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Defined contribution plan distributions: Considerations and recommendations

07.21.21

Read this if you are a plan sponsor of employee benefit plans.

This article is the seventh in a series to help employee benefit plan fiduciaries better understand their responsibilities and manage the risks of non-compliance with Employee Retirement Income Security Act (ERISA) requirements. You can read the previous articles here.

The COVID-19 pandemic has challenged individuals and organizations to continue operating during a time where face-to-face interaction may not be plausible, and access to organizational resources may be restricted. However, life has not stopped, and participants in your employee benefit plan may continue to make important decisions based on their financial needs. 

To help you prepare for a potential IRS examination, we’ve listed some requirements for participants to receive Required Minimum Distributions (RMD), hardship distributions, and coronavirus-related distributions, recommendations of actions you can perform, and documentation to retain as added internal controls. 

Required Minimum Distributions

Recently, the IRS issued a memo regarding missing participants, beneficiaries, and RMDs for 403(b) plans. If an employee benefit plan is subject to the RMD rules of Code Section 401(a)(9), then distributions of a participant’s accrued benefits must commence April 1 of the calendar year following the later of 1) the participant attaining age 70½ or 2) the participant’s severance from employment. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, RMDs was temporarily waived for retirement plans for 2020. This change applied to defined contribution plans, such as 401(k), 403(b), 457(b) plans and IRAs. 

In addition, RMDs were waived for IRA owners who turned 70½ in 2019 and were required to take an RMD by April 1, 2020 and have not yet done so. Do note the waiver will not alter a participant’s required beginning date for purposes of applying the minimum distribution rules in future periods. Although you may be applying this waiver during 2020, it is important you prepare to make RMDs once the waiver period ends by verifying participants eligible to receive RMDs are not “missing.”

There are instances in which plans have been unable to make distributions to a terminated participant due to an inability to locate the participant. In this situation, the responsible plan fiduciary should take the following actions in applying the RMD rules:

  1. Search the plan and any related plan, sponsor and publicly available records and/or directories for alternative contact information;
  2. Use any of the following search methods to locate the participant: a commercial locator service, a credit reporting agency, or a proprietary internet search tool for locating individuals; and
  3. Attempt to initiate contact via certified mail sent to the participant’s last known mailing address, and/or through any other appropriate means for any known address(es) or contact information, including email addresses and telephone numbers.

If the plan is selected for audit by the IRS and the above actions have been taken and documented by the plan, the IRS instructs employee plan examiners not to challenge the plan for violation of the RMD rules. If the plan is unable to demonstrate that the above actions have been taken, the employee plan examiners may challenge the plan for violation of the RMD rules.

We typically recommend management review plan records to determine which participants have attained age 70½. Based on the guidelines outlined above, we recommend plans document the actions they have taken to contact these participants and/or their beneficiaries.

Hardship distribution rules

A common issue we identify during our employee benefit plan audits is that the rules for hardship distributions are not always followed by the plan sponsor. If the plan allows hardship withdrawals, they should only be provided if (1) the withdrawal is due to an immediate and heavy financial need, (2) the withdrawal must be necessary to satisfy the need (you have no other funds or ways to meet the need), and (3) the withdrawal must not exceed the amount needed. You may have noted we did not add the plan participant must have first obtained all distribution or nontaxable loans available under the plan to the list of requirements above. This is due to the recently enacted Bipartisan Budget Act of 2018 (the Act), which removed the requirement to obtain available plan loans prior to requesting a hardship. Thus, the removal of this requirement may increase the number of eligible participants to receive hardship withdrawals, if the three requirements noted are satisfied. The plan sponsor should maintain documentation the requirements for the hardship withdrawal have been met before issuing the hardship withdrawal.

The IRS considers the following as acceptable reasons for a hardship withdrawal:

  1. Un-reimbursed medical expenses for the employee, the employee’s spouse, dependents or beneficiary.
  2. Purchase of an employee's principal residence.
  3. Payment of college tuition and related educational costs such as room and board for the next 12 months for the employee, the employee’s spouse, dependents, beneficiary, or children who are no longer dependents.
  4. Payments necessary to prevent eviction of the employee from his/her home, or foreclosure on the mortgage of the principal residence.
  5. For funeral expenses for the employee, the employee’s spouse, children, dependents or beneficiary.
  6. Certain expenses for the repair of damage to the employee's principal residence.
  7. Expenses and losses incurred by the employee as a result of a disaster declared by the Federal Emergency Management Agency (FEMA), provided that the employee’s principal residence or principal place of employment at the time of the disaster was located in an area designated by FEMA for individual assistance with respect to the disaster.

