Hardship distribution relief for participants

The IRS has issued relief to make it is easier for participants to take hardship distributions from 401(k) plans.   The IRS has relaxed certain documentation requirements, but has not totally eliminated the need for documentation.  Relief is only available through January 31, 2018.

 

Things that participants need to know:

  • In order to take a hardship distribution, your employer’s plan must allow for hardship distribution.  Plans are not required to permit hardship distributions.  You can find out if your plan allows hardship distributions by talking to the plan administrator or checking your plan’s Summary Plan Description.  If you want a hardship distribution and your 401(k) plan does not allow for hardship distributions, ask your employer to amend the plan to allow hardship distributions.  Defined benefit plans and cash balance plans cannot provide hardship distributions.
  • If you are eligible for a 401(k) plan loan, you may be required to take a loan before taking a hardship distribution.  Sometimes this requirement is waived if you certify that taking a loan would increase your financial hardship.  But, keep in mind, a 401(k) plan loan is not taxable as long as you repay it on time.  So, it may be a better strategy to first take available loans and then take a hardship distribution.
  • Your entire 401(k) account may not be available for withdrawal under the law or terms of your plan.  For example, sometimes the 401(k) plan provides that only employee contributions are eligible for hardship withdrawals, but not any employer contributions.
  • Hardship distributions are taxable distributions.  Your hardship distribution will be subject to income tax and you will receive a 1099-R reporting the taxable amount next year.  If you withdraw Roth money, it is not subject to double taxation.  But, pre-tax money such as your pre-tax 401(k) contributions will be taxed.  If your plan allows hardship withdrawals from employer contributions, those amounts are taxable.  Usually 10% of the tax amount is withheld unless you request another amount to be withheld for taxes.  Your actual taxes due when you file your final return may be higher or lower.
  • Participants under the age of 59 1/2 will generally be subject to the 10% additional withdrawal tax.  The 10% withdrawal tax does not apply to Roth money.
  • Your 401(k) plan is not required to apply the IRS-issued relief.  If your employer is not applying the relief and you want them to, ask them to apply the relief.  If they are unwilling to do so, look at the typical hardship distribution rules.
  • If your employer is applying the wildfire hardship distribution reasons, you may be able to apply for a hardship distribution for a wide variety of reasons related to the wildfires:  temporary shelter, etc.
  • Employers are implementing the hardship distribution relief in different ways.  At a minimum, you will probably be asked to sign a certification stating that you have a financial need and that your need meets certain criteria.  You may be asked to provide documentation to support the amount you are requesting.  For example, if your home was burnt and you need to clean it out and repair it, you may be asked for bids or estimates to repair your home.  Because different employers and 401(k) providers are implementing the guidance in different ways, it is probably fastest to have documentation ready if you can reasonably do so.  If you cannot reasonably provide documentation, talk to your employer or 401(k) provider about signing a certification or providing alternate documentation.
  • Usually there is a requirement for your employer to stop your 401(k) contributions for 6 months following a hardship distribution.  However, your employer may choose not to enforce this rule with Irma hardship distributions.
  • Your plan or 401(k) provider, may charge a fee for the hardship distribution.  There are legitimate costs and work associated with processing these distributions.  But, inquire about the fee, particularly if you have other ways to get the necessary funds so that you can make an informed decision.  The fee is generally unrelated to the size of the distribution.  So, for a hardship distribution of $1,000 or $2,000, the fee may seem disproportionately large.
  • If possible have the proceeds ACHed or wired to you instead of a paper check.  In general, participants are surprised by how long it takes a check to travel across country.  And, this is truer when the mail is slowed down due to storms.

California Wildfire Relief Information

Who is a California wildfire affected individual?

Relief is extended to any participant whose principal residence and/or place of employment on October 8, 2017 was in one of the counties identified for individual assistance by FEMA because of the California wildfires.  It also allows participants who do not live in affected areas to qualify for relief if they have parent, grandparent, child, grandchild, dependent or spouse who had a principal residence or place of employment in the disaster area on that date.

