Archive for Employer Knowledge Base

Fringe Benefits | Part Two Update

Today we’re focusing on Fringe Benefits, and what plan may be right for you, including the difference between an accountable plan and a non-accountable plan, and Section 125 plans.

 

Would a Roth 401(k) plan suit your employees?

Roth 401(k) accounts have been around for quite a while. But many employers still don’t offer them and many employees still don’t understand them. As the name implies, these plans are a hybrid — taking some characteristics from Roth IRAs and some from traditional employer-sponsored 401(k)s. When considering (or reconsidering) your retirement plan options, look into whether a Roth 401(k) would suit your employees.

Contribution limits

An employer with a traditional 401(k), 403(b) or governmental 457(b) plan can offer designated Roth 401(k) accounts. As with traditional 401(k) accounts, eligible employees can elect to defer part of their salaries to Roth 401(k) accounts, subject to annual limits. The employer may choose to provide matching contributions, but matching can go into only traditional accounts.

For 2019, a participating employee can contribute up to $19,000 ($25,000 if he or she is age 50 or older) on a combined basis to a Roth 401(k) and/or a traditional 401(k). The most someone can contribute to a Roth IRA for 2019 is $6,000 ($7,000 for those age 50 or older).

The ability to contribute to a Roth IRA is phased out for higher-income taxpayers, but there’s no such restriction for a Roth 401(k). This can make Roth 401(k)s particularly attractive to employees with higher incomes who’d like to take advantage of Roth benefits.

Pluses and minuses

Employee contributions to Roth 401(k) accounts are made with after-tax dollars, instead of pretax dollars. Therefore, employees forfeit a key traditional 401(k) tax benefit.

On the plus side, after an initial period of five years, “qualified distributions” from a Roth 401(k) are 100% exempt from federal income tax, just like qualified distributions from a Roth IRA. In contrast, traditional 401(k) distributions are taxed at ordinary-income rates, currently as high as 37%.

In general, qualified distributions are those made after a participant reaches age 59-1/2, or made because of death or disability. Therefore, employees can take qualified Roth 401(k) distributions after age 59-1/2 and pay no tax, as opposed to the hefty tax bill that may be due from traditional 401(k) payouts.

And unlike traditional 401(k)s, which generally mandate required minimum distributions (RMDs) after age 70-1/2, Roth 401(k)s have no RMDs (except for beneficiaries who inherit them).

Popularity increasing

Data indicates that the popularity of Roth 401(k)s is increasing. For example, survey results released by global consultancy Willis Towers Watson earlier this year revealed that 70% of responding employers now offer Roth features within their 401(k) plans. That’s a notable rise from results of the firm’s earlier surveys — namely, 46% in 2012 and 54% in 2014. We can help you further explore the benefits, risks and overall feasibility of adding a Roth 401(k) to your benefits lineup.

Starting slow with a SIMPLE IRA

For certain employers, particularly small businesses, introducing a retirement plan for employees may seem like a daunting task. The company owner may feel that providing a full-blown 401(k) plan is his or her only choice, but that’s far from true.

There are other options to consider that are relatively easier to administer and usually less costly to set up and maintain. One such plan is a SIMPLE IRA.

Requirements and restrictions

The acronym SIMPLE stands for “Savings Incentive Match Plan for Employees.” (And, of course, IRA stands for “individual retirement account.”) The concept behind these plans is to allow employers with 100 or fewer employees to provide a retirement plan without running into the often-confusing complexities of 401(k) plans. A SIMPLE IRA may even be a viable option for self-employed individuals.

Naturally, these plans still have some requirements and restrictions. Although eligible employees may contribute to their accounts themselves — which isn’t the case for pensions, for example — those annual contributions are less than those allowed for 401(k)s. In 2018, an employee can contribute up to $12,500, or up to $15,500 if the employee is 50 or older. (As of this writing, these amounts for 2019 had not yet been announced.)

There’s also a required match from the employer. Generally, you must choose between:

  • Matching contributions of up to 3% of an employee’s compensation, or
  • Nonelective contributions of 2% of an eligible employee’s compensation.

An employer’s contributions are tax-deductible and employee contributions are made on a pretax basis. Thus, the payment of taxes is deferred until distributions begin.

No testing

If you have no plan, you might want to consider a SIMPLE 401(k) plan. These are like SIMPLE IRAs when it comes to contribution limits and employer matching, but participants in a SIMPLE 401(k) may take out loans. Some organizations have employees who really appreciate this feature, though it makes plan administration a little more challenging for the employer.

Under either of the SIMPLE offerings, employers avoid the nondiscrimination tests — a key component of regular 401(k) plans. (These tests, which involve a calculation based on the organization’s employees, may serve to restrict the allowable contributions of higher-earning employees unless there’s a sufficient level of participation by those earning less.)

A critical step

Please note that the deadline for setting up a SIMPLE IRA for 2018 has already passed. But you could begin exploring the idea now with an eye toward establishing this or another retirement plan for your employees for next year. To discuss further, please contact us.

Get serious with an educational assistance program

Most employers probably know that reimbursements and direct payments of job-related education costs are excludable from workers’ wages as a working condition fringe benefit. Maybe you’ve offered such a benefit in the past and it’s worked out well for everyone.

But if you’re ready to really get serious about promoting the professional development of your employees — and doing so in a tax-efficient manner — consider establishing an educational assistance program.

Meeting IRS requirements

An educational assistance program can cover both job-related and non-job-related education. Assuming it meets eligibility requirements, such a program can allow employees to exclude from income up to $5,250 annually in education reimbursements for costs such as:

  • Undergraduate or graduate-level tuition,
  • Fees,
  • Books, and
  • Equipment and supplies.