Prior to the enactment of the Act, once a hardship withdrawal was taken, the plan participant would not be allowed to contribute to the plan for six months following the withdrawal. The Act repealed the six-month suspension of elective deferrals, thus plan participants are allowed to continue making contributions to the plan in the pay period following the hardship withdrawal. Prior to the Act we had seen instances where the plan participant was allowed to continue making contributions after the hardship withdrawal was taken. Now we would expect participants who received a hardship distribution to continue making elective deferrals following receipt of the distribution.

Coronavirus-related distributions

Under section 2202 of the CARES Act, qualified participants who are diagnosed with coronavirus, whose spouse or dependent is diagnosed with coronavirus, or who experience adverse financial consequences due to certain virus-related events including quarantine, furlough, or layoff, having hours reduced, or losing child care, are eligible to receive a coronavirus-related distribution. 

Distributions are considered coronavirus-related distributions if the participant or his/her spouse or dependent has experienced adverse effects noted above due to the coronavirus, the distributions do not exceed $100,000 in the aggregate, and the distributions were taken on or after January 1, 2020 and on or before December 30, 2020.  Such distributions are not subject to the 10% penalty tax under Internal Revenue Code (IRC) § 72(t), and participants have the option of including their distributions in income ratably over a three year period, or the entire amount, starting in the year the distribution was received. Such distributions are exempt from the IRC § 402(f) notice requirement, which explains rollover rules, as well as the effects of rolling a distribution to a qualifying IRA and the effects of not rolling it over. Also, participants can be exempt from owing federal taxes by repaying the coronavirus-related distribution. 

Participants receiving this distribution have a three-year window, starting on the distribution date, to contribute up to the full amount of the distribution to an eligible retirement plan as if the contribution were a timely rollover of an eligible rollover distribution. So, if a participant were to include the distribution amount ratably over the three-year period (2020 – 2022), and the full amount of the distribution was repaid to an eligible retirement plan in 2022, the participant may file amended federal income tax returns for 2020 and 2021 to claim a refund for taxes paid on the income included from the distributions, and the participant will not be required to include any amount in income in 2022. We recommend the plan sponsor maintain documentation supporting the participant was eligible to receive the coronavirus-related distribution. 

There is much uncertainty due to the current status of the COVID-19 pandemic, and this has forced many of our clients to review and alter their control environments to maintain effective operations. With this uncertainty comes changes to guidance and treatment of plan transactions. We have provided our current understanding of the guidance the IRS has provided for the treatment surrounding distributions, specifically RMDs, hardship distributions, and coronavirus-related distributions. If you and your team have any additional questions which may be specific to your organization or plan, an expert from our Employee Benefits Audit team will be gladly willing to assist you. 
 

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Read this if you are an employee benefit plan fiduciary.

This article is the second in a series to help employee benefit plan fiduciaries better understand their responsibilities and manage the risks of non-compliance with Employee Retirement Income Security Act (ERISA) requirements. In our last article, we looked into the background of ERISA, which established important standards for the sound operation of employee benefit plans, as well as who is and isn’t a plan fiduciary, and what their responsibilities are. 

One important ERISA provision, found in Section 406(a), covers the types of transactions a plan fiduciary can and can’t engage in. ERISA terms the latter prohibited transactions, and they’re a lot like traffic lights—when it comes to avoiding conflicts of interest in business dealings, they’re your guide for when to stop and when to go. By knowing and abiding by these rules of the road, plan fiduciaries can steer clear of tickets, fines, and other damaging mishaps. 

Parties-in-interest—keep them out of the passenger seat 

Much like driver’s ed., fiduciary responsibility boils down to knowing the rules—plan fiduciaries need to have a strong working knowledge of what constitutes a prohibited transaction in order to ensure their compliance with ERISA. The full criteria are too detailed for this article, but one sure sign is the presence of a party-in-interest.

