Retirement Policy

Featured articles
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Pros and Cons of CalSavers for Small Businesses
Answers to frequently asked questions about the CalSavers Retirement Savings Program
Pros and Cons of CalSavers for Small Businesses Answers to frequently asked questions about the CalSavers Retirement Savings Program The clock is ticking! By state law, businesses with 50 or more employees in California must provide a retirement program to their employees by June 30, 2021. And employers with five or more employees must provide a program by June 30, 2022. If you’re an employer in California, you must offer the CalSavers Retirement Savings Program—or another retirement plan such as a 401(k). Faced with this decision, you may be asking yourself: Which is the best plan for my employees? To help you make an informed decision, we’ve provided answers to frequently asked questions about CalSavers: 1. Do I have to offer my employees CalSavers? No. California laws require businesses with 50 or employees to offer retirement benefits, but you don’t have to elect CalSavers. If you provide a 401(k) plan (or another type of employer-sponsored retirement program), you may request an exemption. 2. What is CalSavers? CalSavers is a Payroll Deduction IRA program—also known as an “Auto IRA” plan. Under an Auto IRA plan, if you don’t offer a retirement plan, you must automatically enroll your employees into a state IRA savings program. Specifically, the CalSavers plan requires employers with at least five employees to automatically enroll employees at a 5% deferral rate with automatic annual increases, up to a maximum of 8%. As an eligible employer, you must withhold the appropriate percentage of employees’ wages and deposit it into the CalSavers Roth IRA on their behalf. Employees retain control over their Roth IRA and can customize their account by selecting their own contribution rate and investments—or by opting out altogether. 3. Why should I consider CalSavers? CalSavers is a simple, straightforward way to help your employees save for retirement. CalSavers is administered by a private-sector financial services firm and overseen by a public board chaired by the State Treasurer. As an employer, your role is limited to uploading employee information to CalSavers and submitting employee contributions via payroll deduction. Plus, there are no fees for employers to offer CalSavers, and employers are not fiduciaries of the program. 4. Are there any downsides to CalSavers? Yes, there are factors that may make CalSavers less appealing than other retirement plans. Here are some important considerations: CalSavers is a Roth IRA, which means it has income limits—If your employees earn above a certain threshold, they will not be able to participate in CalSavers. For example, single filers with modified adjusted gross incomes of more than $140,000 would not be eligible to contribute. If they mistakenly contribute to CalSavers—and then find out they’re ineligible—they must correct their error or potentially face taxes and penalties. However, 401(k) plans aren’t subject to the same income restrictions. CalSavers is not subject to worker protections under ERISA—Other tax-qualified retirement savings plans—such as 401(k) plans—are subject to ERISA, a federal law that requires fiduciary oversight of retirement plans. Employees don’t receive a tax benefit for their savings in the year they make contributions—Unlike a 401(k) plan—which allows both before-tax and after-tax contributions—CalSavers only offers after-tax contributions to a Roth IRA. Investment earnings within a Roth IRA are tax-deferred until withdrawn and may eventually be tax-free. Contribution limits are far lower—Employees may save up to $6,000 in an IRA in 2021 ($7,000 if they’re age 50 or older), while in a 401(k) plan employees may save up to $19,500 in 2021 ($26,000 if they’re age 50 or older). So even if employees max out their contribution to CalSavers, they may still fall short of the amount of money they’ll likely need to achieve a financially secure retirement. No employer matching and/or profit sharing contributions—Employer contributions are a major incentive for employees to save for their future. 401(k) plans allow you the flexibility of offering employer contributions; however, CalSaver does not. Limited investment options—CalSavers offers a relatively limited selection of investments, which may not be appropriate for all investors. Typical 401(k) plans offer a much broader range of investment options and often additional resources such as managed accounts and personalized advice. Potentially higher fees for employees—There is no cost to employers to offer CalSavers; however, employees do pay $0.83-$0.95 per year for every $100 in their account, depending upon their investments. While different 401(k) plans charge different fees, some plans have far lower employee fees. Fees are a big consideration because they can seriously erode employee savings over time. 5. Why should I consider a 401(k) plan instead of CalSavers? For many employers —even very small businesses—a 401(k) plan may be a more attractive option for a variety of reasons. As an employer, you have greater flexibility and control over your plan service provider, investments, and features so you can tailor the plan that best meets your company’s needs and objectives. Plus, you’ll benefit from: Tax credits—Thanks to the SECURE Act, you can now receive up to $15,000 in tax credits to help defray the start-up costs of your 401(k) plan. Plus, if you add an eligible automatic enrollment feature, you could earn an additional $1,500 in tax credits. Tax deductions—If you pay for plan expenses like administrative fees, you may be able to claim them as a business tax deduction. With a 401(k) plan, your employees may also likely have greater: Choice—You can give employees, regardless of income, the choice of reducing their taxable income now by making pre-tax contributions or making after-tax contributions (or both!) Not only that, but employees can contribute to a 401(k) plan and an IRA if they wish—giving them even more opportunity to save for the future they envision. Saving power—Thanks to the higher contributions limits of a 