Jon Schultze | The Wagner Law Group

Initial Guidance Regarding Trump Accounts

2026-03-30T20:30:42Z

Initial Guidance Regarding Trump Accounts - Marcia Wagner and Jon C. Schultze, 401(k) Advisor, March, 2026

Updated United States Postal Service Rules May Affect Employee Benefits Filings

2026-02-17T17:15:35Z

By Barry Salkin and Jon Schultze The United States Postal Service (“USPS”) recently made a regulatory change that impacts when a piece of mail is considered to have been accepted by the USPS. This change may affect certain employee benefit (and other) filings, and administrators will need to be aware of the new rules to ensure they are compliant. Section 7502 of the Internal Revenue Code of 1986 (“Code”) contains a rule for establishing the date on which a tax return is timely filed. Commonly referred to as the “mailbox rule” (which either replaced or supplemented the common law rule of physical delivery), a return is treated as timely filed if a properly addressed return is postmarked on or before the due date for filing a return. That shorthand reference to the Code provision may endure, but on December 24, 2025, the USPS limited its scope. On that date, rules regarding postmark dates were clarified in a way that most plan administrators and other plan fiduciaries will likely not have known about. In Regulation 608.111, Postmarks and Postal Possession, the USPS confirmed that the date inscribed by the USPS on a mail piece to reflect its processing does not necessarily coincide with the date on which the USPS accepted possession of the mail piece. Instead, the date of a machine-applied postmark represents the date of the first automated processing operation performed at a USPS facility, which may be days after the USPS took physical possession of the mail piece. For correspondence, forms and returns that can be filed electronically, the USPS’s recent action will not have any effect on benefit plan administration. But electronic filing will not always be an available alternative. For example, indirect rollovers to an IRA trustee or custodian must be effected within 60 days; COBRA notices and payments are tied to postmark dates; and plan contributions by check need to be made by a statutory deadline. Plan administrators and service providers will need to take steps to avoid missing a statutory or regulatory deadline. Filing a return or taking the otherwise required action a week earlier could avoid problems, but there should be a backup plan in the event the early filing option cannot be implemented. Alternatives to merely dropping off a filing at the post office would be obtaining a manual postmark, purchasing a certificate of mailing, or using certified or registered mail. These options may be impractical for bulk mailings, but they are options that may be considered in certain situations. Plan administrators and other plan fiduciaries, as well as plan participants and others involved in the administration of employee benefit plans, should be mindful of this new USPS rule when engaging in time-sensitive activities. Current practices and procedures should be reviewed to ensure that they take into account the new USPS timing rule. Failures to meet deadlines could result in serious consequences, which proper planning can help avoid. The Wagner Law Group would be happy to provide guidance on these requirements. [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2021/07/Barry-Salkin.jpg[/author_image] [author_info]Barry Salkin concentrates his practice in ERISA and employee benefits law. He has significant expertise drafting, amending and negotiating various ERISA and employee benefit plans, including defined benefit pension plans, profit sharing plans, 401(k) plans, as well as qualified and non-qualified deferred compensation programs.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/Jon-Sc.jpg[/author_image] [author_info]Jon Schultze focuses on Employee Benefits and ERISA.Jon oversees the firm's qualified retirement plan area, which includes ensuring that our clients' retirement plans conform to legal requirements.[/author_info] [/author]

A Playbook on the IRS’s Final Regulations on the Roth Catch-Up Contribution Requirement under the SECURE 2.0 Act

2026-04-01T12:56:44Z

A Playbook on the IRS’s Final Regulations on the Roth Catch-Up Contribution Requirement under the SECURE 2.0 Act - Marcia Wagner, Jon C. Schultze and Barry L. Salkin, 401(k) Advisor, January, 2026

Initial Guidance Regarding Trump Accounts

2026-01-16T14:32:38Z

[author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/Jon-Sc.jpg[/author_image] [author_info]Jon Schultze focuses on Employee Benefits and ERISA.Jon oversees the firm's qualified retirement plan area, which includes ensuring that our clients' retirement plans conform to legal requirements.[/author_info] [/author] On December 2, 2025, the Internal Revenue Service (“IRS”) released preliminary guidance on Trump Accounts (IRS Notice 2025-68). In a nutshell, Trump Accounts are a type of Individual Retirement Account (“IRA”) for minors that can be funded from the year the account is opened through the December 31 following the child’s 17^th birthday (the “growth period”). During the growth period, the account is subject to special rules, including annual contribution limits and permitted investments. After the growth period, the account is treated as a traditional IRA for most purposes, with certain exceptions. The IRS intends to issue regulations consistent with the guidance, subject to comments it receives. A. Establishing a Trump Account. An authorized individual, such as a parent or legal guardian, may open a Trump Account for an eligible individual by filing IRS Form 4547 or by using an online tool. Trump Accounts can only be established at specific financial institutions approved by the Treasury Department, and there can be only one funded Trump Account for an individual at any time. Special requirements that apply to employer-based Trump Accounts are described below. B. Contributions. Five types of contributions can be made to a Trump Account: a “pilot program” contribution from the U.S. Treasury of $1,000 for an eligible child born during 2025-28; a “qualified general contribution” funded by states (or political subdivisions thereof), or Internal Revenue Code (“Code”) section 501(c)(3) tax-exempt organizations for members of a qualified class of account beneficiaries; employer contributions under Code section 128; rollover contributions from another Trump Account; and contributions from other sources (such as the account beneficiary, parents or any other person). No contributions can be made to Trump Accounts before July 4, 2026, and, in contrast to the generally applicable deadline to make IRA contributions, contributions to Trump Accounts must be made by the last day of the year. During the growth period, contributions may be made to a Trump Account even if the child does not have includible compensation. For 2026 and 2027, employer contributions and contributions from other sources are subject to an aggregate annual limit of $5,000 (subject to cost-of-living adjustments after 2027); pilot program contributions, qualified general contributions and rollover contributions are not subject to an annual contribution limit. Employer contributions (including employee salary reduction contributions) to a Trump Account are made on a pre-tax basis, but non-employer contributions are made on an after-tax basis. A trustee of a Trump Account is required to have procedures in place to monitor and enforce the contribution limit and to comply with reporting requirements. C. Employer-based Trump Accounts. Code section 128 provides that employers can make contributions to the Trump Accounts of their employees or employees’ dependents, and any such employer contributions are not includible in the gross income of the employee or the employee’s dependent. For 2026 and 2027, employer contributions are limited to $2,500 per employee per year (subject to cost-of-living adjustments after 2027). This annual limit is per employee and not per dependent of the employee; thus, if an employee has more than one dependent that has a Trump Account, the employer may only contribute up to $2,500 in the aggregate to the Trump Accounts. Employees may make pre-tax salary reduction contributions, which are limited to $2,500 per year, reduced by the amount of any employer contribution (the limit is subject to cost-of-living adjustments after 2027). To implement employer-based Trump Accounts, employers must establish a written Trump Account contribution program that is designed for the exclusive benefit of employees to provide contributions to the Trump Accounts of such employees or their dependents. Employee salary reduction contributions would be made on a pre-tax basis under a Section 125 cafeteria plan, and requirements similar to those that apply to Section 129 dependent care assistance programs (regarding discrimination, eligibility, notification, statements, and benefits) will apply to Trump Account programs. The Notice states the IRS intends to issue rules to coordinate employer-based Trump Account programs with Section 125 plans and guidance regarding nondiscrimination requirements under principles similar to the rules governing Section 129 plans. The Notice further states DOL and Treasury anticipate issuing guidance on how to structure an employer-based Trump Account program to ensure it does not create an ERISA plan. D. Eligible investments. During the growth period, funds must be invested in a mutual fund or exchange traded fund (“ETF”) that tracks an index of primarily U.S. companies, does not use leverage, does not have annual fees and expenses of more than 0.1% of the balance of the investment in the fund and meets other criteria that the Secretary deems appropriate. E. Distributions. No distributions are permitted during the growth period other than qualified rollover contributions to a rollover Trump Account, qualified ABLE rollover contributions at age 17 to an ABLE account of the account beneficiary, distributions of excess contributions, and distributions upon the death of the account beneficiary. After the growth period, distributions are generally subject to the rules that apply to distributions from a traditional IRA. ______________________________________________________ Trump Accounts are a novel way to encourage saving for retirement starting at a very young age, and an investment in an index fund should result in significant growth through retirement. It remains to be seen what level of “buy-in” will occur, but the initial funding of the accounts under the Treasury’s pilot program might encourage parents to establish a Trump Account for their children to at least seed the accounts with those contributions. Trump Accounts also might be used as a wealth-transfer vehicle if parents and grandparents make contributions on behalf of their children and grandchildren. This summary does not explain every issue addressed in the Notice. We’ll provide updates as additional guidance on Trump Accounts is issued. The Wagner Law Group would be happy to advise employers that may be considering adding an employer-based Trump Account program to their existing benefits program.

Roth Catch-Up ‘Playbook’ Can Guide Advisers Through Compliance

2025-11-03T17:31:59Z

Roth Catch-Up ‘Playbook’ Can Guide Advisers Through Compliance - Barry Salkin and Jon Schultze, planadviser, October 29, 2025 (PDF)

A Playbook on the IRS’s Final Regulations on the Roth Catch-Up Contribution Requirement Under the SECURE 2.0 Act

2025-10-09T12:10:33Z

By Jon Schultze and Barry Salkin On September 16, 2025, the Internal Revenue Service (“IRS”) issued final regulations providing guidance on changes made by the SECURE 2.0 Act of 2022 to the catch-up contribution provisions of the Internal Revenue Code (“Code”). Under the “Roth catch-up contribution requirement,” catch-up contributions made by plan participants with FICA wages greater than $145,000 (as indexed beginning in 2026) in the preceding calendar year must be made as designated Roth catch-up contributions. The IRS issued proposed regulations in January 2025; the final regulations, as explained in the preamble, provide plans with more flexibility than the proposed regulations in certain respects. The Roth catch-up contribution requirement is extremely complicated, and plan sponsors will need to carefully coordinate their compliance with their internal resources, payroll provider and the plan’s recordkeeper. Applicable Employer Plans. The Roth catch-up contribution requirement applies to Code section 401(k) plans, 403(b) plans and eligible governmental 457(b) plans. The requirement does not apply to SEP arrangements, SIMPLE IRA plans, certain governmental 457(b) plans and tax-exempt 457(b) plans. Applicability Dates. The applicability date of the final regulations depends on the plan:

For plans that are not maintained pursuant to collective bargaining agreements and are not eligible governmental 457(b) plans, the final regulations are effective January 1, 2027.
For plans maintained under one or more collective bargaining agreements, the final regulations apply with respect to contributions in taxable years beginning after the later of the first taxable year beginning after December 31, 2026, or the first taxable year that begins after the expiration date (without regard to any extension) of the last collective bargaining agreement related to the plan in effect on December 31, 2025.
For governmental 457(b) plans, the final regulations apply with respect to contributions in the later of the first taxable year beginning after December 31, 2026, or the first taxable year beginning after the close of the first regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2025.