ERISA’s definition of a party-in-interest

The definition includes any plan fiduciary, the plan sponsor, its affiliates, employees, and paid and unpaid plan service providers, and 50%-or-more owners of stock in the plan sponsor. If you’d like to take a deeper dive into ERISA’s definition of parties-in-interest, see “ERISA's definition of parties-in-interest" at right.

Prohibited transactions—red lights on fiduciary road 

Now that we know who fiduciaries shouldn’t transact with, let’s look at what they shouldn’t transact on. ERISA’s definition of a prohibited transaction includes: 

  • Sale, exchange, and lease of property 
  • Lending money and extending credit 
  • Furnishing goods, services, and facilities 
  • Transferring plan assets 
  • Acquiring certain securities and real property using plan assets to benefit the plan fiduciary 
  • Transacting on behalf of any party whose interests are adverse to the plan’s or its participants’ 

Transacting in any of the above is akin to running a red light—serious penalties are unlikely, but there are other consequences you want to avoid. Offenders are subject to a 15% IRS-imposed excise tax that applies for as long as the prohibited transaction remains uncorrected. That tax applies regardless of the transaction’s intent and even if found to have benefited the plan. 

The IRS provides a 14-day period for plan fiduciaries to correct prohibited transactions and avoid associated penalties. 

Much like owning a car, regular preventative maintenance can help you avoid the need for costly repairs. Plan fiduciaries should periodically refresh their understanding of ERISA requirements and re-evaluate their current and future business activities on an ongoing basis. Need help navigating the fiduciary road? Reach out to the BerryDunn employee benefit consulting team today. 
 

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Prohibited transactions: Rules of the road for benefit plan fiduciaries

Reading through the 133-page exposure draft for the Proposed Statement on Auditing Standards (SAS) Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA, issued back in April 2017, and then comparing it to the final 100+ page standard approved in September 2018, may not sound like a fun way to spend a Sunday morning sipping a coffee (or three), but I disagree.

Lucky for you, I have captured the highlights here. And it really is exciting. Our feedback was incorporated into the final standard both through written comments on the exposure draft and a voice via our firm’s Director of Quality Assurance, who holds a seat on the Auditing Standards Board.

"Limited scope" audits will no longer exist

The debate over the “limited scope” audit has been going on for years. The new standard is designed to help auditors clearly understand their responsibilities in performing an audit, and provide plan sponsors, plan participants, the Department of Labor (DOL), and other interested parties with more information about what auditors do in situations when audits are limited in scope by the plan’s management, which is permitted by DOL reporting and disclosure rules.

Once effective, Audit Committee and Board of Director meetings in which plan financial statements are presented will include more clarity into what an employee benefit plan audit entails, based on revisions to the auditor’s report. I know I would frequently kick off meetings covering the auditor’s report opinion by explaining what a “limited scope” audit was. As a “limited scope” audit will no longer exist, the revised auditor’s report language clearly articulates what the auditor is, and is not, opining on.

When is the new standard effective?

The effective date is “to be determined” as it will be aligned with the new overall auditor’s reporting standard once that is finalized, and the standard does not permit early adoption. So there is still time to educate and prepare all parties involved.

Probably the biggest conversation piece around the water cooler for the new standard is the lingo. The “limited scope” audit language will be going away and now the auditor’s report and all related language will refer to an “ERISA section 103(a)(3)(C)” audit. I know, it’s a mouthful?try and say that one three times fast!

The auditor's report will look much different

The auditor’s report under an ERISA section 103(a)(3)(C) audit will look significantly different from the old “limited scope” auditor’s report, once the standard is effective. There are several illustrative examples of reports included in the standard to refer to. One thing you will immediately notice?the auditor’s report is getting longer and not shorter. Some highlights:

The Opinion section will include two bullets that explicitly state, in basic summarized terms: (1) the certified information agrees to the financial statements, and (2)  the auditor’s opinion on everything else, which the auditor has audited.

Other Matter—Supplemental Schedules Required by ERISA section will include two bullets that explicitly state, in basic summarized terms, (1) the certified information agrees to the financial statements and (2) the auditor’s opinion on everything else, which the auditor has audited in relation to the financial statements. Sound similar to the Opinion section? Well, that’s because it is!).