401(k) plan, employees can save thousands of dollars more—potentially setting them up for a more secure future. Plus, if the 401(k) plan fees are lower than what an individual might have to pay with CalSavers, that means more employer savings are available for account growth. Investment freedom—Employees may be able to access more investment options and the guidance they need to invest with confidence. Case in point: Betterment offers 500+ low-cost, globally diversified portfolios (including those focused on making a positive impact on the climate and society). Support—401(k) providers often provide a greater degree of support, such as educational resources on a wide range of topics. For example, Betterment offers personalized, “always-on” advice to help your employees reach their retirement goals and pursue overall financial wellness. Plus, we provide an integrated view of your employees’ outside assets so they can see their full financial picture—and track their progress toward all their savings goals. 6. What if I miss the retirement program mandate deadline? The state will notify you of your company’s non-compliance. Ninety days after the notification, if you still fail to comply, there is a penalty of $250 per eligible employee. If non-compliance extends 180 days or more, there is an additional penalty per eligible employee. As you can imagine, your company could end up paying thousands of dollars in fees for non-compliance! 7. What action should I take now? If you decide that CalSavers is most appropriate for your company, visit the CalSavers website to register before: June 30, 2021 – for businesses with 50+ employees in California June 30, 2022 – for businesses with 5+ employees in California If you decide to explore your retirement plan alternatives, talk to Betterment. We can help you get your plan up and running fast—and make ongoing plan administration a breeze. Plus, our fees are well below industry average. That can mean more value for your company—and more savings for your employees. Get started now. Betterment is not a tax advisor, and the information contained in this article is for informational purposes only. -
SECURE Act 2.0: Getting Closer to Reality
SECURE Act 2.0 would expand retirement plan coverage and make it easier for employers to offer ...
SECURE Act 2.0: Getting Closer to Reality SECURE Act 2.0 would expand retirement plan coverage and make it easier for employers to offer retirement plan benefits. The Securing a Strong Retirement Act, or ‘SECURE Act 2.0’ as it is commonly called, came much closer to being realized with the House passing the bill by a wide margin, 414-5, on March 29, 2022. This coming almost a full year after the House Ways and Means Committee unanimously approved the bill. It is now off to the Senate for approval. The bill builds on the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, which expanded retirement coverage to more Americans. In addition, the new bill includes several provisions designed to ease retirement plan administration which should encourage more employers to adopt 401(k) plans. Key provisions of SECURE Act 2.0 related to 401(k) plans include: Expansion of automatic enrollment. Requires new 401(k) plans to automatically enroll employees at a default rate between 3% and 10% and automatically escalate contributions at 1% per year to at least 10% (but no more than 15%). Of course, employees can always change their contribution rate or opt out of the plan at any time. Existing plans are grandfathered, and new businesses as well as those with 10 or fewer employees are exempt. Enhanced tax credits for small employer plans. The SECURE Act provides businesses with fewer than 100 employees a three-year tax credit for up to 50% of plan start-up costs. The new bill increases the credit to up to 100% of the costs for employers with up to 50 employees. In addition, SECURE Act 2.0 offers a new tax credit to employers with 50 or fewer employees, encouraging direct contributions to employees. This new tax credit would be as much as $1,000 per participating employee. Increased age for required minimum distributions (RMDs) to 75. The SECURE Act increased the RMD age to 72 (from 70.5). The new bill increases the RMD age even further: to 73 in 2023; 74 in 2030 and ultimately 75 in 2033. Higher catch-up limits. Catch-up contributions mean older Americans can make increased contributions to their retirement accounts. Under current law, participants who are 50 or older can contribute an additional $6,500 to their 401(k) plans in 2022. The new bill increases these limits to $10,000 for 401(k) participants at ages 62, 63, and 64. Catch-up contributions must be made in Roth. Currently, participants can choose whether to contribute pre-tax or Roth as their catch-up contributions. The new bill requires that all catch-up contributions be made in Roth moving forward. This will provide less tax diversification for participants but will generate more tax revenue to help offset the cost of some of the other provisions in the bill. Ability to match on student loans. Heavy student debt burdens prevent many employees from saving for retirement, often preventing them from earning valuable matching contributions. Under this provision of the bill, student loan repayments could count as elective deferrals, and qualify for 401(k) matching contributions from their employer. The bill would also permit a plan to test these employees separately for compliance purposes. Ability to contribute matching contributions in Roth dollars. Currently, all employer matching contributions must be made on a pre-tax basis. The bill proposes that employers would be allowed to offer matching contributions to participants on a Roth basis. Roth matching contributions would not be deductible for employers as pre-tax contributions are, but may provide beneficial tax benefits to employees. Additional incentives for employees to contribute. The only way an employer can currently incentivize employees to contribute to their 401(k) plan is through an employer match. The bill proposes that employers could now offer additional incentives, such as a small gift card benefit, to employees who contribute to their 401(k). One-year reduction in period of service requirements