The SECURE 2.0 Act originally made the Roth catch-up contribution requirement effective January 1, 2024, but the IRS provided a two-year “transition period” through the end of 2025. The IRS has not extended the transition period. Thus, beginning on January 1, 2026, plans must apply a reasonable, good faith interpretation standard to implement the Roth catch-up contribution requirement until the applicable date by which the plan must comply with the final regulations. Compliance with the final regulations is presumably reasonable good faith compliance, and taking a position that the IRS rejected in the preamble in response to comments would likely be regarded by the IRS as not constituting a reasonable good faith interpretation. Affected Participants. The Roth catch-up contribution requirement applies to participants:

who are catch-up eligible, i.e., attain or have attained age 50 during a calendar year (not the plan year);
whose FICA wages from the employer in the preceding calendar year exceeded $145,000, as indexed; and
who make salary deferrals that exceed either the Code section 402(g) limit (the “salary deferral dollar limit”), as indexed ($23,500 for 2025), or a comparable limitation or restriction included in the terms of the plan.

The final regulations make several important clarifications regarding the determination of affected participants’ FICA wages.

“FICA wages” are wages for purposes of Social Security taxation as reported in Box 3 of Form W-2. A participant who does not have FICA wages, such as a partner with self-employment income or an employee of an exempt state or local government, will not be subject to the Roth catch-up requirement.
The FICA wage dollar amount is not pro-rated for an employee’s partial year of employment. Thus, for example, an employee who is hired on October 1 at a $200,000 salary will not be subject to the Roth catch-up requirement in the following year because the employee’s FICA wages will total only $50,000 for the calendar year.
The relevant employer is the common law employer of the plan participant. The proposed regulations did not allow FICA wages paid by multiple members of the same controlled group or affiliated service group to be aggregated, even if the group uses a common paymaster (a common paymaster simplifies FICA withholding and reporting for compensation paid by multiple entities). In response to comments received by the IRS, the final regulations allow a plan to aggregate the FICA wages a participant receives from all employers in a controlled group and/or where a common paymaster is used.

Deemed Elections. A plan may provide that an election by a participant subject to the Roth catch-up contribution requirement to make catch-up contributions on a pre-tax basis will be treated as a deemed election to make catch-up contributions as designated Roth catch-up contributions. If a plan will apply deemed elections, the plan document must provide for them and must permit participants to change their deemed elections. For example, a participant who has reached the salary deferral dollar limit with pre-tax dollars can elect to discontinue making catch-up contributions that would otherwise have to be made as Roth contributions. Additionally, a plan must cease to apply a deemed election if an employee is not subject to, or ceases to be subject to, the Roth catch-up requirement, such as when an employee’s FICA wages for the preceding year are determined not to exceed the Roth catch-up threshold or the employee changes employers during the year and remains covered under the same plan. Catch-up contributions that were designated as Roth catch-up contributions pursuant to a deemed election do not need to be recharacterized as pre-tax catch-up contributions. When Requirement Applies. Different requirements apply to plans that use deemed Roth elections and plans that have separate elections. For plans using deemed Roth elections, the final regulations provide two methods for determining when the deemed Roth election will be implemented:

When pre-tax salary deferrals reach the salary deferral dollar limit. Because catch-up contributions are made after a participant reaches the salary deferral dollar limit, a plan can count designated Roth contributions made at any point during the year toward the Roth catch-up requirement even if the designated Roth contributions are made before the participant reaches the salary deferral dollar limit, i.e., before the participant’s salary deferrals are made as catch-up contributions. Thus, a participant subject to the Roth catch-up contribution requirement who makes pre-tax salary deferrals during a year that do not exceed the salary deferral dollar limit might not need to have catch-up contributions deemed to be Roth catch-up contributions instead of pre-tax catch-up contributions.
When pre-tax and Roth salary deferrals reach the salary deferral dollar limit. This method, added to the final regulations in response to comments, allows a plan to apply the deemed election when a participant’s total salary deferrals reach the salary deferral dollar limit regardless of whether a portion of the salary deferrals were made as Roth contributions. The plan must permit a participant to make a new election that is different from the deemed election, which can allow such a participant to make additional pre-tax catch-up deferrals, taking into account the designated Roth contributions made earlier in the year, if they are less than the salary deferral dollar limit.

For plans using separate elections, i.e., that do not continue salary deferrals that exceed the salary deferral dollar limit and require participants to make a separate catch-up contribution election, a plan may apply a separate-election deemed Roth catch-up election to a participant’s salary deferrals that the participant elects to treat as catch-up contributions, including separate election plans that make catch-up contributions concurrent with salary deferral contributions. The plan must permit a participant to make a new election different from the deemed election. One comment suggested that a plan should be permitted to require that all participants’ catch-up contributions be made as designated Roth contributions to avoid the administrative complexity. The final regulations do not include such a rule because, as the IRS explains, participants must be permitted to make pre-tax salary deferrals in order to designate pre-tax salary deferrals as designated Roth contributions. Thus, participants who are not subject to the Roth catch-up contribution requirement would be unable to make pre-tax catch-up contributions as is required under the Code. However, a plan sponsor could remove a catch-up contribution provision from a plan. Coordination With Other Rules. The IRS also explained how the final regulations relate to other catch-up contribution rules:

Super catch-up contributions made by participants who attain age 60 to 63 during a calendar year are subject to the Roth catch-up contribution requirement.
Special 15-year catch-up contributions to 403(b) plans are not subject to the Roth catch-up contribution requirement. If a participant is eligible to make special 15-year 403(b) plan catch-up contributions and age 50 catch-up contributions, the special 15-year 403(b) plan catch-up contributions may be pre-tax, and any age 50 catch-up contributions would be subject to the Roth catch-up contribution requirement.
Special catch-up contributions to 457(b) plans during the last three years prior to retirement age are not subject to the Roth catch-up contribution requirement. If a participant is eligible to make special pre-retirement 457(b) plan catch-up contributions and age 50 catch-up contributions, the special pre-retirement 457(b) plan catch-up contributions may be pre-tax, and any age 50 catch-up contributions would be subject to the Roth catch-up contribution requirement.
For dual qualified plans, i.e., plans that are qualified under both the Internal Revenue Code and the Puerto Rico Code, the final regulations treat the Roth catch-up contribution requirement for participants subject to the Puerto Rico Code as satisfied for taxable years that begin before the effective date of any future amendment to the Puerto Rico Code that provides for designated Roth contributions.

Correcting failures. The final regulations clarify the correction methods that may be used if participants subject to the Roth catch-up requirement make pre-tax salary deferrals that exceed an applicable limit. The final regulations describe several methods of correction.

Form W-2 correction method. The excess pre-tax amount, adjusted for earnings, is transferred from the participant’s pre-tax deferral account to the participant’s designated Roth account, and the participant’s Form W-2 includes the transferred pre-tax deferral amount as a designated Roth contribution. This correction method cannot be used if the participant’s Form W-2 has already been filed or furnished to the participant, limiting its usefulness for corrections occurring after January 31; thus, if all or a portion of a participant’s pre-tax deferrals are recharacterized as catch-up contributions to correct an ADP test failure, it will generally be too late to use the Form W-2 correction method.
In-plan Roth rollover correction method. The plan can directly roll over the excess pre-tax amount, adjusted for earnings, to the Participant’s designated Roth account, and the amount rolled over is reported on a Form 1099-R for the year of the correction. The contribution and earnings would be includible in the participant’s gross income in the year of the rollover. A plan can use this correction method even if the plan does not permit participant in-plan Roth rollover contributions because the rollover is made by the plan administrator to correct an operational failure and not by the participant.
Distribution method. The plan can distribute the pre-tax catch-up contribution, adjusted for applicable earnings, that was required to be a designated Roth catch-up contribution as an excess contribution.

The advantage of both the Form W-2 correction method and the in-plan rollover correction method is that the incorrect catch-up contributions can remain in the plan. However, these correction methods can only be used if the plan provides for a deemed Roth catch-up election; otherwise, the incorrectly made catch-up contributions would have to be distributed from the plan. If the amount transferred under the Form W-2 correction method or directly rolled over under the in-plan Roth rollover correction method is the first contribution to a participant’s designated Roth account, the five-taxable-year period begins with the taxable year for which the amount is includible in the participant’s gross income. The deadline to make correction is the last day of the taxable year following the year for which the catch-up contribution was made. However, if the correction is made after the deadline to correct the type of salary deferral failure that occurred, the consequences of not making a timely correction still apply to the catch-up contributions. The types of failures that may occur generally are:

If a pre-tax salary deferral is a catch-up contribution because it exceeds the salary deferral contribution limit, the deadline to make a correction is April 15 of the calendar year following the calendar year in which the salary deferral was made.
If a pre-tax salary deferral is a catch-up contribution because the participant’s annual additions would otherwise exceed the Code section 415 limit, the deadline to make a correction is the deadline under the Code section 415 regulations for allocating amounts for the limitation year for which the salary deferral was made.
If a pre-tax salary deferral is a catch-up contribution due to an ADP test failure, the deadline to make a correction is the date that is 2-1/2 months (six months for a plan that includes an eligible automatic contribution arrangement) after the close of the plan year for which the excess contribution was made. This deadline would also apply to correct a pre-tax catch-up contribution that is a catch-up contribution because it exceeds an employer-provided plan limit.

Thus, a plan may have different correction deadlines depending on each participant’s particular situation, but the same correction method is required for similarly-situated individuals. Correction is not required under two circumstances:

The amount of the pre-tax salary deferrals that should have been designated Roth catch-up contributions does not exceed $250.
The employee’s FICA wages are determined to exceed the applicable threshold on account of adjustments made after the applicable correction deadline.

Amendment Deadlines. Plan sponsors will need to amend their plan documents to reflect the manner in which the final regulations were implemented. The deadlines to adopt amendments for these changes depends on the plan:

The amendment deadline is generally December 31, 2026.
Plans maintained pursuant to one or more collective-bargaining agreements must be amended by December 31, 2028.
Governmental plans must generally be amended by December 31, 2029.

The final regulations also clarify that an amendment that applies mid-year is not a prohibited change to a safe harbor plan as described in Notice 2016-16.