Other key takeaways

  • Auditors will be required to make inquiries of management to gain assurance they performed procedures to determine the certifying institution is qualified for the ERISA section 103(a)(3)(C) audit, as it is management’s responsibility to make that determination.
  • Fair value disclosures included within the plan’s financial statements are also included under the certification umbrella and subject to the same audit procedures. As an auditor, if anything comes to our attention that does not meet expectations, we would further assess as necessary.
  • The auditor is required to obtain and read a draft Form 5500 prior to issuance of the auditor’s report.

The final standard also removed some highly debated provisions included in the draft proposal as follows:

  • There is no report on findings required, but the auditor is required to follow AU-C 250, AU-C 260 and AU-C 265. Should anything arise that warrants communication to those charged with governance, those findings must be communicated in writing. Be sure to grab another coffee and refresh yourself on AU-C 250, AU-C 260 and AU-C 265!
  • The new required procedures section for an audit was scrapped and replaced with an Appendix A for recommended audit procedures based on risk assessments. There are some great tools there to look at.
  • The required emphasis-of-matter section paragraph section of the auditor’s report was also scrapped.

Questions about the new employee benefit audit standard or employee benefit plan audits

At BerryDunn, we perform over 200 employee benefit plan audits each year. If you have any questions, we would love to help. And we’ll keep the acronyms to a minimum. Please reach out with any questions.

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Auditing standards board approves new employee benefit plan auditing standard: What you need to know

So far in our value acceleration article series, we have talked about increasing the value of your business and building liquidity into your life starting with taking inventory of where you are at and aligning values, reducing risk, and increasing intangible value.

In this article, we are going to focus on planning and execution. How these action items are introduced and executed may be just as important as the action items themselves. We still need to protect value before we can help it grow. Let’s say you had a plan, a good plan, to sell your business and start a new one. Maybe a bed-and-breakfast on the coast? You’ve earmarked the 70% in cash proceeds to bolster your retirement accounts. The remaining 30% was designed to generate cash for the down payment on the bed-and-breakfast. And it is stuck in escrow or, worse yet, tied to an earn-out. Now, the waiting begins. When do you get to move on to the next phase? After all that hard work in the value acceleration process, you still didn’t get where you wanted to go. What went wrong?

Many business owners stumble at the end because they lack a master plan that incorporates their business action items and personal action items. Planning and execution in the value acceleration process was the focus of our conversation with a group of business owners and advisors on Thursday, April 11th.

Business valuation master plan steps to take

A master plan should include both business actions and personal actions. We uncovered a number of points that resonated with business owners in the room. Almost every business owner has some sort of action item related to employees, whether it’s hiring new employees, advancing employees into new roles, or helping employees succeed in their current roles. A review of financial practices may also benefit many businesses. For example, by revisiting variable vs. fixed costs, companies may improve their bidding process and enhance profitability. 

Master plan business improvement action items:

  • Customer diversification and contract implementation
  • Inventory management
  • Use of relevant metrics and dashboards
  • Financial history and projections
  • Systems and process refinement

A comprehensive master plan should also include personal action items. Personal goals and objectives play a huge role in the actions taken by a business. As with the hypothetical bed-and-breakfast example, personal goals may influence your exit options and the selected deal structure. 

Master plan personal action items:

  •  Family involvement in the business
  •  Needs vs. wants
  •  Development of an advisory team
  •  Life after planning

A master plan incorporates all of the previously identified action items into an implementation timeline. Each master plan is different and reflects the underlying realities of the specific business. However, a practical framework to use as guidance is presented below.

The value acceleration process requires critical thinking and hard work. Just as important as identifying action items is creating a process to execute them effectively. Through proper planning and execution, we help our clients not only become wealthier but to use their wealth to better their lives. 

If you are interested in learning more about value acceleration, please contact the business valuation services team. We would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations. 

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Planning and execution: Value acceleration series part four (of five)

The US Department of the Treasury and the Internal Revenue Service on November 29 announced the release of guidance providing taxpayers information on how to satisfy the prevailing wage and apprenticeship requirements to qualify for enhanced tax benefits under the Inflation Reduction Act’s clean energy provisions. 

The publication of Notice 2022-61 and further guidance in the Federal Register—published on November 30, 2022—begins the 60-day period for these key labor provisions to take effect. In other words, these requirements will apply to qualifying facilities, projects, property, or equipment for which construction begins on or after January 30, 2023. So, in order to receive increased incentives, taxpayers must meet the prevailing wage and apprenticeship requirements for facilities where construction begins on or after January 30, 2023.

