rules.

Impact on the markets

While trying to predict the direction of the stock market is always a fool’s errand at best, part of the premise of the plan is to lower corporate tax rates in an effort to spur growth.

This could well be a stimulus for the markets, but of course there are many factors that come into play here.

Be a resource

Even if you aren’t a tax expert, become knowledgeable about the features of these new rules that will impact your clients and prospects. Incorporate more knowledge into your advice to existing clients and your marketing to prospects.

Vestwell does not offer tax advice, please consult your tax professional, as necessary, related to any tax-related topics.

The “Rothification” of the Investment Industry

"rothification"

Even before President Trump’s tax reform legislation was finalized, rumblings of limits to 401(k) contribution amounts gave credence to “Rothification” impacting the investment industry.

If such proposals had passed, this would have reduced the amount of pre-tax money that people could contribute to their 401(k) plans, while freeing up spending money for the government.

But the industry is already seeing a rise in the conversion from some or all traditional defined contribution plans to Roth-like plans, hence the movement being coined Rothification. The results have sparked a debate about the pros and cons of moving in this direction.

Pros

Proponents of the increased reliance on Roth 401(k)s and IRAs point to the tax benefits later in life for retirement savers.

These savers will sacrifice a tax break today, so that they can avoid paying taxes when the money is withdrawn from their savings in retirement.

There are also estate planning benefits, because there are no required minimum distributions (RMDs) on Roth IRAs. Roth 401(k) accounts rolled over to Roth IRAs would also receive such benefits.

Cons

Many financial advisors fear that Rothification would lead to reduced retirement savings at a time when Americans can ill-afford to do so.

The loss of the income tax deduction would cause worker’s take-home pay to be reduced.

This could, in effect, limit the cash-flow available for 401(k) contributions and other retirement savings.

Consider Taxes

Roth accounts certainly offer solid options for retirement saving. While the benefit of tax savings down the road in retirement can seem distant, the reality is that many retirees may find themselves in a higher income tax bracket in the future.

Many also see Roth accounts as a way for retirement savers to diversify their retirement accounts’ tax profiles, in efforts to be prepared no matter what tax rules are passed in the future.

In the Meantime

Financial advisors should consider how Roth accounts can make sense for 401(k) plan sponsors and their employees.

We haven’t seen the last of the Rothification movement, so it’s best to first be educated, and then be prepared for what’s next.

Vestwell does not offer tax advice, please consult your tax professional, as necessary, related to any tax-related topics.