for long-term part time workers. The 2019 SECURE Act requires employers to allow long-term part-time workers to participate in the 401(k) plan if they work 500-999 hours consecutively for 3 years. The new bill reduces the requirement to 2 years. Keep in mind that plans with the normal 1000 hours in 12 months eligibility requirement for part-time employees must allow participants who meet that requirement to enter the plan. Retroactive first year elective deferrals for sole proprietors. Thanks to the SECURE Act, employers can retroactively establish a profit sharing plan for the previous year up until their business tax deadline. This allows the owner to receive profit sharing for the previous year without having to make any employee deferrals. SECURE Act 2.0 extends the retroactive rule to sole proprietors or single member LLCs, where only one owner is employed. For example, a sole proprietor owner would have until April 15, 2023 to allocate profit sharing and elective deferrals for the 2022 plan year. Penalty-free withdrawals in case of domestic abuse. The new bill allows domestic abuse survivors to withdraw the lesser of $10,000 or 50% of their 401(k) account, without being subject to the 10% early withdrawal penalty. In addition, they would have the ability to pay the money back over 3 years. Expansion of Employee Plans Compliance Resolution System (EPCRs). To ease the burdens associated with retirement plan administration, this new legislation would expand the current corrections system to allow for more self-corrected errors and exemptions from plan disqualification. Separate application of top heavy rules covering excludable employees. SECURE 2.0 should make annual nondiscrimination testing a bit easier by allowing plans to separate out certain groups of employees from top heavy testing. Separating out groups of employees is already allowed on ADP, ACP and coverage testing. Eliminating unnecessary plan requirements related to unenrolled participants. Currently, plans are required to send numerous notices to all eligible plan participants. The new legislation eliminates certain notice requirements. Retirement savings lost and found - SECURE Act 2.0 would create a national, online lost and found database. So-called “missing participants'' are often either unresponsive or unaware of 401(k) plan funds that are rightfully theirs. -
Related Companies and Controlled Groups: What this means for 401(k) plans
When companies are related, how to administer 401(k) plans will depend on the exact ...
Related Companies and Controlled Groups: What this means for 401(k) plans When companies are related, how to administer 401(k) plans will depend on the exact relationship between companies and whether or not a controlled group is deemed to exist. Understanding Controlled Groups Under IRS Code sections 414(b) and (c), a controlled group is a group of companies that have shared ownership and, by meeting certain criteria, can combine their employee bases into one 401(k) plan. The controlled group rules were put into place to ensure that the plan provides proper coverage of employees and that it does not discriminate against non-highly compensated employees. Parent-Subsidiary Controlled Group: When one corporation owns at least an 80% interest in another corporation. The 80% ownership threshold is determined either by owning 80% of the total value of the corporation’s shares of stock or by owning enough stock to hold 80% of the voting power. Brother-Sister Controlled Group: When two or more entities are controlled by the same person or group of people, provided that the following criteria are met: Common ownership: Same five or fewer shareholders own at least an 80% controlling interest in each company. Identical ownership: The same five or fewer shareholders have an identical share of ownership among all companies which, in the aggregate, is more than 50%. In this first example below, a brother-sister controlled group exists between Company A and Company B since the three owners together own more than 80% of Companies A and B, and their identical ownership is 75%. Owner Company A Company B Identical Ownership Mike 15% 15% 15% Tory 40% 50% 40% Megan 40% 20% 20% Total 95% 85% 75% In this second example below, a brother-sister controlled group does not exist between Company A and Company B since the identical ownership is only 15%, well below the required 50% threshold. Owner Company A Company B Company C Identical Ownership Jon 100% 15% 15% 15% Sarah 0% 40% 50% 0% Chris 0% 40% 20% 0% Total 100% 95% 85% 15% Combined Controlled Group: More complicated controlled group structures might involve a parent/subsidiary relationship as well as one or more brother/sister relationship. Three or more companies may constitute a combined controlled group if each is a member of a parent-subsidiary group or brother-sister group and one is: A common parent company included in a parent-subsidiary group and Is also included in a brother-sister group of companies. In the below example, we see that Company A and B are in a brother-sister controlled group as the common ownership for both are at least 80% and the identical ownership is greater than 50%. However, since Company B also owns 100% of Company C, there’s a parent-subsidiary controlled group, which results in a combined controlled group situation. Owner Company A Company B Company C Identical Ownership Ariel 80% 85% 80% Company B 100% Controlled groups and 401(k) plans If related companies are determined to be part of a controlled group, then employers of that controlled group are considered a single employer for purposes of 401(k) plan administration. So even if multiple 401(k) plans exist among the employers within a single controlled group, they must meet the requirements as if they were a single-employer for purposes of: Determining eligibility Determining HCEs ADP & ACP testing Coverage testing Top heavy testing Compensation and contribution limits Vesting determination Maximum contribution and benefit limits Given the complexities associated with controlled group rules and how it may impact 401(k) plan administration, we encourage companies that might have questions related to controlled groups to consult with their attorney or tax accountant.