Prevailing wage and apprenticeship requirements

The Inflation Reduction Act, which President Biden signed into law on August 16, 2022, introduced a new credit structure whereby many clean energy tax incentives are subject to a base rate and a “bonus multiplier” of 5X. To qualify for the bonus rate, projects must satisfy certain wage and apprenticeship requirements implemented to ensure both the payment of prevailing wages and that a certain percentage of total labor hours are performed by qualified apprentices. 

Projects under 1MW or that begin construction within sixty days of the date when the Treasury publishes guidance regarding the wage and apprenticeship requirements are automatically eligible for the bonus credit.

The newly released guidance addresses the Inflation Reduction Act's two labor requirements—providing prevailing wages and employing a certain amount of registered apprentices—that taxpayers must meet for clean energy developments to qualify for the bonus rate. Both the prevailing wage and apprenticeship requirements apply to the following tax incentives:

  • Advanced energy project credit
  • Alternative fuel refueling property credit
  • Credit for carbon oxide sequestration
  • Clean fuel production credit
  • Credit for production of clean hydrogen
  • Energy-efficient commercial buildings deduction
  • Renewable energy production tax credit
  • Renewable energy property investment tax credit

The prevailing wages requirements also apply to the following tax incentives:

  • New zero-efficient home credit
  • Zero-emissions nuclear power production credit

New guidance

The new guidance describes the process for identifying the applicable wage determination for a specific geographic area and job classification on the Department of Labor’s sam.gov website. If no prevailing wage determination is posted for a specific geographic area and/or job classification, the notice provides that taxpayers should contact the DOL’s Wage and Hour Division, which would then provide the taxpayer with the labor classifications and wage rates to use.

For purposes of the apprenticeship requirements, the guidance provides specific information regarding the apprenticeship labor hour, ratio, and participation requirements. The guidance also describes the good faith effort exception, whereby a taxpayer will be deemed to have satisfied the apprenticeship requirements with respect to a facility if the taxpayer has requested qualified apprentices from a registered apprenticeship program and the request has been denied or the program fails to respond the request within five business days.

The guidance also specifies the recordkeeping requirements taxpayers must comply with to substantiate that they paid workers a prevailing wage and satisfied the apprenticeship requirements.

Beginning of construction guidance

As mentioned above, taxpayers must meet the prevailing wage and apprenticeship requirements with respect to a facility to receive the increased credit or deduction amounts if construction of the facility begins on or after the date sixty days after the Treasury publishes guidance. Notice 2022-61 confirms the use of long-standing methods for establishing the date of beginning of construction:

  • The physical work test (starting physical work of a significant nature)
  • The 5% safe harbor (incurring 5% or more of the total cost of the facility)

For purposes of both tests, taxpayers must demonstrate either continuous construction or continuous efforts—the continuity requirement—for beginning of construction to be satisfied.

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Treasury issues prevailing wage and apprenticeship requirements guidance

What are the top three areas of improvement right now for your business? In this third article of our series, we will focus on how to increase business value by aligning values, decreasing risk, and improving what we call the “four C’s”: human capital, structural capital, social capital, and consumer capital.

To back up for a minute, value acceleration is the process of helping clients increase the value of their business and build liquidity into their lives. Previously, we looked at the Discover stage, in which business owners take inventory of their personal, financial, and business goals and assemble information into a prioritized action plan. Here, we are going to focus on the Prepare stage of the value acceleration process.

Aligning values may sound like an abstract concept, but it has a real world impact on business performance and profitability. For example, if a business has multiple owners with different future plans, the company can be pulled in two competing directions. Another example of poor alignment would be if a shareholder’s business plans (such as expanding the asset base to drive revenue) compete with personal plans (such as pulling money out of the business to fund retirement). Friction creates problems. The first step in the Prepare stage is therefore to reduce friction by aligning values.

Reducing risk

Personal risk creates business risk, and business risk creates personal risk. For example, if a business owner suddenly needs cash to fund unexpected medical bills, planned business expansion may be delayed to provide liquidity to the owner. If a key employee unexpectedly quits, the business owner may have to carve time away from their personal life to juggle new responsibilities. 

Business owners should therefore seek to reduce risk in their personal lives, (e.g., life insurance, use of wills, time management planning) and in their business, (e.g., employee contracts, customer contracts, supplier and customer diversification).