A list of affected areas can be accessed at FEMA’s website:

https://www.fema.gov/disaster/4344

California Wildfire Relief Information

Relief for 401(k) contributions and loan repayments

The Department of Labor (DOL)  recognizes that some employers and service providers acting on the employer’s behalf, such as payroll processing services, located in identified covered disaster areas will not be able to forward participant payments and withholdings to employee retirement benefit plans within the prescribed timeframe. In such instances, the DOL will not – solely on the basis of a failure attributable to the California wildfires – seek to enforce the provisions of Title I with respect to a temporary delay in the forwarding of such payments or contributions to an employee pension benefit plan to the extent that affected employers, and service providers, act reasonably, prudently and in the interest of employees to comply as soon as practical under the circumstances.

Nova 401(k) Associates encourages clients to use this relief cautiously.  We are appreciative of the DOL relief, but clients need to understand that timely deposits of 401(k) contributions and loan repayments is an enforcement priority for the DOL.  Please deposit your 401(k) contributions and loan repayments as soon as practical after the wildfires.  We suggest that you resume your regular deposit schedule for 401(k) contributions and loan repayments at the same time you resume your regular schedule for payroll tax withholdings.  If that is not possible, document why in the event it comes up on a CPA or DOL audit.

California Wildfire Relief Information

Wildfire Form 5500 Relief

The Form 5500 deadline has been extended to January 31, 2018 for Forms 5500, Forms 5500-SF and Forms 5500-EZ that would have been due between October 8, 2017 and January 31, 2018.  This automatically extends the deadline for Summary Annual Reports and small defined benefit plan Annual Funding Notices.

In order to qualify for relief, the employer must be an affected individual.

Nova 401(k) Associates is currently available to work with employers and auditors to minimize delays beyond the original Form 5500 deadline.  While some of our clients will need a lengthy extension due to the wildfires, some of our clients will only require a short extension.  For those clients and auditors who are ready to work on the Form 5500, we are ready to assist you now so that you do not have to worry about this during the holiday season or busy month of January 2018!

California Wildfire Relief Information

Administrative Relief on Loans and Hardship Distributions

The IRS has provided employers with some administrative relief to make it easier to offer loans and hardship distributions.

Delayed amendments – The IRS will allow plans that do not offer loans and hardship distributions to administratively adopt those provisions and then amend the plan no later than the end of the first plan starting after December 31, 2017.  So, for a calendar plan year, this would be December 31, 2018.  While we appreciate this relief, we recommend that plan sponsors promptly amend their plans for added provisions, preferably before permitting these distributions.  Nova is available now to assist with plan amendments and updated SPDs.  Delaying the amendment could lead to a situation where the amendment is not actually adopted or where the eventual amendment does not match what was done.  Either of these could problems with a CPA, IRS or DOL audit.  Nova is waiving amendment fees for plan sponsors who add these provisions.

Delayed documentation  – The IRS is allowing the employer to delay collecting some documentation for loans and hardship distributions.  An example of the documentation that may be delayed is obtaining spousal consent if spousal consent is required.  If it is practical to do so, we urge employers to collect all documentation before processing a loan and distribution.  Nova has found that it is impractical to collect documentation after the fact.  First, employers move on and forget to get the documentation.  Second, employees quit and it is very difficult to get the documentation once they no longer work for you.  Unless it is a real hardship for the participant, we suggest getting all signatures and documentation upfront.  If it is absolutely necessary to process a transaction without the documentation, make sure to put a tickler on your calendar.

Relaxed documentation and reasons for hardship distributions – The IRS is relaxing documentation requirements on wildfire hardship distributions and is allowing participants to receive hardship distributions for just about any reason related to the California wildfires.  Most hardship distribution requests we have seen thus far would qualify under the old hardship distributions and the employee was able to provide documentation for the request.  So, this relief is often not necessary.  Within the 401(k) community there is disagreement about what the relief on the hardship documentation means.  Does it mean that participants do not have to provide any documentation or that participants ultimately have to provide documentation but not before receiving the distribution?