The IRS, however, won’t allow reimbursement of materials that employees can keep after the courses end (except for textbooks). You can deduct up to $5,250 of educational assistance program reimbursements as an employee benefit expense. And you don’t have to withhold income tax or pay payroll taxes on these reimbursements.

To pass muster with the IRS, such a program must avoid discrimination in favor of highly compensated workers, their spouses and their dependents, and it can’t provide more than 5% of its total annual benefits to shareholders, owners and their dependents. In addition, you must provide reasonable notice about the program to all eligible employees that outlines the type and amount of assistance available to workers.

Hiring and retaining staff

Another “hidden” advantage to reimbursing education costs is attracting new hires and retaining them. The labor markets in many industries are competitive right now, so it’s important not to overlook ways to differentiate yourself from other companies looking to hire from the same pool. Moreover, keeping an engaged, well-trained staff in place enables you to avoid constantly enduring the high costs of hiring.

Also bear in mind that Millennials make up a significant portion of the labor market now. This generation has its own distinctive traits and preferences toward working — one of which is a need for ongoing challenges and education, particularly when it comes to technology.

Keeping them on board

If your organization’s employees want to take their professional skill sets to the next level, don’t let them go to a competitor to get there. By setting up an educational assistance program, you can keep your staff well trained and evolving toward the future while saving taxes. We can help you further explore setting up such a program and its tax advantages.

Changes ahead for 401(k) hardship withdrawal rules

Many employers sponsor 401(k) plans to help employees save for retirement. But sometimes those employees need access to plan funds well before they retire. In such cases, if the plan allows it, participants can make a hardship withdrawal.

If your organization sponsors a 401(k) with this option, you should know that there are important changes on the way next year.

What will be different

Right now, 401(k) hardship withdrawals are limited to only funds an employee has contributed, and the employee must first take out a plan loan from the account. The employee also cannot participate in the plan for six months after a hardship withdrawal.

However, important changes take effect in 2019 under the Bipartisan Budget Act of 2018 (BBA). First, employees’ withdrawal limits will include not only their own contributed amounts, but also accumulated employer matching contributions plus earnings on contributions. If an employee has been participating in your 401(k) for several years, this could add substantially to the amount of funds available for withdrawal in the event of a legitimate hardship.

In addition, the BBA eliminates the current six-month ban on employee participation in the 401(k) plan following a hardship withdrawal. This means employees can stay in the plan and keep contributing, which allows them to begin recouping withdrawn amounts right away. And, for you, the plan sponsor, it means no longer having to re-enroll employees in the 401(k) after the six-month hiatus.

What remains the same

Some things haven’t changed. Hardship withdrawals are still subject to a 10% tax penalty, along with regular income tax. This combination could take a substantial bite out of the amount withdrawn, effectively forcing account holders to take out more dollars than they otherwise would have to, so as to wind up with the same net amount.

The BBA also didn’t change the reasons for which hardship withdrawals can be made. According to the IRS, such a withdrawal “must be made because of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need.” This can include the need of an employee’s spouse or dependent, as well as that of a nonspouse, nondependent beneficiary.

The agency has said that the meaning of “immediate and heavy” depends on the facts of the situation and assumes the employee doesn’t have any other way to meet the need. Examples offered by the IRS include:

  • Qualified medical expenses,
  • Tuition and related educational fees and expenses, and
  • Burial or funeral expenses.

The agency has also cited costs related to a principal residence as usually qualifying. These include expenses related to the purchase of a principal residence, its repair after significant damage, and costs necessary to prevent eviction or foreclosure.

Further guidance

If your organization sponsors a 401(k) plan that permits hardship withdrawals, be sure to read up on all the details related to the BBA’s changes. Our firm can provide more information and further guidance.

6 ways to run a better meeting

There are few more self-destructive acts for an employer than to waste its employees’ time. You not only squander productivity but also hurt morale. Among the most common culprits of wasted time are bad meetings. A sloppily managed one can leave employees grumbling and frustrated for hours, even days, afterward. Here are six ways to run a better meeting:

  1. Start on time. Beginning promptly shows you respect people’s time and encourages punctuality as an aspect of your organizational culture. Train and encourage meeting leaders to adhere to firm start times. Managers should address chronic latecomers verbally first (but after the meeting), and in writing later if necessary.
  2. Lead with something positive. Poorly run meetings can quickly devolve into unproductive gripe sessions. Set the tone for a more constructive discussion of your agenda items by leading off with some good news highlighting an organizational or individual accomplishment.
  3. Clear the air. After a positive start, if there’s an “elephant in the room,” confront it. Examples include a sudden staff change, bad sales report or unflattering story in the media. Say whatever needs to be said to acknowledge it and, if appropriate, discuss it. Then move on to a more constructive topic.
  4. Deploy multiple voices. Depending on the agenda and meeting length, it’s usually a good idea to ask more than one team member to address a topic and lead a discussion. This will give the meeting more of a dynamic feel — lessening the likelihood that attendees will tune out a single voice. It also eases the burden on one person to run the whole show.
  5. Follow a “no rehash” rule. Every topic should be thoroughly discussed. But backtracking to previous agenda items can turn meetings into a chaotic, confusing and laborious mess. Establish and enforce a clearly stated policy that, once the meeting has moved forward, previous discussions cannot be restarted.
  6. Conclude optimistically with actionable tasks. Just as you started positively, also try to end the meeting on an upbeat, motivational note. Not every agenda item will require follow-up action, but many will. Identify those that do call for action and assign clear tasks to the appropriate attendees. Otherwise, dismiss everyone with a renewed sense of urgency to work on the items discussed. Contact us for more ideas on how to better accomplish your strategic objectives.