* * * * *

This Article addresses issues under the final regulations that will affect a majority of plans. We have not explained every issue under the final regulations which, in many cases, apply to a smaller group of plans. Plan sponsors should seek legal advice regarding their good faith compliance with the new requirements. The Wagner Law Group would be happy to provide guidance on these requirements. [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/Jon-Sc.jpg[/author_image] [author_info]Jon Schultze focuses on Employee Benefits and ERISA.Jon oversees the firm's qualified retirement plan area, which includes ensuring that our clients' retirement plans conform to legal requirements.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2021/07/Barry-Salkin.jpg[/author_image] [author_info]Barry Salkin concentrates his practice in ERISA and employee benefits law. He has significant expertise drafting, amending and negotiating various ERISA and employee benefit plans, including defined benefit pension plans, profit sharing plans, 401(k) plans, as well as qualified and non-qualified deferred compensation programs.[/author_info] [/author]

An ERISA Journey for ESG via American Airlines By Way of Utah?

2026-03-30T21:15:51Z

An ERISA Journey for ESG via American Airlines By Way of Utah? - Marcia Wagner, Andrew Oringer, Barry Salkin, Jon Schultze, and Ari Sonneberg, 401(k) Advisor, May, 2025

An ERISA Journey for ESG Via American Airlines by Way of Utah?

2025-03-04T20:01:10Z

By Andrew Oringer, Barry Salkin, Jon Schultze and Ari Sonneberg Both supporters and opponents of the consideration of environmental, social and governance (“ESG”) goals can point to decisions by U.S. district courts in 2025 that are consistent with their positions on the permissibility of ESG-motivated investing in plans governed by the Employee Retirement Income Security Act of 1974 (“ERISA”). Supporters of the consideration of ESG factors may point to State of Utah v. Micone which upheld the validity of the approach of the U.S. Department of Labor (the “DOL”) established in 2022 to the so-called “tiebreaker” approach under ERISA’s general fiduciary rules. Opponents of ESG-motivated investing may cite to Spence v American Airlines, finding that the defendants breached their duty of loyalty in how they handled proxy voting by the plan’s investment manager in support of ESG activities that allegedly focused on factors other than the financial interests of plan participants and beneficiaries. However, even though the two cases involve many of the same underlying legal principles, they did so in very different legal contexts. As discussed below, it may well be the private litigation, rather than the litigation determining the legitimacy of the DOL’s regulation, that will have the greater practical impact on future fiduciary conduct. BACKGROUND ERISA fundamentally requires a fiduciary to focus on financial considerations in managing plan assets. Over the years, the pendulum has swung back and forth, as presidential administrations go between Democratic and Republican party affiliations, regarding the extent to which ancillary factors may be taken into account, particularly in the so-called tiebreaker scenario where a plan fiduciary can decide between investments that would be equally beneficial to plan participants and beneficiaries by looking to ancillary considerations. While the basic premise that financial considerations are paramount is immutable absent a statutory change, Democratic administrations have generally sought to make it easier to take ancillary considerations into account, and Republican administrations have generally sought to make it more difficult. The swings of the pendulum by hypothesis had to occur against the statutory backdrop that focuses on financial considerations. But the tonal shifts from administration to administration have been unquestionably significant. Thus, for example, a fiduciary with a so-called “green” agenda may have felt emboldened, or at least more comfortable, in taking ESG into account where there’s the sense that the federal government is supportive thereof. Conversely, there may have been a chilling effect in taking into account ESG factors where there was a sense that the federal government was hostile thereto. For years, these swings of the pendulum took place in the world of what is referred to as sub-regulatory advice - interpretive guidance that does not rise to the level of a regulation. Generally, such guidance has been considered to be less authoritative than a regulation, and is not subject to the detailed notice and comment procedures that apply to regulations. The first Trump administration significantly altered the path of ESG-related regulatory activity when it addressed these questions in both substantive and procedural ways. On the substantive side, the administration's hostility to ESG in the ERISA context was palpable. While the text of the Trump-era final regulation (the “Trump Regulation”) did not explicitly mention ESG, the regulation effectively forced fiduciaries expressly to justify any effort to take into account non-pecuniary factors in making investment decisions. The tiebreaker scenario was identified as at best a theoretical (almost “black swan”) possibility, as a practical matter. (The first Trump Administration had a substantially similar tiebreaker rule, although its triggering event - two economically indistinguishable investments - could be treated as a black swan only if the investments were completely indistinguishable). The Trump Regulation can arguably be characterized as reflecting a concern that, unlike some other investment strategies, an ESG-centric strategy could be motivated in whole or in part by considerations other than the best financial interests of plan participants and beneficiaries; in particular, by a desire to protect, improve or otherwise arise out of a concern for what is best in a political or otherwise non-economic sense. Moreover, process-wise, the Trump administration promulgated an actual regulation, thereby forcing any future administration that might want to swing the pendulum back to make another actual (as opposed to sub-) regulatory change. However, to the extent that those who opposed the consideration of ESG factors were buoyed by the Trump Regulation, it is important to note that the regulation did not prohibit the consideration ESG factors. While ERISA focuses on the financial consequences of investment decision-making, it does not contain a general laundry list of prohibited factors that a fiduciary may not consider. The Trump Regulation likewise does not do so. The Biden administration was decidedly less hostile to ESG, and took the bait of having to change the regulatory language in order to effectuate the next swing of the ESG pendulum. The Biden-era regulation (the “Biden Regulation”), as it had to, was promulgated against a backdrop of the paramount nature of economic considerations, but may arguably be characterized as viewing ESG considerations as just another set of considerations, no different from traditional economic considerations. Thus, the Biden Regulation stripped out the Trump-era special procedural requirements surrounding the consideration of ancillary investment-related factors, and the DOL, in promulgating the regulation, expressly declined to cast aspersions on the potential validity of the tiebreaker scenario. Here again, though, there may have been an overreaction on the part of those in favor of pursuing ESG goals that belied the technical underpinnings of the Biden Regulation. Some may have believed that the regulation countenanced the consideration of ESG goals even where there could be an adverse impact on the plan’s financial results, and there may have been conflicting signals from the administration itself. But the DOL has been clear that financial considerations must always be paramount. For example, in a brief in the Utah case, the DOL stated that “[t]he [DOL’s] guidance recognized that fiduciaries . . . can consider collateral factors only in tightly limited circumstances consistent with prioritizing the plan’s financial interests....,” and then proceeded to state affirmatively that the Biden Regulation did not “license[] fiduciaries to defy their statutory obligations by taking actions that are not in the financial interests of plan beneficiaries. . . . To the contrary, a fiduciary engaging in such conduct would defy the clear text of the rule.” Thus, as noted above, the pendulum swings not with changes to the fundamental rules but with tonal shifts around the edges. While the tonal shifts may be critical to the manner in which fiduciaries behave, the basic rules are what they are. It is noted that ERISA’s dogmatic focus on financial returns presents special challenges for international money managers in a global economy. Elsewhere in the world there may not always be such a focus on the financial and a sublimation of the non-financial, and the contract can serve to accentuate the extent to which ERISA requires a focus on the financial. (It is noted in this regard that Presidential Memorandum of January 20, 2025 on “America First Trade Policy” may also have an impact on global investing under ERISA plans.) In this context, it may be argued that a lasting effect of the first Trump administration's efforts, regardless of ongoing ESG-related pendulum swings, has been and will be to cause fiduciaries who wish to consider ESG to focus on how ESG factors may affirmatively improve investment returns, rather than on whether the case can be made that the consideration of ESG factors do not adversely affect returns. Two other observations are worthy of note. First, even when a pro-ESG administration is in place and there is encouragement of the consideration of ESG factors, a fiduciary might be wary of the possibility that a subsequent administration may not be supportive of the consideration of ESG factors (as we have seen, when the Trump administration took over from Biden’s), thus resulting in the consideration of a possible unwinding of previous ESG-centric initiatives. That kind of later unwinding could result in such consequences as the unwinding of prior investment approaches and even (fairly or unfairly) the drawing into question of prior fiduciary choices. Second, excessive focus on a current administration’s level of support for ESG can unduly deflect from valid concerns that private litigation may or may not result in judicial decision-making that conforms to the politics of the day. UTAH The latest Utah decision is limited to one narrow legal determination. The District Court for the Northern District of Texas had previously held, applying the then-required doctrine established by the Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. for determining the validity of an agency’s regulatory enactments, that the tiebreaker rule as applied in the Biden Regulation was a permissible regulatory interpretation by the DOL under ERISA. While a full discussion of the Chevron doctrine is outside the scope of this Alert, the view from 30,000 feet is that the doctrine, born in 1984, required federal courts to afford significant deference to federal agencies’ interpretations of federal statutes. After the District Court’s decision in State of Utah, in a groundbreaking decision of wide-ranging significance to regulations generally, the Supreme Court in Loper Bright Enterprises v. Raimondo reversed Chevron and held that it was for a court to exercise its independent judgment in deciding the validity of an agency regulation interpreting a federal statute. In the interim between the first Utah decision and Loper Bright, the plaintiffs had appealed Utah to the U.S. Court of Appeals for the Fifth Circuit. In light of Loper Bright, the Fifth Circuit remanded the case to the District Court for the limited purpose of determining whether the DOL’s tiebreaker regulation was consistent with the statutory text of ERISA, The Fifth Circuit’s approach to its remand had been almost apologetic, stating (footnotes omitted; emphasis in original): “Judicial humility . . . entails not only the occasional recognition of a wrong decision, as the Supreme Court’s opinion in Loper Bright readily illustrates, . . . but also when to make that decision in the first place. . . . Whatever efficiency or economy is gained by taking up the parties’ invitation to decide their dispute in light of the intervening changes, . . . we . . . would be better served by the slight delay occasioned by remanding to the district court for its reasoned judgment.” To some, the approach of remanding out of a sense of “judicial humility” highlighted that the Fifth Circuit was remanding not so much out of a concern that the District Court’s result was incorrect, but perhaps more in order to allow the District Court to consider the critical intervening development of the Loper Bright decision. On remand, the District Court has now held that the remand from the Fifth Circuit did not require it to reconsider its holdings with respect to the other challenges to its earlier decision that the regulation was arbitrary and capricious and violated the major questions doctrine. The District Court on remand rejected the plaintiff’s arguments regarding the regulation’s consideration of ESG factors, including the curious arguments that it would be preferable to decide between two financially equivalent benefits by a coin flip rather than ESG considerations, or if two investment options are financially equivalent, then invest in both. (While it generally may not be surprising that a judge would rule on remand in the same fashion as was ruled in the initial decision, it is notable that Judge Kacsmaryk had previously authored decisions striking down several Biden-era actions, including a decision overturning the Biden administration’s healthcare nondiscrimination policies under the Patient Protection and Affordable Care Act.) So the Biden Regulation has thus far survived judicial challenge, to the approval of some in the pro-ESG camp and to the consternation of those opposed to considering ESG. However, is this result really where the rubber hits the road (or runway)? As indicated above, the tiebreaker scenario has been part of the ERISA world for years, and exists in the context of a fiduciary’s need to consider financial factors as being paramount. A critical question then becomes: assuming arguendo that a tiebreaker scenario is theoretically cognizableunder ERISA, is that the end of the inquiry for those fiduciaries seeking to rely on ESG factors in their decision-making? Which brings us to the cautionary tale of the American Airlines case, which came after the initial upholding of the Biden Regulation in the first Utah decision. AMERICAN AIRLINES In contrast to the issue addressed in Utah, the issue in American Airlines was whether the plan fiduciaries violated their fiduciary duties of prudence and loyalty by including funds managed by its primary investment manager that pursued non-financial and non-pecuniary ESG policy goals through proxy voting and shareholder activism. The District Court reached the unusual conclusion that, although the duty of prudence was not violated because the conduct of the fiduciaries at least equaled current industry standards (putting aside for the moment whether industry standards were flawed), the duty of loyalty was breached. The court found that the fiduciaries disregarded the manager’s ESG-related investment philosophy, which was consistent with the plan sponsor’s own corporate interests, particularly with respect to climate change, and did not sufficiently focus on financial considerations by failing to monitor and evaluate the manager’s non-pecuniary ESG investing. (In reaching this conclusion, one of the factors that the District Court focused on was that the manager was a 5% shareholder of the plan sponsor and had also provided debt assistance to it.) The calculation of damages is to follow. CONCLUSION ERISA fundamentally requires that investment decisions made by fiduciaries generally regard financial considerations as paramount. Tonal shifts from administration to administration, which presumably will continue over time, may have emboldening or chilling effects on the consideration of ancillary factors such as ESG factors (or even anti-ESG factors) as the pendulum continues to swing, but the underlying statutory construct remains constant. In addition, even focusing just on the level of governmental support could be treacherous, as, someday, as we have just seen, a Democratic administration is bound to give way to a Republican one, thereby raising the specter of whether it may be desirable, even focusing only on the regulatory environment, to unwind previously implemented ESG-centric investment strategies. All of these considerations seem to have come home to roost in the Utah and American Airlines cases. As to Utah, for now, the relatively neutral approach of the Biden Regulation remains in effect. However, even assuming that the Fifth Circuit is given the opportunity to and does affirm the District Court, the ultimate fate of the Biden Regulation under the second (and current) Trump administration is unclear. Additional tonal shifts may yet be on the horizon. [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2022/12/andrew-oringer.png[/author_image] [author_info]Andrew Oringer heads the firm’s New York office and serves as its General Counsel. His expertise extends to a broad array of issues relating to ERISA and executive compensation. He advises clients regarding their pension and welfare plans and arrangements, benefits-related tax matters and fiduciary issues arising in connection with the investment of plan assets, and has extensive experience with executive compensation representing employers as well as individual executives.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2021/07/Barry-Salkin.jpg[/author_image] [author_info]Barry Salkin concentrates his practice in ERISA and employee benefits law. He has significant expertise drafting, amending and negotiating various ERISA and employee benefit plans, including defined benefit pension plans, profit sharing plans, 401(k) plans, as well as qualified and non-qualified deferred compensation programs.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/Jon-Sc.jpg[/author_image] [author_info]Jon Schultze focuses on Employee Benefits and ERISA.Jon oversees the firm's qualified retirement plan area, which includes ensuring that our clients' retirement plans conform to legal requirements.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2021/07/Ari-Sonneberg.jpg[/author_image] [author_info]Ari Sonneberg specializes in the fields of ERISA and employee benefits. Ari advises and represents clients with respect to design, compliance and all other aspects of qualified and non-qualified employee benefit plans. He has extensive experience in drafting, designing, amending, and restating qualified and non-qualified employee benefit plans and related trusts, including money purchase pension plans, profit sharing plans, 401(k) plans, defined benefit plans, welfare benefit plans, medical expense reimbursement plans, 403(b) plans, and nonqualified deferred compensation plans.[/author_info] [/author]