At a minimum, plan sponsors should collect a certification from the participant regarding their need.  Nova suggests that plan sponsors collect whatever documentation is available prior to issuing the hardship distribution to avoid future issues.   However, Nova is comfortable with relaxed standards with respect to the supplied documentation.  For example, if a participant signs the need certification, provides pictures of their burnt home and requests $3,000 in a hardship distribution (because that is all they have in their account), we believe the documentation is sufficient.  The pictures document the need and the amount is less than the typical cost of clean-up and repairs.  We would not suggest requiring formal contractor estimates, a contract or estimate.  Additionally, we would rely on the need certification and not require proof of no insurance or FEMA benefits.  Given the amount requested, even if a participant had insurance or receives FEMA aid, they are likely to have at least $3,000 in unreimbursed expenses.  If on the other hand, the requested hardship amount were $100,000, we would suggest trying to obtain additional documentation perhaps in the form of bids or at least an employee’s written estimate of the cost with the major elements detailed.

We suggest a common sense approach of striking a balance between getting as much documentation as reasonably possible and working with participants to process the distributions as soon as possible.  If the documentation that is typically required is not available, get creative and work with the participant to get something that will document the file, but is not burdensome for them.  Also, be in touch with Nova and the plan’s recordkeeper to understand if the plan’s recordkeeper is imposing the standard of collecting documentation later.

No suspension of 401(k) deferrals – Generally when a participant takes a hardship distribution, there is a requirement that their 401(k) contributions to the plan be stopped for six months.  For wildfire hardship distributions, there is not a requirement to apply this rule.  While this sounds like a nice idea, it is a bit of an administrative quagmire.  How can you tell which hardship distributions are Irma hardship distributions and which are not?  Do your processes automatically stop 401(k) deferrals and how to do you stop those processes?  Does the employee want the deferrals to stop?  Nova suggests that regular hardship distribution requests be processed as regular hardship distributions unless the participant signs a “Wildfire Hardship Certification” form and that the form have a box for the employee to check whether or not they want their 401(k) deferrals stopped.  This will draw a clear line between regular hardships and wildfire hardships which will make it easier for employers to explain to any auditor in the future what was done.  This will also minimize the number of wildfire hardships to the lowest possible number.

Please contact us or your ERISA attorney with questions on the above.

California Wildfire Relief Information

Wildfire Employer Contributions

In CA-2017-06, the IRS extended the filing deadline to January 31, 2018 for income tax returns due between October 8, 2017 and January 31, 2018.  Deadlines for certain employer contributions to retirement plans key off of fully extended tax filing deadlines.  Thus, when the fully extended tax filing deadline is delayed, the employer contribution deadline is also generally extended.  It is important to use great care if planning to take advantage of this aspect of the wildfire relief because not all employer contribution deadlines are extended.  

  • Discretionary profit sharing and discretionary matching contributions are extended to January 31, 2018.
  • The deadline for employer SIMPLE IRA and SEP IRA contributions is extended to January 31, 2018.
  • QNEC and QMAC deadlines to correct a failing ADP or ACP test are extended to January 31, 2018.  Rev. Proc. 2007-56 provides that for qualification purposes the deadline for correcting a failed ADP/ACP test can be extended.  The deadline for contributing QNECs and QMACs is generally the end of the plan year following the applicable plan plan year.  So, for 2016 calendar plan years, the deadline would generally be December 31, 2017.  This deadline is extended to January 31, 2018.
  • Minimum required contribution to defined benefit plans and cash balance plans are extended to January 31, 2018.
  • Similarly the quarterly contribution deadlines for defined benefit plans and cash balance plans are extended to January 31, 2018.
  • The safe harbor contribution deadline is not extended for qualification purposes.  However, the extension may provide some additional flexibility in deducting safe harbor contributions made October 8, 2017 – December 31, 2017 for the 2016 tax  year.  Safe harbor contributions are due the last day of the plan year following the plan year to which it applies.  So, for 2016 calendar plan years, these employer contributions are due no later than December 31, 2017 for qualification purposes and this deadline has not been extended.  To be deducted for the 2016 tax year, safe harbor 401(k) contributions must be made by the employer’s fully extended tax filing deadline.  Thus, if an employer’s tax return was properly extended on October 8, 2017, the deduction deadline has effectively been extended to December 31, 2017 as well.

To take advantages of the wildfire extension, the tax payer generally must have been under a valid extension as of October 8, 2017.  Additionally, the tax payer must have qualified as an “affected” individual.