Intangible value and the four C's

Now more than ever, the value of a business is driven by intangible value rather than tangible asset value. One study found that intangible asset value made up 87% of S&P 500 market value in 2015 (up from 17% in 1975). Therefore, we look at how to increase business value by increasing intangible asset value and, specifically, the four C’s of intangible asset value: human capital, structural capital, social capital, and consumer capital. 

Here are two ways you can increase intangible asset value. First of all, do a cost-benefit analysis before implementing any strategies to boost intangible asset value. Second, to avoid employee burnout, break planned improvements into 90-day increments with specific targets.

At BerryDunn, we often diagram company performance on the underlying drivers of the 4 C’s (below). We use this tool to identify and assess the areas for greatest potential improvements:

By aligning values, decreasing risk, and improving the four C’s, business owners can achieve a spike in cash flow and business value, and obtain liquidity to fund their plans outside of their business.

If you are interested in learning more about value acceleration, please contact the business valuation services team. We would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations.

Article
The four C's: Value acceleration series part three (of five)

Read this if your company is a benefit plan sponsor.

While plan sponsors have been able to amend their 401(k) plans to include a post-tax deferral contribution called Roth for more than a decade, only 86% of plan sponsors have made it available to participants, according to the Plan Sponsor Council of America. Meanwhile, despite the potential benefits of such plans, just a quarter of participants who have access to the Roth 401(k) option use it. Plan sponsors may want to consider adding a Roth 401(k) option to their lineup because of the potential tax benefits and other advantages for plan participants.

A well-designed Roth 401(k) may be an attractive option for many plan participants, and it is important for plan sponsors considering such a feature to design the plan with the needs of their workforce in mind. It is also critical to clearly communicate the differences from the pre-tax option, specific timing rules required, and the tax-free growth it offers. Additionally, plan sponsors should be mindful of potential administrative costs and other compliance requirements in connection with allowing the Roth option.

Roth 401(k)s: The basics

A Roth is a separate contribution source within a 401(k) or 403(b) plan that differs from traditional retirement accounts because it allows participants to contribute post-tax dollars. Since participants pay taxes on these contributions before they are invested in the account, plan participants may make qualified withdrawals of Roth monies on a tax-free basis, and their accounts grow tax-free as well.

Participants of any income level may participate in a Roth 401(k) and may contribute a maximum of $20,500 in 2022—the same limit as a pre-tax 401(k). Contributions and earnings in a Roth 401(k) may be withdrawn without paying taxes and penalties if participants are at least 59½ and it’s been at least five years since the first Roth contribution was made to the plan. Participants may make catch-up contributions after age 50, and they may split their contributions between Roth and pre-tax. Similar to pre-tax 401(k) accounts, Roth 401(k) assets are considered when determining minimum distributions required at age 72, or 70 ½ if they reached that age by Jan. 1, 2020.

Only employee elective deferrals may be contributed post-tax into Roth 401(k) accounts. Employer contributions made by the plan sponsor, such as matching and profit sharing, are always pre-tax contributions. If the plan allows, participants may convert pre-tax 401(k) assets into a Roth account, but it is critical to remember that doing so triggers taxable income and participants must be prepared to pay any required tax. In addition, plan sponsors must be careful to offer Roth 401(k)s equally to all participants rather than just a select group of employees.

Qualified distributions from a designated Roth account are excluded from gross income. A qualified distribution is one that occurs at least five years after the year of the employee’s first designated Roth contribution (counting the first year as part of the five) and is made on or after age 59½, on account of the employee’s disability, or on or after the employee’s death. Non-qualified distributions will be subject to tax on the earnings portion only, and the 10% penalty on early withdrawals may apply to the part of the distribution that is included in gross income. Participants may take out loans if permitted in the plan document. 

First steps for plan sponsors

A common misconception among plan sponsors is that a Roth offering requires a completely different investment vehicle. The feature is simply an added contribution option; therefore, no separate product is needed.

When considering the addition of a Roth 401(k) option, it is important for plan sponsors to check with service providers to determine whether payroll may be set up properly to add a separate deduction for the participant. Plan sponsors may also need to consider guidelines for conversions, withdrawals, loans, and other features associated with the Roth contribution source to ensure the plan document is prepared and followed accurately.