Prepare for Upcoming Changes to Retirement Plans for 2025

2024-11-12T16:42:01Z

The SECURE 2.0 Act of 2022 (the “SECURE 2.0”) made significant changes to retirement plans and how they operate. Many of the changes have already been implemented by service providers, but some sponsors will need to plan for changes that will be effective in 2025. This alert outlines some of those changes. Long Term, Part-Time Employees. Under SECURE 2.0, 401(k) plans and 403(b) plans subject to ERISA are required to allow long-term, part-time employees (“LTPT employees”) to make salary deferral contributions. LTPT employees are non-collectively bargained employees who are credited with at least 500 hours of service in two consecutive 12-month periods, excluding 12-month periods beginning before 2023, and have met the plan’s age requirement. Employees who meet these requirements may enter a 401(k) plan or 403(b) plan as early as January 1, 2025, for calendar year plans. The plan’s existing provisions for measuring 12-month periods for eligibility and for determining entry dates apply when determining eligibility and entry dates for LTPT employees. LTPT employees do not have to receive any employer contributions, including safe harbor contributions, unless they otherwise satisfy the plan’s eligibility requirements for such contributions. If they are allocated employer contributions as LTPT employees, they must be credited with a year of vesting service for each year in which they complete at least 500 hours of service even if the plan requires 1,000 hours of service for other employees. LTPT employees do not have to be included in coverage and nondiscrimination testing or for purposes of the top-heavy requirements. Please refer to our prior alerts dated October 21, 2024, and November 1, 2023, for more information. Enhanced Catch-Up Contributions for Certain Ages. Effective for taxable years beginning on or after January 1, 2025, plans that provide for catch-up contributions, which are participant deferrals in excess of the applicable limit ($23,500 for 2025), may permit participants who will attain age 60-63 before the end of a taxable year to make enhanced catch-up contributions. For 2025, the regular catch-up limit is $7,500, and the enhanced catch-up limit is $11,250 (150% of the regular catch-up limit). A further SECURE 2.0 change also applies to catch-up contributions. Effective for taxable years beginning in 2026 (unless extended), catch-up contributions made to 401(k) plans, 403(b) plans and 457(b) governmental plans by participants whose compensation exceeded $145,000 (as indexed) in the prior year must be made on a Roth (post-tax) basis. One advantage of Roth deferrals is that a participant who has attained age 59-1/2 and who has completed five taxable years of participation, beginning with the first taxable year for which Roth deferrals were made, can receive a distribution of Roth amounts entirely free of taxes on the earnings. Thus, it may benefit some employees to begin making Roth deferrals sooner than 2026 to start the five-year clock. Yet another benefit under SECURE 2.0 is that, starting in 2024, Roth assets in a participant’s account are excluded from the calculation of required minimum distributions when the participant attains the applicable age to begin receiving distributions from the plan. This will allow an older participant with Roth assets to continue to enjoy tax-free earnings for a longer period. Automatic Portability of Small-Sum Distributions. A plan can provide for cashouts of small balances (the cashout limit increased from $5,000 to $7,000 in 2024) when participants terminate employment and do not elect to receive payment of their account balances. If the cashout amount does not exceed $1,000, payment can be made to the participant, but if the cashout amount exceeds $1,000, it must be rolled over to an individual retirement account. Auto-portability involves the automatic rollover of that default IRA into the participant’s new employer’s retirement plan unless the participant elects otherwise. SECURE 2.0 provides a prohibited transaction exemption for the fees service providers collect for providing automatic portability services. Many service providers have formed a consortium to facilitate automatic portability services; employers generally have to elect to participate in this program. One drawback of automatic portability is that Roth IRA assets currently cannot be rolled over to a qualified retirement plan, so any portion of the IRA that constitutes Roth assets will remain in the IRA. Plans must be operated in compliance with the required changes as they become effective, but the IRS has extended the deadline to adopt an amendment reflecting these changes to the end of the 2026 plan year for many employers. We will continue to provide information and explain actions plan sponsors may need to take to implement the changes made by SECURE 2.0 as they become eﬀective and as the IRS releases regulations and other guidance. If you have any questions or concerns about how the new requirements will affect your plan, please feel free to contact us for assistance. [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/Jon-Sc.jpg[/author_image] [author_info]Jon Schultze focuses on Employee Benefits and ERISA.Jon oversees the firm's qualified retirement plan area, which includes ensuring that our clients' retirement plans conform to legal requirements.[/author_info] [/author]

IRS Issues Interim Guidance on Matching Contributions Made on Account of Qualified Student Loan Repayments

2025-02-28T14:41:10Z

IRS Issues Interim Guidance on Matching Contributions Made on Account of Qualified Student Loan Repayments - Marcia Wagner, Barry Salkin and Jon Schultze, 401(k) Advisor, October 2024

IRS Provides Guidance on Application of SECURE 2.0 Act’s Coverage of Long-Term, Part-Time Employees

2024-10-22T19:24:31Z

By Jon Schultze and Barry Salkin In Notice 2024-73, the Internal Revenue Service (“IRS”) issued guidance on the application of certain non-discrimination rules to long-term, part-time employees in Internal Revenue Code (“Code”) Section 403(b) plans subject to ERISA (“ERISA LTPT employees”). The SECURE Act modified the eligibility requirements for long-term, part-time employees under Section 401(k) plans (see our November 1, 2023 newsletter); the SECURE 2.0 Act made similar modifications for long-term, part-time employees under § 403(b) plans. An ERISA LTPT employee who has attained age 21 must be able to make elective deferrals on the earlier of: (i) completion of a year of service in which he or she is credited with at least 1,000 hours of service; and (ii) the end of the first 24-month period consisting of two consecutive 12-month periods during each of which the employee has been credited with at least 500 hours of service, excluding 12-month periods beginning before January 1, 2023. The Notice, which applies to plan years beginning after December 31, 2024, provides the following guidance:

The eligibility rules for ERISA LTPT employees do not apply to a § 403(b) plan that is not subject to ERISA. In addition to governmental and nonelecting church plans, § 403(b) plans not subject to ERISA are those providing for no nonelective or matching contributions, and no employer involvement in plan administration.
A § 403(b) plan that is subject to ERISA must provide the right to make ERISA contributions to any employee who qualifies as an ERISA LTPT employee.
A § 403(b) plan that is subject to ERISA may retain a part-time employee exclusion for part-time employees, i.e., employees who normally work less than 20 hours per week, who do not qualify as ERISA LTPT employees, so long as the exclusion from making elective deferrals applies to all part-time employees who do not qualify as ERISA LTPT employees.
A § 403(b) plan that is subject to ERISA may exclude student employees from making elective deferrals, even if they are ERISA LTPT employees, because this is a statutory exclusion based on a classification. Similarly, a § 403(b) plan subject to ERISA may continue to exclude nonresident aliens and employees otherwise eligible under another § 403(b) plan, an eligible governmental 457(b) plan, or a § 401(k) plan maintained by the same employer.
An employer with a § 403(b) plan that is subject to ERISA may exclude ERISA LTPT employees when determining whether the plan satisfies the Code’s nondiscrimination requirements for matching contributions, whether the plan is required to satisfy the actual contribution percentage test or one of the Code’s safe harbor alternatives for satisfying the Code’s nondiscrimination requirements for matching contributions.
Once an ERISA LTPT employee ceases to be an ERISA LTPT employee, for example, by being credited with at least 1,000 hours of service in the prior plan year, that employee can no longer be excluded from receiving nonelective or matching contributions or from the application of the applicable Code nondiscrimination requirement.