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Pros and Cons of the New York State Secure Choice Savings Program
Pros and Cons of the New York State Secure Choice Savings Program Answers to small businesses' frequently asked questions The New York State Secure Choice Savings Program was established to help the more than 3.5 million private-sector workers in the state who have no access to a workplace retirement savings plan. Originally enacted as a voluntary program in 2018, Gov. Kathy Hochul signed a law on Oct. 22, 2021, that requires all employees of qualified businesses be automatically enrolled in the state's Secure Choice Savings Program. If you’re an employer in New York, state laws require you to offer the Secure Choice Savings Program if you: Had 10 or more employees during the entire prior calendar year Have been in business for at least two years Have not offered a qualified retirement plan during prior two years If you’re wondering whether the Secure Choice Savings Program is the best choice for your employees, read on for answers to frequently asked questions. Do I have to offer my employees the Secure Choice Savings Program? No. State laws require businesses with 10 or more employees to offer retirement benefits, but you don’t have to elect the Secure Choice Savings Program if you provide a 401(k) plan (or another type of employer-sponsored retirement program). What is the Secure Choice Savings Program? The Secure Choice Savings Program is a Payroll Deduction IRA program—also known as an “Auto IRA” plan. Under an Auto IRA plan, if you don’t offer a retirement plan, you must automatically enroll your employees into a state IRA savings program. Specifically, the New York plan requires employers to automatically enroll employees at a 3% deferral rate. As an eligible employer, you must set up the payroll deduction process and remit participating employee contributions to the Secure Choice Savings Program provider. Employees retain control over their Roth IRA and can customize their account by selecting their own contribution rate and investments—or by opting out altogether. Why should I consider the Secure Choice Savings Program? The Secure Choice Savings Program is a simple, straightforward way to help your employees save for retirement. According to SHRM, it is managed by the program’s board, which is responsible for selecting the investment options. The state pays the administrative costs associated with the program until it has enough assets to cover those costs itself. When that happens, any costs will be paid out of the money in the program’s fund. Are there any downsides to the Secure Choice Savings Program? Yes, there are factors that may make the Secure Choice Savings Program less appealing than other retirement plans. Here are some important considerations: The Secure Choice Savings Program is a Roth IRA, which means it has income limits—If your employees earn above a certain threshold, they will not be able to participate. For example, single filers with modified adjusted gross incomes of more than $140,000 would not be eligible to contribute. If they mistakenly contribute to the Secure Choice Savings Program—and then find out they’re ineligible—they must correct their error or potentially face taxes and penalties. However, 401(k) plans aren’t subject to the same income restrictions. New York Secure Choice is not subject to worker protections under ERISA—Other tax-qualified retirement savings plans—such as 401(k) plans—are subject to ERISA, a federal law that requires fiduciary oversight of retirement plans. Employees don’t receive a tax benefit for their savings in the year they make contributions—Unlike a 401(k) plan—which allows both before-tax and after-tax contributions—Illinois only offers after-tax contributions to a Roth IRA. Investment earnings within a Roth IRA are tax-deferred until withdrawn and may eventually be tax-free. Contribution limits are far lower—Employees may save up to $6,000 in an IRA in 2022 ($7,000 if they’re age 50 or older), while in a 401(k) plan employees may save up to $20,500 in 2022 ($27,000 if they’re age 50 or older). So even if employees max out their contribution to the Secure Choice Savings Program, they may still fall short of the amount of money they’ll likely need to achieve a financially secure retirement. No employer matching and/or profit sharing contributions—Employer contributions are a major incentive for employees to save for their future. 401(k) plans allow you the flexibility of offering employer contributions; however, the Secure Choice Savings Program does not. Limited investment options—Secure Choice Savings Program offers a relatively limited selection of investments. Why should I consider a 401(k) plan instead of the Secure Choice Savings Program? For many employers—even very small businesses—a 401(k) plan may be a more attractive option for a variety of reasons. As an employer, you have greater flexibility and control over your plan service provider, investments, and features so you can tailor the plan that best meets your company’s needs and objectives. Plus, you’ll benefit from: Tax credits—Thanks to the SECURE Act, you can now receive up to $15,000 in tax credits to help defray the start-up costs of your 401(k) plan. Plus, if you add an eligible automatic enrollment feature, you could earn an additional $1,500 in tax credits. Tax deductions—If you pay for plan expenses like administrative fees, you may be able to claim them as a business tax deduction. With a 401(k) plan, your employees may also likely have greater: Choice—You can give employees, regardless of income, the choice of reducing their taxable income now by making pre-tax contributions or making after-tax contributions (or both!) Not only that, but employees can contribute to a 401(k) plan and an IRA if they wish—giving them even more opportunity to save for the future they envision. Saving power—Thanks to the higher contributions limits of a 401(k) plan, employees can save thousands of dollars more—potentially setting them up for a more secure future. Plus, if the 401(k) plan fees are lower than what an individual might have to pay with Illinois Secure Choice, that means more employer savings are available for account growth. Investment freedom—Employees may be able to access more investment options and the guidance they need to invest with confidence. Case in point: Betterment offers 500+ low-cost, globally diversified portfolios (including those focused on making a positive impact on the climate and society). Support—401(k) providers often provide a greater degree of support, such as educational resources on a wide range of topics. For example, Betterment offers personalized, “always-on” advice to help your employees reach their retirement goals and pursue overall financial wellness. Plus, we provide an integrated view of your employees’ outside assets so they can see their full financial picture—and track their progress toward all their savings goals. What action should I take now? After the Secure Choice Savings Program opens for enrollment, you’ll have nine months to set up a payroll deposit retirement savings arrangement. No rollout date has been set yet, and the board can delay the program rollout as needed. We’ll keep you posted of any deadline updates. If you decide to explore your retirement plan alternatives, talk to Betterment. We can help you get your plan up and running fast—and make ongoing plan administration a breeze. Plus, our fees are well below industry average. That can mean more value for your company—and more savings for your employees. Get started now. -
How Do State-Based Plans Stack Up Against 401(k) Plans?