California Wildfire Relief Information

November 13, 2014 – Webinar Cash Balance Plans

Webinar Registration

This webinar is geared toward financial advisors and Texas CPA’s with a general knowledge of retirement plans looking for a retirement plan design to maximize tax deductions for their clients.  A cash balance plan can be a great solution that combines the best of defined benefit plans and defined contribution plans.  This webinar will include the following learning objectives:

•  How Cash Balance Plans Work
•  Cash Balance Plan Advantages and Requirements
•  Cash Balance Plan Trends
•  Review of Case Studies
•  How to Identify Opportunities

Information for Texas CPA’s:
We are registered with the Texas State Board of Accountancy as a CPE sponsor.  Please note that this registration does not constitute an endorsement by the board as to the quality of our CPE program.  If you would like to attend this webinar and receive 1.0 hours of Texas CPA credit, you must register individually.  If you register, log in, are present for the entire live webinar, and return your evaluation, you will receive a Certificate of Attendance via e-mail within one week of the webinar.

If you have any questions about the webinar, please contact your account manager or Lisa Horn at lhorn@nova401k.com.

2016 Form 8955-SSA – Additional Information

FORM 8955-SSA-BACKGROUND

The Internal Revenue Service (IRS) requires an annual filing of the Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits, or Form 8955-SSA. The purpose of this form is to report to the IRS and Social Security Administration (SSA) any terminated participants with a vested benefit in the plan. The SSA then provides this information to the reported participants when they file for social security benefits.  

Whereas the previous Schedule SSA was included with the annual Form 5500 filing, this new form must be prepared and filed separately. The reason for this change is that, beginning with the 2009 plan year, all Forms 5500 are filed electronically and immediately available for public inspection on the DOL website.  The new Form 8955-SSA, like the predecessor Schedule SSA, will satisfy the reporting requirements while maintaining participant confidentiality.

 

FILING REVIEW

Additionally, please review the filing, and if you have any questions about the data used to prepare the filing or the participants filed, please contact me as soon as possible.  When reviewing the form, please pay particular attention to the following points:

* Please note that the account balance was determined as of last day of the 2016 plan year in accordance with the instructions.  In most cases, the reported account balance will be different than the current balance.

* Plan administrator should confirm individual account statements were provided to participants (see Q8).  This box has automatically been marked “Yes”.  It is not entirely clear what notice is required to be provided to participants, but at a minimum please make sure that participants have been provided with their quarterly or annual statements showing their vested balance.  Additionally, Nova 401(k) Associates recommends that terminated participants be notified of their right to withdraw their money from the plan.  For a nominal cost, Nova 401(k) Associates can provide participants with distribution packages. Please contact our Distributions Department at distributions@nova401k.com for additional information.

* Confirm that each participant’s name reported on Form 8955-SSA matches the name on the participant’s social security card. Please note that Nova 401(k) Associates does not have access to this information, and in many cases neither does the plan sponsor.  However, Nova 401(k) Associates suggests that plan sponsors make a good faith attempt to comply with this request.  Prospectively, employers may wish to collect an individual’s name as it appears on their Social Security card.

* The email that you received indicates the date that you have to let your account manager know if there are any changes to Form 8955-SSA. If you do not respond by that date, Nova 401(k) Associates will proceed with filing the 8955-SSA on the plan’s behalf.

 

SIGNED COPY OF FORM 8955-SSA

Even though plan sponsors will not need to mail the Form 8955-SSA to the IRS, plan sponsors and plan administrators must keep a signed copy of the Form 8955-SSA with the plan’s records.

 

See also:

2016 Form 5500 – Additional Information

Obtaining Electronic Signature Credentials

2016 Form 5500 – Additional Information

FORM 5500 DUE DATE

The Form 5500 is due seven (7) months following the close of the plan year. For calendar year plans, this would be July 31, 2017.  If an extension was requested for your Form 5500, the Form 5500 would be extended an additional two and a half months.  For calendar year plans, the extended due date would be October 16, 2017. As a courtesy to our larger filers (audited plans with more than 100 participants), Nova automatically extends your Form 5500 to allow for additional time to complete the audit requirements.

 

WET SIGNATURE COPY MUST BE MAINTAINED BY PLAN SPONSOR

Electronic filing is required for plan years beginning in 2009.  Without regard to the electronic filing requirement, Plan sponsors must maintain a fully executed (wet signature) copy of the Form 5500 with all schedules and attachments.  If the filing is for a defined benefit plan, the wet signature copy of the actuarial schedule, Schedule SB or MB, must be part of the plan’s permanent records as well.  The instructions for the Form 5500 indicate plan’s copy may be stored electronically, so long as the electronic copy captures the handwritten signatures.