According to Notice 2024-73, the IRS anticipates issuing proposed regulations on the subject of the Notice that will also address the special vesting rules for § 403(b) plans covering ERISA LTPT employees. These will generally be similar to the regulations for § 401(k) plan LTPT employees. Notice 2024-73 also states that the final regulations IRS intends to issue for long-term, part-time employees under § 401(k) plans will apply no earlier than plan years that begin on or after January 1, 2026. Pending the issuance of final regulations, taxpayers will need to comply with a reasonable good faith interpretation of the SECURE Act. The IRS has yet to issue guidance on many of the changes made by the SECURE and SECURE 2.0 Acts, and much of its guidance has been in the form of questions and answers. We will keep you informed as further guidance is issued and explain any actions plan sponsors may need to take once provisions become eﬀective. If you have any questions or concerns about how the new ERISA Section 403(b) plan requirements will affect your plan, please feel free to contact us for assistance. [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/Jon-Sc.jpg[/author_image] [author_info]Jon Schultze focuses on Employee Benefits and ERISA.Jon oversees the firm's qualified retirement plan area, which includes ensuring that our clients' retirement plans conform to legal requirements.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2021/07/Barry-Salkin.jpg[/author_image] [author_info]Barry Salkin concentrates his practice in ERISA and employee benefits law. He has significant expertise drafting, amending and negotiating various ERISA and employee benefit plans, including defined benefit pension plans, profit sharing plans, 401(k) plans, as well as qualified and non-qualified deferred compensation programs.[/author_info] [/author]

Code Section 1042 Transaction Gone Awry

2024-09-09T15:13:04Z

It is often the case under the Internal Revenue Code (“Code”) that adherence to procedural rules is crucial to secure tax benefits. Failure to meet these procedural conditions can result in unanticipated tax consequences. In the case of Berman v. Commissioner, 163 TC 1 (July 16, 2024), three taxpayers who failed to comply with the Code Section 1042 provisions that allow for the deferral of capital gains tax in ESOP transactions were saved from being taxed on over $4 million each in capital gains because the court ruled the Code’s installment sales rules under Code Section 453 still applied. As background, Congress enacted Code Section 1042 to incentivize the adoption of ESOPs. It allows taxpayers to defer, and in certain circumstances eliminate, capital gains tax on eligible stock sold to an ESOP if the proceeds are invested in qualified replacement property. The stock sold to the ESOP must have the greatest voting power and dividend rights. Eligible shareholders, i.e., shareholders who have held the corporation’s stock for at least three years and who sell their stock to the ESOP can invest the proceeds in qualified replacement property within a 15-month period, beginning three months before and ending 12 months after the sale to the ESOP. The ESOP must own at least 30 percent of the company’s stock in aggregate if there is more than one selling stockholder. There are also tax filing requirements, which include a statement of consent, a statement of election, and a statement of purchase. Qualified replacement property includes common stock with voting and dividend rights; preferred stock; bonds; convertible floating rate notes; and convertible bonds of operating companies incorporated in the United States. Qualified replacement property does not include securities issued by U.S. government entities (so municipal bonds do not qualify); securities issued by non-U.S. entities; domestic subsidiaries of non-U.S. parents; FDIC certificates of deposit; mutual funds; and securities of the corporation that issued the stock sold to the ESOP, and members of that corporation’s controlled group. To constitute qualified replacement property, the entity must be U.S. domiciled with no more than 25 percent of its gross receipts from passive sales, and at least 50 percent of the company’s assets being actively used for business purposes. Capital gains taxes on the sale of stock to the ESOP are not owed until the qualified replacement property is sold, provided certain conditions are satisfied. Under current law, Code Section 1042 only applies to C corporations. However, under the SECURE 2.0 Act, beginning in 2026, this favorable tax treatment will become available to S corporations but only up to 10% of the value of stock sold to the ESOP. If a corporation converts from an S corporation to a C corporation, Code Section 1042 becomes immediately available to shareholders who have held the corporation’s stock for at least three years. In the Berman case, the taxpayers had done everything necessary to satisfy the conditions of Code Section 1042. They sold over 30% of their stock to the ESOP in exchange for promissory notes, reported the transaction as a Section 1042 transaction on their tax returns, and purchased qualified replacement property within 12 months using cash and outside loans. However, in the year following the sale, under an aggressive tax strategy applied by some taxpayers at the time, they entered into a purported loan transaction, using 90 percent of their qualified replacement property as collateral for the loan and paying the remaining 10 percent to the lender as a fee. The Tax Court, following the holdings of other courts, determined that the purported loan was actually a sale, a legal conclusion to which taxpayers agreed, and as a result of the sale, Code Section 1042(e) required the recapture of the gain that had been deferred. Each taxpayer received approximately $449,000 the following year under the promissory notes they received for the sale of the stock, but the IRS sought to tax the entire gain each received from the stock sale - $4,125,00. The IRS’s view was that Code Section 1042 required recognition of the entire gain on the sale rather than taxing the payments under the notes when they are paid under the installment sales rules of Code Section 453. In response, the taxpayers argued that the election to seek 1042 treatment was invalid because the corporation was an S corporation at the time of the sale to the ESOP, or, in the alternative, the election was invalid because of a material mistake of fact or a fraudulent misrepresentation. The Tax Court rejected the argument that the election was invalid under the duty of consistency rule because a taxpayer is precluded from taking a position in a subsequent year that is inconsistent with a position it had taken in a prior year. With respect to invalidating the election, the general rule under the Code is that where a taxpayer can make an election, that election is irrevocable, and the regulations under Code Section 1042 so provided. As a result of the foregoing, the Tax Court had to reconcile the provisions of Code Section 1042 and the installment sale provisions of Code Section 453. The Tax Court disagreed with the position of the IRS that there was no basis for concluding that an election under Code Section 1042 constituted an affirmative election not to apply the installment method under Code Section 453 because the installment sales rules apply unless a taxpayer affirmatively elects not to be taxed on an installment basis. Thus, the gains that would have been recognized as long-term capital gains in the absence of a Code Section 1042 election would be taxed under the installment sales rules. Accordingly, taxpayers were taxed in the year of recapture under the installment sales method, with an adjustment for basis under Code Section 1042(d). In subsequent years, Code Section 1042 had no effect, and taxpayers could be taxed on the installment basis method. Our takeaway: In Berman, the taxpayers avoided a disastrous tax result—being taxed on the total phantom income that they, in fact, never received—based on a precise statutory construction of Section 1042. However, the case illustrates that where a taxpayer fails to comply with a statutory provision, the IRS will frequently seek the maximum possible amount of revenue that it can receive. [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/Jon-Sc.jpg[/author_image] [author_info]Jon Schultze focuses on Employee Benefits and ERISA.Jon oversees the firm's qualified retirement plan area, which includes ensuring that our clients' retirement plans conform to legal requirements.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2021/07/Barry-Salkin.jpg[/author_image] [author_info]Barry Salkin concentrates his practice in ERISA and employee benefits law. He has significant expertise drafting, amending and negotiating various ERISA and employee benefit plans, including defined benefit pension plans, profit sharing plans, 401(k) plans, as well as qualified and non-qualified deferred compensation programs.[/author_info] [/author]

IRS Issues Interim Guidance on Matching Contributions Made on Account of Qualified Student Loan Repayments

2024-08-27T14:18:17Z

Starting in 2024, Section 110 of the SECURE 2.0 Act allows employers to make matching contributions to Section 401(k), 403(b) and governmental 457(b) plans, and SIMPLE IRAs (which have analogous but slightly different requirements) on account of employees’ qualified student loan payments (“QSLPs”) rather than their elective contributions. Many plan sponsors have deferred implementation of QSLP matches pending IRS guidance, and on August 19, 2024, the IRS issued Notice 2024-63, which provides interim guidance in a question-and-answer format. It addresses discrete issues of eligibility, annual certification, ADP testing, and reasonable procedures to administer a plan with a QSLP matching feature. This interim guidance may encourage employers interested in a QSLP program to consider adopting such a feature because it allows employees with large education loans who cannot afford to save for retirement to receive employer matching contributions without themselves having to make elective deferrals to a plan. Under the Internal Revenue Code (“Code”), a QSLP is a payment: (i) made by an employee during a plan year in repayment of a qualified education loan incurred by the employee to pay for qualified higher education expenses of the employee, the employee’s spouse, or the employee’s dependent; (ii) that does not exceed, when aggregated with other such payments during the year, the lesser of the Code Section 402(g) limit for the year or the employee’s compensation as defined under Code Section 415, reduced by the employee’s elective deferrals for the plan year; and (iii) that is certified for the plan year by the employee. Under the first requirement, the employee must be legally obligated to make the payment under the terms of the loan to receive a QSLP match on account of that payment. In general, a cosigner has a legal obligation to make payments under the terms of a loan, but only after the primary borrower defaults under the loan. With respect to the second requirement, the amount of the employee’s QSLP a Section 401(k) or 403(b) plan can take into account is the lesser of the Code section 402(g) deferral limit reduced by the employee’s elective deferrals, and the amount of the employee’s compensation. A similar concept of elective deferrals applies to limit an employee’s QSLP in Section 457(b) plans. With respect to the third requirement, the employee must submit a certification that education loan payments are QSLPs. A plan may require a separate certification for each education loan payment intended to be a QSLP or permit an annual certification that applies to all education loan payments intended to qualify as QSLPs for a year. Five items of information must be provided to satisfy the Plan’s QSLP certification requirements:

The amount of the loan payment;
The date of the loan payment;
That the payment was made by the employee;
That the loan being repaid is a qualified education loan and was used to pay for qualified higher education expenses of the employee, the employee’s spouse, or the employee’s dependents; and
That the loan was incurred by the employee.