How Do State-Based Plans Stack Up Against 401(k) Plans? State-mandated retirement plans increase worker access to workplace savings programs, but they may not be the best fit for employees or employers. The most important thing you can do to help your employees prepare for retirement is to offer a workplace savings plan. A recent study from the Employee Retirement Benefit Institute (EBRI) shows that workers who have access to a retirement plan at work are far more likely to save for retirement: 79% of those with access to a plan have retirement savings vs. only 17% of those without access to a plan. Increasing access to a workplace savings plan is an important policy goal in the U.S. Helping more workers save for a financially secure retirement will reduce reliance on government programs for retirees. Policymakers continue to explore new solutions for increasing workers’ access to retirement plans, including incentivizing employers to sponsor a workplace plan, like a 401(k) plan. State governments are also coming up with various strategies to increase workers’ access to workplace savings programs, including requiring employers to participate in a savings plan designed and administered by the state. Since 2012, Georgetown University’s Center for Retirement Initiatives shows that 45 states have taken action to promote access to workplace savings plans, ranging from studying plan options to passing legislation to enrolling employers into a plan. State plans As of September 2020, a dozen states and one city government have passed legislation to help or require employers to offer a savings plan at work in one of the following ways: Voluntary participation in a Payroll Deduction IRA: New York and New Mexico Mandated participation in a Payroll Deduction IRA (if not offering another retirement plan): California, Colorado, Connecticut, Illinois, Maryland, New Jersey, Oregon, and Seattle WA Voluntary participation in a multiple employer defined contribution plan: Massachusetts and Vermont Voluntary use of products from a state-based retirement plan marketplace: Washington and New Mexico The most popular option: Payroll Deduction IRA Plans Of the states that have passed legislation to establish a state-based plan, the majority have chosen to require employers to participate in a Payroll Deduction IRA program, also known as an “Auto IRA” plan. Generally, under an Auto IRA plan, employers who do not offer a retirement plan (for example, a 401(k) plan) must automatically enroll their employees into a state IRA savings program. The employer withholds a certain percentage of an employee’s wages and deposits it into a Roth IRA on behalf of the employee. Employees have control over their individual Roth IRA and can opt out of participating. These programs do not allow employers to supplement employee deferrals with matching or other types of employer contributions. The state administers the Roth IRAs and oversees the investment options. The details of each program vary by state. For example, The OregonSaves program requires any employer that does not offer a qualified retirement plan to enroll employees at a 5% deferral rate, which must be increased by 1% each year up to a maximum of 10%. The Illinois Secure Choice plan requires employers who have been in business for at least two years and have at least 25 employees to automatically enroll employees at a 5% deferral rate. The CalSavers plan requires employers with at least 5 employees to automatically enroll employees at a 5% deferral rate with automatic annual increases up to a maximum of 8%. Pros & Cons of state-based plans States are increasing access to retirement plans by requiring most employers to offer the state-based plan if they don’t offer another type of retirement plan. The automatic enrollment feature encourages savings among workers who otherwise might not take the initiative to do so. And automatic payroll deduction makes disciplined saving easy and convenient for employees. While employers are being forced into these arrangements, there are little to no costs for the employer and few administrative burdens other than processing the payroll withholding and depositing employees’ money into the IRAs. There are, however, some less-than-ideal aspects of state-based plans that should be considered. These plans are not subject to the worker protections under ERISA that apply to other tax-qualified retirement savings plans, such as 401(k) plans. ERISA is a federal law that requires fiduciary oversight of retirement plans and provides some uniformity to plan operations nationwide. Each state-based plan has its own rules and features, which can make it more difficult for employees and employers living and working in different states to comply. Another concern is that workers do not receive a tax benefit for their savings in the year they make contributions because most state-based plans (so far) consist of after-tax contributions to a Roth IRA. Investment earnings within a Roth IRA are tax-deferred until removed from the IRA and may eventually be tax-free. IRAs also have much lower contribution limits than other types of retirement plans. A worker may save up to $6,000 in an IRA in 2020 ($7,000 if they’re age 50 or older), while a worker may save up to $19,500 in a 401(k) plan in 2020 ($26,000 if they’re age 50 or older) and may be eligible for additional employer matching and/or profit sharing contributions. Pros & Cons of 401(k) Plans For many employers – even very small businesses – a 401(k) plan may be a more attractive option than a state-based plan for a variety of reasons. Employer benefits Flexibility and control over plan service providers, investments, and plan features to meet your company’s needs and objectives Tax credit for plan start-up costs for small businesses Tax deduction for plan expenses paid by business owner Option to make tax-deductible contributions to your employees’ accounts