Education is an important component of any new plan feature or offering. Plan sponsors should check with service providers to see how they may help to explain the feature and optimize its rollout for the plan. One-on-one meetings with participants may be very helpful in educating them about a Roth account.

A word about conversions

If permitted by the plan document, participants may convert pre-tax 401(k) plan assets (deferrals and employer contributions) to the Roth source within their plan account. The plan document may allow for entire account conversions or just a stated portion. When assets are converted, participants must pay income taxes on the converted amount, and the additional 10% early withdrawal tax won’t apply to the rollover. Plan sponsors should educate participants on the benefits of converting to the Roth inside the company 401(k).

Collaborate with the right service providers to educate your participants

The right service providers may review your current plan design, set up accounts properly, actively engage and educate your participants, and offer financial planning based on individual circumstances to show how design features like a Roth account may benefit their situation. If you would like to start the conversation about adding a Roth option or enhancing your participant education program, contact our employee benefits team. We are here to help. 

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Plan sponsor alert: Roth 401(k) remains underutilized despite potential benefits

Read this if you are a Maine business or pay taxes in Maine.

Maine Revenue Services has created the new Maine Tax Portal, which makes paying, filing, and managing your state taxes faster, more efficient, convenient, and accessible. The portal replaces a number of outdated services and can be used for a number of tax filings, including:

  • Corporate income tax
  • Estate tax
  • Healthcare provider tax
  • Insurance premium tax
  • Withholding
  • Sales and use tax
  • Service provider tax
  • Pass-through entity withholding
  • BETR

The Maine Tax Portal is being rolled out in four phases, with two of the four phases already completed. Most tax filings for both businesses and individuals are now available. A complete listing can be found on maine.gov. Instructional videos and FAQs can also be found on this site.

In an effort to educate businesses and individuals on the use of the new portal, Maine Revenue Services has been hosting various training sessions. The upcoming schedule can be found on maine.gov

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New Maine Tax Portal: What you need to know

Read this if you are a financial institution with income tax credit investments.

Financial institutions and other businesses that participate in tax credit investments designed to incentivize projects that produce social, economic, or environmental benefits could benefit from proposed rules that simplify the accounting treatment of such investments and result in a clearer picture of how these investments impact their bottom lines.

FASB proposal

On August 22, 2022, the Financial Accounting Standards Board (FASB), issued a proposal that would broaden the application of the accounting method currently available to account for investments in low-income housing tax credit (LIHTC) programs to other equity investments used to generate income tax credits. The proposal, titled “Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”, would expand the eligibility of the proportional amortization method of accounting beyond LIHTC programs to other tax credit structures that meet certain eligibility criteria.  

FASB introduced the option to apply the proportional amortization method to account for investments made primarily for the purpose of receiving income tax credits and other income tax benefits in ASU 2014-01. However, the guidance limited the proportional amortization method to investments in LIHTC structures.

The proportional amortization method is a simplified approach for accounting for LIHTC investments in which the initial cost of the investment is amortized in proportion to the income tax credits and other benefits received (allocable share of depreciation deductions). The cost basis amortization and income tax credits received are presented net on the investor’s income statement as a component of income tax expense (benefit). Under existing guidance, investments in non-LIHTC projects are accounted for using either the equity method or cost method, depending on certain factors. 

The proposal aims to address the concerns that the equity and cost methods do not offer a fair representation of the economic characteristics for investments for which returns are primarily related to federal income tax credits. Supporters of the proposal argue that the accounting method applied should not be determined by the legislative program under which the tax credits are authorized, but instead by the economic intent under which the investment was made. The hope is the FASB proposal will create a heightened sense of uniformity in accounting for investments in income tax credit structures. 

Additional provisions

Other provisions within the proposal would require a reporting entity to “make an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis” and disclose the nature of its tax equity investments and the impact on its financial position and results of operations. 

The significance of this proposal is amplified by the uptick in tax credit programs in recent years, including the New Markets Tax Credit (NMTC), Historic Rehabilitation Tax Credit (HTC), and Renewable Energy Tax Credit (RETC). While the FASB has yet to declare an effective date for the implementation of the proposal, comment letters from stakeholders were due October 6, 2022. 

For more information

To discuss the impact this new accounting pronouncement may have on your financial institution, please contact the BerryDunn Financial Services team. We’re here to help.

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FASB proposes changes to accounting for income tax credits