Information about items 1, 2 and 3 must be received at least annually by the plan. Information about items 4 and 5 does not need to be provided annually if the employee registers the loan with the plan, but may need to be updated or registered if the loan is refinanced or other information changes. The certification requirement can be satisfied annually through an affirmative certification by the employee. The employer may choose to independently verify the amount of the loan, the date of the loan payment, and that the payment was made by the employee, with one type of independent verification being the employee’s making the qualified loan repayments through payroll deduction. Overall, the Notice provides flexibility in satisfying the certification requirement that will ease the administrative burden for plan sponsors. Matching contributions on QSLPs must be made at the same rate and under the same vesting schedule as apply to the plan’s regular elective deferral match. The Notice does not describe the administrative procedures that govern a QSLP match feature and simply says a plan may establish any reasonable procedures to implement a QSLP match feature. Whether a procedure is reasonable depends on all relevant facts and circumstances, including whether the QSLP matches are effectively available to all eligible employees and whether the procedures promote compliance with QSLP match requirements. For example, the Notice explains that a plan may establish a single QSLP match claim deadline for a year, or multiple deadlines including quarterly deadlines. An annual deadline that is three months after the end of a plan year is an example of a reasonable deadline, but the deadline can be earlier as long as it is reasonable. The Notice also provides options for how actual deferral percentage (“ADP”) testing can be performed. It provides two methods of applying a separate ADP test for employees who receive QSLP matches and a main ADP test that includes employees who do not receive QSLP matches: one method separately tests the elective deferrals of employees who receive QSLP matches, while the other method separately tests employees who receive QSLP matches but they are included in the main ADP test if they make elective deferrals. The first method may be helpful if non-highly compensated employees who receive QSLP matches have a higher deferral percentage than highly compensated employees, while the other method may be helpful if highly compensated employees who receive QSLP matches have a higher deferral percentage than non-highly compensated employees who receive QSLP matches. The IRS also provided guidance in the Notice on other issues:

A plan may not limit QSLP matches to only certain qualified education loans, such as qualified education loans for an employee’s own education, for a particular degree program, or for attendance at a particular school.
A plan with a QSLP match feature may not exclude employees from receiving QSLP matches if they are eligible to receive elective deferral matches, or exclude employees from receiving elective deferral matches if they are eligible to receive QSLP matches. However, it is permissible to include a QSLP match feature only for non-collectively bargained employees.
Only an employee’s qualified education loan payments made during a plan year are eligible to be counted for purposes of the employee’s QSLP match for the plan year.
A QSLP match may be added to a safe harbor 401(k) plan as a midyear change as long as the safe harbor notice requirements are satisfied.
A plan may provide for QSLP matches to be contributed at a different frequency than elective deferral matches, provided the QSLP matches are required to be contributed at least annually. For example, it would be permissible for QSLP matches to be contributed once each year and for elective deferral matches to be contributed on a payroll basis.
Plans may, but are not required to, provide for contributions of QSLP matches on a rolling basis as employees submit claims. Alternatively, a plan may provide for QSLP matching contributions for a plan year to be made at the same time for all employees receiving QSLP matches for the plan year.
If an employee’s certification of a QSLP is found to be incorrect, a match based on that certification does not need to be corrected and may be treated as a QSLP match. However, if correction is made, it must be made to all QSLP matches made under similar circumstances. The option not to correct an incorrect certification does not apply if an operational failure occurs in administering a QSLP match feature.

The Notice applies for plan years beginning after December 31, 2024. For plan years beginning before January 1, 2025, a plan sponsor may rely on a good faith interpretation of Section 110. The IRS anticipates issuing proposed regulations under Section 110, and the Notice solicits comments on specific issues as well as on the guidance itself. The IRS also indicated that proposed regulations would be issued under Code Section 409A addressing the application of Code Section 409A to a nonqualified deferred compensation plan linked to a plan with a QSLP feature. The guidance helpfully explains the IRS’s interpretation of the new QSLP match provision in the SECURE 2.0 Act. Plan sponsors will have to consider whether they want to add this feature to their defined contribution plans, what certification process will be used, who will administer the certification requirements and which ADP testing method will be more appropriate. We’ll continue to provide information about the changes under the SECURE Acts as they become eﬀective and when guidance is issued, and explain any actions plan sponsors may need to take. The current deadline to adopt amendments reflecting changes made for the CARES Act and SECURE Acts is December 31, 2026 (2029 for governmental plans). If you have any questions or concerns about how the new guidance may affect your plan, please contact us for assistance. [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/Jon-Sc.jpg[/author_image] [author_info]Jon Schultze focuses on Employee Benefits and ERISA.Jon Schultze oversees the firm's qualified retirement plan area, which includes ensuring that our clients' retirement plans conform to legal requirements.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2021/07/Barry-Salkin.jpg[/author_image] [author_info]Barry Salkin concentrates his practice in ERISA and employee benefits law. He has significant expertise drafting, amending and negotiating various ERISA and employee benefit plans, including defined benefit pension plans, profit sharing plans, 401(k) plans, as well as qualified and non-qualified deferred compensation programs.[/author_info] [/author]

Developments on the ESOP Front

2024-05-16T11:21:10Z

By Jon Schultze, Andrew Oringer and Barry Salkin Employee stock ownership plans (“ESOPs”) are retirement plans that provide employees with the opportunity to own stock of their employer. Congress has long encouraged the use of ESOPs under both the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code of 1986 (the “Code”), but ESOPs present an unusual set of issues for retirement plans in that, unlike most plans, they are generally not diversified and instead are primarily invested in the stock of the plan sponsor. As a result of the risks surrounding single-stock investing and the complex rules that, in some cases, are subject to abuse, enforcement efforts, particularly by the Department of Labor (the “DOL”), have sometimes focused specifically on ESOPs. The SECURE 2.0 Act of 2022 (“SECURE 2.0”) contains a number of provisions favorable to ESOPSs, showing that, despite possible DOL misgivings about ESOPs, Congress continues to incentivize them. For example, the DOL received $50 million in grants over a five-year period for new and existing state-law programs that encourage ESOP formation; the definition of “publicly traded securities” has been expanded; and beginning in 2028, selling stockholders of S corporations will be able to utilize Section 1042 of the Code, which allows selling stockholders of C corporations to defer taxable gains on certain sales of stock to an ESOP as an incentive to establish private-company ESOPs, to defer up to 10% of their taxable gains (rather than the 100% available to selling stockholders of C corporations). One of the key requirements relating to ESOPs and other plans holding employer securities, concerns whether “adequate consideration” has been paid or received by the plan for the securities it acquires or sells. The DOL proposed regulations in 1988 on adequate consideration, but SECURE 2.0 now requires the DOL to issue regulations defining “adequate consideration.” Lisa Gomez, Assistant Secretary of Labor at the DOL, has told The ESOP Association in an April 12, 2023, letter that the DOL will indeed move forward with this important regulatory project.[1] The DOL has announced it will issue proposed regulations by the end of 2023. In addition, the DOL announced a new initiative in July 2023 that includes the establishment of a Division of Employee Ownership (the “DEO”) to support the creation and expansion of worker-owned businesses. The DEO will support programs designed to promote employee ownership; provide education, outreach and training to inform employees and employers about the possibilities and benefits of worker ownership and business ownership succession planning; and provide technical assistance to employers and employees to help them explore the feasibility of employee ownership. While SECURE 2.0 and the DOL’s new DEO initiative are positive developments for ESOPS, the DOL continues to challenge ESOP valuations aggressively. An important part of the DOL’s enforcement efforts has included litigation, with one of the key reference points being its 2014 settlement agreement with GreatBanc Trust Company.[2] A more recent example of the DOL’s litigation activity regarding ESOPs can be found with the recent settlement in the case of Walsh v. Reliance Trust Company.[3] The final “adequate consideration” regulations noted above should help alleviate the litigation by resolving longstanding disagreements between the DOL and service providers. As part of the IRS’s expanded focus on tax avoidance and ensuring high-income taxpayers pay what they owe, on August 9, 2023, the IRS warned businesses and tax professionals to be alert to complex issues that can arise with respect to ESOPs.[4] The IRS indicated that its current compliance efforts have identified numerous concerns, such as valuation issues, prohibited allocations of shares to disqualified persons and a failure to follow Code provisions for ESOP loans that can cause the loans to be prohibited transactions subject to a 15% excise tax. The IRS also indicated that it has identified potentially abusive arrangements. One such arrangement involves a business creating a management S corporation whose stock is owned by the ESOP for the sole purpose of diverting taxable income to the ESOP, which does not pay taxes on the income because an ESOP is a tax-exempt entity. The S corporation purports to provide loans to the business owners in the amount of the business income to avoid having the owners taxed on the business income directly. The IRS disagrees with the efficacy of this approach and would treat the purported loans as taxable income. The IRS also asserted that such an arrangement could cause the corporation to lose its S corporation status. The IRS may have been encouraged by the decision in Aspro v. United States,[5] in which the Court of Appeals for the Eighth Circuit upheld the IRS’s disallowance of a tax deduction for management fees paid by a C corporation to its shareholders, which was recharacterized as a disguised dividend. While not an ESOP case, the case involves the IRS’s focus on schemes used to avoid taxation of income. In October 2023, Laura Warshawsky, Deputy Associate Chief Counsel at the IRS, clarified at a virtual conference hosted by the American Bar Association’s Tax Section that the IRS’s notice was not intended to indicate it would designate ESOPs or certain ESOP valuations as “listed transactions” for tax-avoidance purposes, and the IRS won’t go so far as to audit all worker-owned companies. However, tax regulators will target high-income employers that dodge paying taxable income by loaning it to worker participants through ESOPs. Plan sponsors can legitimately seek to minimize their federal tax liability but should be careful about seeking tax advice from “promoters focused on marketing questionable transactions.” On the other hand, transactions that IRS might regard as abusive may still satisfy the technical requirements of the Code. If presented with a transaction that seems compliant on its face but seems too good to be true, we recommend proceeding with caution and seeking a disinterested professional for guidance. We will continue to monitor Congressional and agency developments in the ESOP area. If you have any questions about ESOPs, or about the fiduciary provisions of ERISA and the Code generally, please feel free to contact us for assistance.

[1] The ESOP Association, “Department of Labor Agrees to Notice and Comment Rulemaking on Adequate Consideration Exemption for ESOPs,” https://www.esopassociation.org/articles/department-labor-agrees-notice-and-comment-rulemaking-adequate-consideration-exemption. [2] https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/enforcement/esop-agreement-appraisal-guidelines.pdf [3] See DOL Press Release No. 23-1950-NAT (Sept.13, 2023); see also Zuss, “Department of Labor Recovers $22.5 million for ESOP”, https://www.plansponsor.com/department-of-labor-recovers-22-5-million-for-esop/ (Sept. 13, 2023). [4] See IR-2023-144, Aug. 9, 2023, https://www.irs.gov/newsroom/irs-cautions-plan-sponsors-to-be-alert-to-compliance-issues-associated-with-esops [5] 32 F.4th 673 (8th Cir. 2022).