Ability as a business owner to save for your own retirement Employee benefits Disciplined savings through automatic payroll deduction Reduced taxable income through pre-tax salary contributions & greater flexibility with respect to timing of taxes, with option to make Roth contributions Tax credits for lower paid employees Higher contribution limits than permitted in most state-based savings arrangements (For 2020, employee and employer contributions can reach 100% of an employee’s income up to $57,000 for employees under age 50 and $63,500 for employees age 50 and older, including business owners) Access to a broad range of investment options and often additional resources, including managed accounts and/or personalized advice Tax-deferred growth on investments while in the 401(k) plan Option to take a loan from retirement savings Benefits of 401(k) Plan vs Payroll Deduction Roth IRA 401(k) Payroll Deduction Roth IRA Employer contributions allowed x Plan design flexibility x Choice of provider x Small business tax credits x Tax deductions for employer contributions x Employee contribution limits (2020) $19,500 under age 50 $26,000 age 50+ $6,000 under age 50 $7,000 age 50+ Combined employee and employer contribution limits (2020) Up to 100% of employee’s income (max $57,000 for employees under age 50 and $63,500 for employees age 50+ and older, including business owners No employer contributions Ability for employees to save on pre-tax basis and reduce current tax liability x Flexibility with respect to employee tax liability x Additional potential plan features Personalized advice, employer contributions, loans, hardship distributions ERISA Protection from creditors x Of course, with all these benefits for the employer and employees come some administrative requirements to ensure the tax laws are met. Employers sponsoring a 401(k) plan are also required by ERISA to act solely in the interest of their employees and ensure that they and any others who have discretionary control over the plan or its assets meet the high standards of a fiduciary. Engaging plan providers for document, recordkeeping, and investment support is an added expense for employers. With the right 401(k) solution, however, employers can offer a robust retirement plan benefit that fits the company’s objectives and employees’ needs, as well as receive expert assistance, while also controlling costs. Ready for the right 401(k) solution? Betterment for Business offers a digital platform that makes it easy for you to set up and maintain a plan, with low cost administration, guided onboarding, and expert investment and administrative support. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional. -
CARES Act and 401(k)s: Additional IRS Updates
CARES Act and 401(k)s: Additional IRS Updates The latest notice from the IRS expands the definition of those qualified to take advantage of CARES Act 401(k) distribution and loan relief. IRS Notice 20-50 The IRS continues to release updates to the CARES (Coronavirus Aid, Relief, and Economic Security) Act in response to a growing number of outstanding questions. This latest notice, IRS Notice 20-50, provides further clarification and additional benefits to participants impacted by COVID-19. As a refresher, the CARES Act was signed into law in late March and allows qualified individuals to take coronavirus-related distributions of up to $100,000 from their eligible retirement accounts (including IRAs) until December 30, 2020. These distributions are not subject to the 10% early withdrawal penalty that would typically apply to certain distributions taken prior to age 59-½. The CARES Act also relaxes normal retirement plan loan provisions and repayment terms. For loans taken between March 27, 2020, and September 22, 2020, the maximum loan amount has been increased from $50,000 to $100,000 of the vested balance. Additionally, participants are able to delay their loan repayments for up to one year if they fall between March 27, 2020, and December 31, 2020. With Notice 20-50, the IRS has expanded the definition of “qualified individual.” Specifically, a qualified individual is now considered to be anyone who: Is diagnosed, or whose spouse or dependent is diagnosed with the virus; Experiences adverse financial consequences due to COVID-19 as a result of: the individual, the individual’s spouse, or a member of the individual’s household (that is someone who shares the individual’s principal residence) being quarantined, furloughed or laid off, or having work hours reduced; being unable to work due to lack of childcare; closing or reducing hours of a business that they OWN or operate; having pay or self-employment income reduced; or having a job offer rescinded or start date for a job delayed. The notice also clarifies that qualified individuals can claim the tax benefit of the coronavirus-related distribution rules even if their employer did not implement these COVID-related distribution and loan rules. In this Notice, the IRS also added a “Loan Safe Harbor” to the CARES Act, which permits plan sponsors to delay or suspend loan repayments for up to 1 year if those repayments otherwise would have been made from March 27, 2020, through December 31, 2020. Under this Safe Harbor: Loan repayments will resume when the suspension ends. This means that the repayments will resume as of January 2021 if the suspension goes through December 31; The term of the loan may be extended up to one year after the date the loan was originally due even if it will exceed 5 years; and The loan and the additional interest on the unpaid balance must be re-amortized as of January 1, 2021, to the new date. 401(k) regulations related to COVID-19 continue to evolve. Betterment is actively reviewing updates as they are published and encourages employers and others to refer to the notice for more information. -
Should Your Business Continue to Work Remotely? 7 Benefits to Consider.