 

SUMMARY ANNUAL REPORT (SAR) DUE DATE

Attached with your electronic Form 5500 filings is the Summary Annual Report (SAR) for the plan year. The SAR is not electronically submitted to the DOL. This SAR contains information from the plan’s Form 5500 and its format is prescribed by DOL regulations. The SAR must be distributed annually to each participant, including active and deferred vested participants, retirees and beneficiaries. For 401(k) plans, please note that the SAR must be distributed to all persons eligible to participate, even if they have elected not to contribute to the plan.

 

The SAR must be distributed within nine (9) months following the close of the plan year. For calendar year plans, this would be September 30, 2017.  If an extension was requested for your Form 5500, the SAR is extended an additional two and a half months. For calendar year plans, the extended SAR deadline would be December 15, 2017. We suggest that you distribute the SAR as soon as practical to make sure the deadline is met. For active employees, we suggest that you include it with employee paychecks or hand deliver it. For inactive participants, we suggest that you send it by first class mail. Spanish SARs are available upon request for an additional fee of $150.

 

PARTICIPANT CONTRIBUTIONS

The Form 5500 requires that you disclose to the DOL whether or not participant contributions were transmitted within the time period described in 29 CFR 2510.3-102. This question has been completed based on the information provided in the annual census file or data request.  If the information is incorrect, please notify us as soon as possible and we will revise your filing.

 

SCHEDULE C (only applies to plans with more than 100 participants and with and audit requirement)

We have completed the Schedule C information based on our interpretation of current guidance.  If your auditor has a different opinion of the completion of the Schedule C, please contact your Account Manager for changes.

 

FIDELITY BOND

The Form 5500 requires that you disclose to the DOL whether or not the plan is covered by a fidelity bond. This question has been completed based on the information provided in the annual census file or data request. If the value of the bond is incorrect, please notify us as soon as possible and we will revise your filing. See separate attachment for complete bonding requirements.

 

See also:

2016 Form 8955-SSA – Additional Information

Obtaining Electronic Signature Credentials

Obtaining Your Electronic Signer Credentials

Step-by-Step Instructions

Step 1: Open your internet browser and go to http://www.efast.dol.gov. Click “Register” on the left side of the page under the “Main” table.
Step 2: Read the Privacy Statement and check the box “I have read this agreement”. Click the “Accept Agreement” box to continue.
Step 3: Complete your Profile Information. IMPORTANT: For User Type, check the “Filing Signer” field. Click the “Next” button to proceed to the next screen.
Step 4: Select your challenge question and input your answer. Click “Next” to continue.
Step 5: Confirm information entered is accurate and click “Submit”.
Step 6: Click “OK” on the “Register – Check Email” screen.
Step 7: An email notification with your EFAST2 and User ID information will be sent to your email address.  Click on the first hyperlink.  If you are an AOL user, select the second hyperlink.
Step 8: The hyperlink will then take you to a website. You will need to enter your Challenge Question answer and then click “Next”.
Step 9: To continue, check the “I have read this agreement” box and then click the “Accept Agreement” button.
Step 10: To continue, check the “I have read this agreement” box and then click the “Accept Agreement” button again.
Step 11: Create a password and make certain that the password you have chosen adheres to the guidelines listed on the right below “Password Requirements”. Then click “Save”.
Step 12: Your user ID and PIN will be displayed on the next screen.  Save your User ID, the Password you created, and your PIN in a safe place.  You will need it annually to sign your Form 5500 electronically.
Additional Information:
  • To access 2016 instructions and forms, link to http://www.dol.gov/ebsa/5500main.html
  • To get help with anything related to EFAST2 or the 2015 forms, call 1.866.GOEFAST (1.866.463.3278)
  • To access the electronic Public Disclosure Web site, go to https://www.efast.dol.gov and click on “Form 5500/5500-SF Search” in the upper left hand corner of the screen.

See also:

2016 Form 5500 – Additional Information

2016 Form 8955-SSA – Additional Information