Prepare for Upcoming Changes to Defined Contribution Plans Long-Term, Part-Time Employees

2023-11-01T14:39:09Z

The SECURE Act of 2019 (the “2019 Act”) and the SECURE 2.0 Act of 2022 (the “2022 Act”) made many significant changes to retirement plans and how they operate. Several provisions became eﬀective immediately while others were deferred and will phase in over time. Although an amendment reflecting these changes is generally not required before the end of the 2025 plan year, plans must be operated in compliance with the changes as they become effective. Some changes that become effective for plan years beginning in 2024 and later will be implemented automatically by service providers. However, some sponsors will need to start planning now for an important change that will apply to many plans effective as of January 1, 2024. We are sending this alert now to give ample time to prepare for, and comply with, this new provision by the January 1, 2024, eﬀective date. The 2019 Act (Div. O, section 112) requires 401(k) plans to allow long-term, part-time employees (“LTPT employees”) to make salary deferral contributions. The 2022 Act extends this requirement to 403(b) plans, starting in 2025. LTPT employees are employees, other than collectively bargained employees, who are credited with more than 500 hours of service in three 12-consecutive month periods, excluding 12-month periods beginning before 2021, and who have met the plan’s age requirement. Employees who meet these requirements may enter a 401(k) plan as early as January 1, 2024, for calendar year plans. The existing rules for measuring 12-consecutive month periods for eligibility and for determining entry dates apply when determining eligibility and entry dates for LTPT employees. LTPT employees do not have to receive any employer contributions, including safe harbor contributions, unless they otherwise satisfy the eligibility requirements for such contributions under the terms of the plan. However, if they are allocated employer contributions, they must be credited with a year of vesting service for each year in which they complete at least 500 hours of service even if the plan requires 1,000 hours of service for other employees. LTPT employees are excluded from coverage and nondiscrimination testing, and are not included for purposes of the top-heavy requirements. For a plan that already allows any employee to make salary deferral contributions, little will change. Due to the new vesting rule, however, sponsors may need to monitor vesting service for LTPT employees if they are allocated employer contributions that are subject to a vesting schedule. The new vesting service rule for LTPT employees applies only if such employees become participants because they are LTPT employees; thus, if employees are not restricted from participating based on an hours-based requirement, any employer contributions allocated to their accounts can be made subject to the plan’s regular vesting schedule. For plans that exclude part-time and/or seasonal employees (unless they complete 1,000 hours of service), we recommend reviewing employment records for 2021, 2022 and 2023 well before the January 1, 2024, effective date to identify any employees who may qualify as LTPT employees. If any employees meet the new requirements, they will need to be provided with information about the plan and enrollment materials. The 2022 Act, (Division T, section 125) changes the LTPT employee rule under the 2019 Act. Under the 2022 Act, LTPT employees must be allowed to make salary deferral contributions to 403(b) plans as well as to 401(k) plans. The 2022 Act also reduced the lookback period from three to two 12-consecutive month periods with more than 500 hours of service, excluding, for the new two-year rule, 12-month periods beginning before 2023. Employees who meet these requirements and the plan’s age requirement may enter a plan as early as January 1, 2025. Although the new rules seem straightforward, there are many open questions that will need to be addressed. For example: What alternatives might be available for employers that do not track actual hours? Does the new rule apply to employees who are excluded from participating as a member of an excluded classification not based on service but who nonetheless complete at least 500 hours of service? For 403(b) plans, what is the effect on universal availability and the student employee exclusion? We do not believe the new laws are intended to override the existing excluded classification rules that are not hours- or service-based, but further guidance is needed. As previously noted, many more provisions of the new laws will become effective over the next few years, and very little guidance has been issued at this time. We will continue to provide information about these legal changes as they become eﬀective and explain any actions plan sponsors may need to take. If you have any questions or concerns about how the new requirements will affect your plan, please feel free to contact us for assistance.

IRS Delays Roth Catch-up Contribution Change to Defined Contribution Plans

2023-09-05T15:25:31Z

By John Schultze and Barry Salkin One of the changes made by the SECURE 2.0 Act requires that catch-up contributions made by employees with FICA compensation from an employer sponsoring a 401(k), 403(b) or 457(b) defined contribution plan of at least $145,000 in the prior calendar year, as indexed, be made as after-tax Roth catch-up contributions (section 603). This provision, which was supposed to become effective January 1, 2024, is problematic because the IRS has issued no guidance, and many service providers have stated they will be unable to update their systems by the end of the year. IRS Notice 2023-62, released on August 25, 2023, provides a two-year transition period that extends the implementation of this new Roth catch-up contribution rule until 2026. What was the change to catch-up contributions? Currently, a participant who has attained age 50 and satisfied the contribution limits under a plan (the dollar limit or a lower plan-imposed limit) may make catch-up contributions, if the plan permits, on either a pre-tax or post-tax Roth basis as elected by the participant if the plan accepts Roth contributions. The change made by SECURE 2.0 Act requires that eligible employees with FICA compensation from the employer of $145,000 or more in the prior calendar year, as indexed (an “eligible participant”), who make catch-up contributions must do so as after-tax Roth contributions for taxable years beginning after 2023. Participants with FICA compensation below the dollar threshold can continue to make catch-up contributions on either a pre-tax or Roth basis. Based on the original January 1, 2024, effective date of this change, a plan sponsor would have had to identify its eligible participants during 2023, so their catch-up contributions could be made as Roth contributions in 2024. In the Notice, the IRS states that plan participants aged 50 and older can continue to make catchup contributions after 2023, regardless of income, on a pre-tax or Roth basis. The delayed implementation is important for at least three reasons. First, if a plan allows for catch-up contributions but does not accept Roth contributions, absent the IRS Notice, the plan would have to be amended either to accept Roth contributions or to suspend catch-up contributions. Because each of these changes involves a plan design option, not a legal compliance change, the plan amendment would have to be in place by January 1, 2024; it could not be deferred until the extended SECURE 2.0 Act amendment deadline, the last day of the 2025 plan year. Under Notice 2023-62, however, a plan that does not provide for Roth contributions will be treated as satisfying the new requirement until the end of the transition period. At that time, presumably, such a plan will have to be amended to accept Roth contributions or to discontinue catch-up contributions. Second, many service providers, primarily payroll companies, have stated they will be unable to implement this provision by January 1, 2024. While recordkeepers will likely be able to implement the change, the capability of internal payroll departments and outside payroll providers to timely implement this new requirement is questionable. Third, the catch-up contribution change has many open questions that will need to be addressed through IRS guidance. The IRS Notice provides preliminary guidance on the following issues:

The new Roth catch-up contribution rule does not apply to participants who have non-FICA income above the dollar limit, such as a partner or self-employed individual receiving self-employment income.
An eligible participant will not have to make an affirmative election to make catch-up contributions on a Roth basis; the plan administrator and employer may treat an election to make catch-up contributions on a pre-tax basis as an election to make catch-up contributions on a Roth basis.
In the case of a plan maintained by more than one employer, an eligible employee’s FICA wages from more than one participating employer are not aggregated or taken into account by another participating employer when determining if the employee is an eligible participant whose catch-up contributions must be made on a Roth basis. For example, an employee may receive wages from two participating employers in the prior year that in the aggregate exceed $145,000, but unless the participant’s wages from one of the participating employers in the prior year exceeds the dollar limit, the participant’s catch-up contributions are not required to be made as Roth contributions. As a corollary, if a participant received more than $145,000 in wages from one participating employer in the prior year, the participant’s catch-up contributions made under a different participating employer are not required to be made as Roth contributions unless the participant’s wages from that employer exceeds the dollar limit.

Additional questions not addressed in the Notice include: What happens if a sponsor incorrectly categorizes a participant due an error in determining wages? How should a sponsor address amounts that are recharacterized as catch-up contributions to correct nondiscrimination testing? Many of the provisions of the SECURE Act of 2019 and the SECURE 2.0 Act of 2022 are currently effective or will become effective over the next few years, and plans must be operated in compliance with the changes as they become effective. Because so little guidance has been issued at this time, the extension provided under this IRS Notice is welcome and will allow for a more orderly transition to comply with the catch-up contribution change. We’ll continue to provide information about the changes under the SECURE Acts as they become eﬀective and explain any actions plan sponsors may need to take. If you have any questions or concerns about how the new requirements will affect your plan, please feel free to contact us for assistance.

IRS Issues Transitional Guidance for Required Minimum Distributions

2023-07-28T12:35:12Z

By Jon Schultze and Barry Salkin In response to changes made by the SECURE 2.0 Act of 2022 (SECURE 2.0) to the required minimum distribution (“RMD”) rules of the Internal Revenue Code (the “Code”), the Internal Revenue Service (“IRS”) recently issued Notice 2023-54, which provides two forms of transitional relief for 2023 RMDs. The IRS will be issuing final regulations under Code Section 401(a)(9) and related provisions that will apply to RMDs no earlier than 2024. Rollover relief. SECURE 2.0 changed the required beginning date for tax-qualified plans and other eligible retirement plans from April 1 of the calendar year following the calendar year in which an individual attains age 72 to April 1 of the calendar year following the calendar year in which the individual attains age 73 or 75, depending on the individual’s date of birth. As a result, a participant in a tax-qualified defined contribution plan (or an IRA) who was born in 1951 will have a required beginning date of April 1, 2025, rather than April 1, 2024, and the first distribution made to that plan participant (or IRA owner) that will be treated as a RMD will be a distribution made for 2024, rather than for 2023. While the law was clear on this issue, the IRS was told by plan administrators and payors that it would take some time to update their systems. As a result, plan participants (or IRA owners) who reached age 72 in 2023 could have received distributions this year that would have been RMDs under pre-SECURE 2.0 law. To address that circumstance, Notice 2023-54 provides three forms of transitional relief:

For a distribution made between January 1, 2023, and July 31, 2023, to a participant born in 1951 (or to the participant’s surviving spouse) that would have been a RMD under pre-SECURE 2.0 law, a payor or plan administrator will not be considered to have violated any of the Code provisions relating to eligible rollover distributions by failing to treat the distribution as an eligible rollover distribution.
For distributions described above, Treasury and IRS have extended the 60-day rollover period until September 30, 2023.
For distributions made from an IRA between January 1, 2023, and July 31, 2023, to an IRA owner born in 1951 (or to the individual’s surviving spouse) that would have been a RMD but for the change in the required beginning date made by SECURE 2.0, Treasury and IRS are extending the date for rolling over the portion of the distribution mischaracterized as an RMD until September 30, 2023. This rollover option is available even if the taxpayer had made another rollover within the preceding 12-month period, but the IRA owner will not be able to make another IRA rollover for a 12-month period.