Should Your Business Continue to Work Remotely? 7 Benefits to Consider. Companies that were once uncertain about remote work are now capitalizing on the benefits of remote work. Around the world, millions of employees are working in the comfort of their homes—not by choice, but by necessity. As the COVID-19 pandemic forces people to shelter in place, companies that were once uncertain about remote work are now seeing the silver lining of benefits. The Brookings Institution estimates that up to half of American workers are currently working from home, more than double the number who worked from home (at least occasionally) in 2017-2018. This large-scale, work-from-home experiment is revealing the pros and cons of telecommuting in real-time. If you’re a business owner or manager, you may be asking yourself: “After the pandemic is over, should we continue working from home?” Making a temporary situation permanent According to a recent survey from Gartner, 74% of Chief Financial Officers intend to shift some employees to remote work permanently after the pandemic is resolved. “CFOs, already under pressure to tightly manage costs, clearly sense an opportunity to realize the cost benefits of a remote workforce. In fact, nearly a quarter of respondents said they will move at least 20% of their on-site employees to permanent remote positions,” said Alexander Bant, practice vice president, research for the Gartner Finance Practice. Of course, not every job is suited to be done remotely—and there are downsides. Notably, managing remote teams can be more challenging, staff members may feel isolated working at home, and instead of becoming more productive, some employees may become more distracted. Despite these potential disadvantages, more CFOs, business owners, and managers are recognizing that remote work can deliver significant cost savings (and other benefits) in the long run. Let’s delve into the top benefits of telecommuting. Save money First and foremost, telecommuting can save your small business a significant amount of money. With all or some of your employees working from home, you’ll be saving money on: Real estate—Currently, you may be locked into a lease for a period of years. However, if you decide to downsize your office space or forgo it entirely in the future, you’ll save a significant amount of money. Operational costs—From heating and air conditioning to office supplies and copy machines, you’ll likely be able to cut many operational costs. However, you may incur costs associated with setting up your employees’ home offices and implementing telecommuting systems and software. Perks—When employees work at home, they make their own coffee (or swing by a local coffee shop), prepare their own lunches, and pour their own beers for Zoom happy hours with their co-workers. With a remote team, you can switch these office perks to invest in valuable benefits such as starting a 401(k) plan or increasing your company matching contributions. So how much could you save? According to a March 2020 report from Global Workplace Analytics, a typical employer can save an average of $11,000 per half-time telecommuter per year. It’s the net sum of things like increased productivity, lower real estate costs, reduced absenteeism and turnover, and better disaster preparedness. Want to calculate your own savings? Global Workplace Analytics offers a free TeleworkSavings Calculator™. Make employees happy According to Global Workplace Analytics, 80% of employees want to work from home at least some of the time.1 In particular, Millennials appreciate flexibility and remote work opportunities. Telecommuting is such a draw that office workers would even take a pay cut if they could work from home! More than a third of workers would take a pay cut of up to 5% in exchange for the option to work remotely at least some of the time; a quarter would take a 10% pay cut; 20% would take an even greater cut.2 Improve employees’ financial wellbeing Many studies have shown that personal financial stress negatively impacts employees’ performance, productivity, and ability to focus—all of which can lead to higher employee turnover. However, telecommuting can help your employees cut costs, improve their work-life balance, and boost their financial wellbeing. In fact, employees could save hundreds (or even thousands) of dollars on commuting expenses, take-out lunches, and even business clothes! According to a USA Today interview with FlexJobs, remote workers typically save about $4,000 a year by telecommuting. The money employees save can help them improve their current standard of living, invest for retirement and other long-term goals, and gain an overall sense of financial wellbeing. Increase productivity While the perception is that remote workers work less, the reality is actually quite different. A recent study from Airtasker , a gig economy platform, which surveyed more than 1,000 full-time employees across the United States, 505 of whom worked remotely, found that: Remote workers averaged 27 minutes of unproductive time a day, compared to 37 minutes for in-office workers Remote workers worked an average of 1.4 more days every month (or 16.8 more days every year) Plus, a remote job eliminates many of the typical “time sucks” of the average in-office workday like lengthy commute times, chats by the water bubbler, and unnecessary meetings. Minimize workforce turnover If you ask someone what they don’t like about their job, you’ll get a lot of different answers. “I hate my commute!” “My schedule isn’t flexible!” “I work so hard, but I don’t earn enough money.” “My boss micromanages me!” Many of these common reasons why people are dissatisfied at their job can be solved through remote work. By trusting your employees to telecommute, you give them the flexibility, free time, and money they need to be happy enough to stick around. Hire the best talent (regardless of location) Relocation expenses ranging from moving services to temporary housing can cost your company thousands of dollars per employee. Instead, consider hiring the best talent from around the world, allowing them to work remotely. You’ll save significant upfront costs and be able to draw from a larger pool of talented potential staff members (who may also strongly prefer to work from home). Plus, if your company is based in a city with a high cost of living and you hire a remote worker in a rural, lower cost of living area, you may be able to pay them a lower rate that’s still competitive for their location. Keep your business on track in the best (and