Ten-year distribution relief. Under a change made by the original SECURE Act, if a participant or IRA owner died after reaching his or her required beginning date and was not an eligible designated beneficiary, the participant’s or IRA owner’s account balance had to be entirely distributed by the end of a 10-year period. It was generally believed that so long as all of the account balance was distributed by the end of the 10-year period, the Code requirements would be satisfied. But the IRS took the unanticipated position in its proposed regulations that annual distributions had to be made in each year during the 10-year period. The regulations took a similar position for distributions after the death of an eligible designated beneficiary or after a minor child reaches the age of majority. In light of the IRS’s unexpected interpretation of the 10-year rule and in response to comments on the proposed regulations, the IRS issued Notice 2022-53, which provided that a defined contribution plan would not fail to be tax-qualified in 2021 or 2022 for failure to make a required distribution in accordance with the IRS interpretation of the 10-year rule in the proposed regulations, and a taxpayer who failed to receive such a distribution from a plan or IRA would not be subject to an excise tax under Code Section 4974 for failing to receive the distribution. Notice 2023-54 has now provided relief for 2023 distributions that is similar to that in its 2022 Notice for 2021 and 2022 distributions. The relief applies to any distribution that under the proposed Code Section 401(a)(9) regulations would be required to be made in 2023 under a defined contribution plan or IRA subject to the 10-year rule for the year in which the employee (or designated beneficiary) died, if that payment is required to be made either (i) to a designated beneficiary of an employee (or an IRA owner) if the employee (or IRA owner) died on or after his required beginning date in 2020, 2021 or 2022, and the designated beneficiary is not using the lifetime or life expectancy exception to the 10-year distribution rule, or (ii) to the beneficiary of an eligible designated beneficiary, including a person who is treated as an eligible designated beneficiary with respect to a participant (or IRA owner) who died before December 31, 2019, if the eligible designated beneficiary died in 2020, 2021 or 2022, and was using the lifetime or life expectancy exception to the 10-year rule. The IRS’s Notice provides much-needed relief since the IRS has been slow to issue regulations regarding many SECURE Act provisions that were then further changed by SECURE 2.0. The IRS intends to finalize its proposed RMD regulations under the SECURE Act, with further revisions to reflect SECURE 2.0, that will apply to calendar years beginning no earlier than 2024.

IRS Issues Guidance on Nonfungible Tokens (“NFTs”) in IRAs and Tax-Qualified Individual Account Plans

2023-03-30T14:38:08Z

By Barry Salkin and Jon Schultze Unlike ERISA, the Internal Revenue Code (“Code”) places almost no restrictions on the manner in which plan assets of individual retirement plans or tax-qualified defined contribution plans can be invested. Certain types of investments may generate unrelated business taxable income or debt-financed income, but those types of investments are not prohibited under the Code. However, an exception to that general rule applies to collectibles. Code Section 408(m)(1) treats the acquisition by an IRA of a collectible as a distribution from the IRA equal to the cost to the IRA of the collectible. The distribution would be taxable as ordinary income, and if received prior to age 59½ , would be subject to the 10 percent tax on early distributions. Code Section 408(m)(1) applies the same treatment to collectibles acquired by an individually-directed account under a tax-qualified plan. Under Code Section 408(m)(2), collectibles include a work of art; a rug or antique; any metal or gem; any stamp or coin; an alcoholic beverage; and any other tangible personal property specified by the Treasury Department (none to date). Code Section 408(m)(3) excludes certain coins and bullion from the definition of collectibles. There has been limited guidance from both the IRS and the courts on the interpretation of this Code Section. As Code Sections go, however, Section 408(m) is relatively straightforward. With cryptocurrency becoming a mainstream item, the status of NFTs as collectibles under Code Section 408(m) became one of the many issues that IRS is required to address, along with the treatment of cryptocurrency under the Code, and the IRS has provided preliminary guidance on the issue in Notice 2023-27. The guidance is restricted to issues under Code Section 408(m) and does not comment upon or otherwise address the Department of Labor’s 2022 guidance regarding cryptocurrency. In Notice 2023-27, the IRS explains that NFT ownership may provide the holder with a right with respect to an asset that is not a digital file, such as the right to attend a ticketed event, or may certify ownership of a physical item or some other particular item. The Notice refers to the right that an NFT provides, or the ownership of an asset that the NFT certifies, as the NFT’s “associated right or asset.” The IRS then indicates that pending issuance of guidance on the treatment of NFTs as collectibles, the IRS will apply a look-through analysis, under which the NFT’s underlying right or asset will be tested for status as a collectible. The IRS provided some examples illustrating how its analysis would be applied. For instance, if an NFT certifies ownership of a gem, the NFT would be treated as a collectible because gems are treated as collectibles under Code Section 408(m). In contrast, if an NFT certifies ownership of a right to use or develop a “plot of land” in a virtual environment, the NFT generally would not constitute a collectible. The IRS also stated that if the NFT’s associated right or asset is a digital file, the extent to which a digital file might constitute a “work of art” under Code Section 408(m), which would make it a collectible, is a matter that IRS is considering. Even if some NFTs would not be treated as collectibles by the IRS, not every IRA custodian or trustee will choose to offer them. When NFTs that are not collectibles are offered as an IRA or plan investment, IRA owners and plan participants should carefully review the terms of the IRA custodial or trust agreements to ensure they fully understand how these assets will be treated under the agreements. Any guidance from the IRS and DOL regarding NFTs and other electronic forms of ownership and currency is welcome as IRA owners and plan participants seek to diversify into these new asset forms. The Wagner Law Group will continue to keep you informed as this area develops.

IRS Issues Proposed Regulations Regarding Use of Forfeitures in Tax-Qualified Plans

2023-03-15T15:55:06Z

By Jon Schultze and Barry Salkin Some of the IRS regulations dealing with tax-qualified plans predate ERISA and subsequent federal tax legislation, and have become outdated. However, sometimes it takes IRS a long time to update its regulations to reflect current law. On February 24, 2023, the IRS issued proposed regulations addressing one such outdated regulation. In 1963, IRS issued regulations governing the use of forfeitures in pension plans, a category that includes both defined benefit plans that promise a stated (“defined”) benefit and money purchase pension plans which promise a stated (“defined”) contribution that is held in a participant’s individual account and grows with earnings until paid out at retirement. Under the 1963 regulations, forfeitures in a defined contribution pension plan could not be used to increase any participant’s benefit; in a defined benefit pension plan; forfeitures were required to be used to reduce employer contributions. In 1986, the Tax Reform Act changed the law to allow forfeitures in defined contribution plans to be reallocated to other participants, and by the mid-1970’s ERISA’s funding rules had already rendered the 1963 regulations obsolete for defined benefit plans. For defined benefit pension plans, the proposed regulations require reasonable actuarial assumptions to be used to determine the effect of expected forfeitures on the present value of a plan’s liabilities under the plan’s funding method. With respect to defined contribution plans, the proposed regulations allow forfeitures to be used to pay plan administrative expenses; reduce employer contributions to the plan; or increase benefits in other participants’ accounts. The preamble to the proposed regulations states that employer contributions would include the restoration of inadvertent benefit overpayments and of conditionally forfeited participant accounts. The proposed regulations also address the timing of the use of forfeitures by generally requiring that plan administrators use forfeitures no later than 12 months after the end of the plan year in which they arise. Under a transition rule relating to this twelve-month deadline, any forfeitures that occur in a plan year beginning before 2024 are treated as having been incurred in the first plan year beginning after 2023. As a plan design issue, the IRS recommends that a plan provide for the use of forfeitures for more than one permissible purpose, noting that if a plan’s use of forfeitures is restricted to one purpose and the forfeitures in any year exceed the amount needed for that purpose, the plan would have an operational failure unless it is amended to provide also for the use of forfeitures for additional purposes.

SECURE Act 2.0 Modification to Controlled Group and Affiliated Service Group Requirements

2023-06-26T19:48:39Z

By Jon Schultze and Barry Salkin One of the less-discussed provisions of the recently enacted SECURE Act 2.0 makes two changes to the “family attribution” rules under Section 414 of the Internal Revenue Code (the “Code”). As described below, these technical rules apply when determining the ownership of entities for purposes of the nondiscrimination rules to which tax-qualified retirement plans are subject. The two changes will be beneficial to owners of closely held businesses, and will eliminate two traps for the unwary. The Code, and IRS regulations under the Code, prohibit discrimination in favor of highly compensated employees in the availability and amount of benefits provided under a tax-qualified plan. To prevent circumvention of the nondiscrimination rules by the use of multiple entities, the Code treats certain legally separate entities as a single entity when applying the nondiscrimination rules. This is achieved by means of the controlled group and affiliated service group rules found in Section 414. Whether or not entities are related under the controlled group and affiliated service group rules is based on ownership interests. For example, one of the ways in which a controlled group (and therefore a single employing entity) can exist is if five or fewer individuals own 80% or more of two entities and the same individuals own more than 50 % of the entities taking into account only their identical, or common, ownership in each entity. If A owns 100% of company X, and B owns 100 percent of company Y, there would be no controlled group because there is no common ownership of the two companies. An individual can, however, have an indirect ownership interest in an entity if the ownership interest of a family member is treated as belonging to, or attributed to, the individual. If A and B are married to each other, the spousal attribution rule treats A’s ownership interest in company X as B’s and B’s ownership interest in company Y as A’s, making company X and company Y related entities for nondiscrimination testing purposes. As a result, if company X and company Y provide different benefits to their highly compensated employees and non-highly compensated employees, nondiscrimination testing can fail. This can be a problem for spouses who own separate businesses. To address this, the existing regulations under Code Section 414 create an exception to spousal attribution if four conditions are satisfied:

an individual has no direct ownership interest in their spouse’s business;
the individual does not participate in the management of the other spouse’s business and is not a director, officer or employee of the spouse’s business;
the business’s passive income (dividends, interest, rent, royalties, and annuities) is no more than 50% of its gross income; and
the ownership in the business does not have any restrictions on the spouse’s disposition of the business that favor the individual, or the children of the individual and the spouse under the age of 21.

Before the enactment of SECURE Act 2.0, a minor child would be treated as owning the interests of his or her parents. As a result, separate businesses of two parents that otherwise satisfy the above exception to spousal attribution would be considered members of the same controlled group because ownership of the parents is attributed to the minor child. To correct this situation, SECURE Act 2.0 changes the family attribution rules to allow disaggregation of the entities if the only common ownership is the indirect ownership of the entities by a child under the age of 21 due to the attribution of the parents’ ownership interests to the child. Another trap for the unwary is that the first condition for the exception to spousal attribution (no direct ownership interest in the spouse’s business) cannot be satisfied in a community property state because each spouse is deemed to own one-half of the other person’s business. As a result, the controlled group determination for spouses each owning their own business in a community property state can be different from the controlled group determination for the identical business structure in a non-community property state. SECURE Act 2.0 eliminates this anomalous result by disregarding community property laws when determining ownership for purposes of controlled groups and affiliated service groups. These two changes should provide greater flexibility in designing benefit plans of entities separately and wholly owned by spouses, starting in 2024. While these modifications to the controlled group and affiliated service group rules will affect a limited number of taxpayers, they provide a useful illustration of the complexities and potential traps for the unwary under the Code’s controlled group and affiliated service group rules. Additional attribution rules that were not changed by SECURE Act 2.0 continue to apply when determining controlled groups and affiliated service groups as well as when identifying highly compensated employees and key employees. Therefore, it is important to communicate ownership interests and family connections to plan administrators to avoid unintended consequences.