worst) of times As we’ve witnessed over the last several weeks, companies that had already invested in telecommuting software—and had a corporate culture conducive to remote work—were able to more smoothly transition their workforce. While we hope that COVID-19 is the last pandemic that the world ever faces, the fact of the matter is that business disruptions happen. Whether it’s a major tropical storm or a health crisis, it helps to have a contingency in place that allows your employees to work remotely on a full-time or part-time basis. Capitalizing on the benefits of remote work If you decide to reap the benefits of telecommuting, you may be wondering: “What should I do with all the money my company saves?” Well, it’s a perfect opportunity to invest in your company’s future by starting a 401(k) plan or adding a company match. According to a Betterment for Business survey, 67% of plan participants said that a good 401(k) plan was important in their evaluation of a job offer. By providing this valuable benefit, you’ll improve your company’s ability to recruit and retain top talent. Plus, living and working through a pandemic is challenging for everyone. Reward your employees and show how much you appreciate them by investing in their futures with a 401(k) plan. There’s never been a better time to start a 401(k) plan than right now. With the recent passage of the SECURE Act, you can now receive up to $15,000 in tax credits to help defray the start-up costs of your 401(k) plan. Also, if you add an eligible automatic enrollment feature, you could earn an additional $1,500 in tax credits. See how. Betterment makes it easy for you to offer your employees a better 401(k)—at a fraction of the cost of most providers. Want to learn more? Let’s talk. https://globalworkplaceanalytics.com/telecommuting-statistics(State of the American Workforce, Gallup, 2016) https://globalworkplaceanalytics.com/telecommuting-statistics(State of Remote Work 2019, Owl Labs) -
Paycheck Protection Program Flexibility Act of 2020
Paycheck Protection Program Flexibility Act of 2020 The Flexibility Act will greatly benefit small business owners who borrowed PPP funds, increasing their ability to have those loans forgiven. On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”), which modifies provisions related to the forgiveness of loans made to small businesses under the COVID-19 related Paycheck Protection Program (PPP). The Flexibility Act will greatly benefit business owners who borrowed PPP funds and increase their ability to have those loans forgiven. What is being modified? The time period during which PPP loan proceeds must be spent has been modified from 8 weeks from loan origination to the earlier of 24 weeks from loan origination OR December 31, 2020. The percentage of loan proceeds that may be spent on Eligible Non-Payroll costs has increased from 25% to 40%. The deadline to restore full-time employee headcount and/or wages that were cut or decreased between February 15, 2020 and April 2, 2020, has been extended to December 31, 2020. The loan maturity term date for new loans taken after June 5, 2020, has been extended from 2 years to 5 years. Borrowers and lenders can renegotiate maturity dates of existing PPP loans. The deadline for repaying any portion of loans that are not forgivable has been extended from 6 months to the time when the lender receives the forgiven amounts from the SBA. However, if a borrower fails to apply for forgiveness within 10 months after the end of the covered period, then the borrower must immediately begin making repayments. Betterment is not a tax advisor, nor should any information in this article be considered tax advice. Please consult a tax professional. -
DOL Rules that 401(k) Notices Can Be Sent Electronically
DOL Rules that 401(k) Notices Can Be Sent Electronically The new “Notice and Access” Rule provides relief to the expense and burden of distributing required 401(k) notices to employees. On May 21, 2020, The U.S. Department of Labor (DOL) announced final rules allowing required 401(k) plan disclosures to be posted online or delivered via email. This new safe harbor rule was much anticipated since prior to the rule required notices could only be delivered electronically if employees satisfied the definition of being “wired at work” (or affirmatively opted to receive notices electronically). Plan participants are required to receive notices and disclosures about their 401(k) plan in a secure and timely manner. The new e-Disclosure Safe Harbor Rule provides some relief from certain administrative expenses in that it will allow new forms of electronic delivery to be the default delivery method, so long as the intended recipient can be reached electronically and receives the appropriate initial notification. The New “Notice and Access” Rule The new rule allows plan sponsors to deliver 401(k) disclosure notices electronically to all employees that are part of the plan, regardless of their employment status. As a safe harbor, this new rule includes several requirements: Initial Paper Notice - Before defaulting an individual into electronic delivery, a plan administrator must first notify the individual by paper: 1) that some or all plan documents will be furnished electronically; 2) that they have the right to request and receive paper copies of some or all of the covered documents (or to opt out of electronic delivery altogether); and 3) of the procedures for exercising such rights. Notice of Internet Availability - A plan administrator is required to send a notice of internet availability to the employee’s email address on file each time a 401(k) plan disclosure is posted to the website. Each notice of internet availability must remind the individual of his or her right to request and receive paper copies and to opt out of electronic delivery altogether, as well as the procedures to exercise such rights. Covered Disclosures and Documents - Documents must be posted online on a timely basis and written in a manner to be understood by an average employee. The 401(k) documents covered by the new rule are: Summary Plan Description (SPD) Summary of Material Modification (SMM) Summary Annual Reports QDIA Notice Annual Notice (Safe Harbor & Automatic Enrollment) Investment-related disclosures (identifying information, performance data, benchmarks, fee information, etc.) Website Standards - Documents posted under the new rule must be maintained on the website until replaced by an updated document. Posted documents must be searchable electronically and protect the confidentiality of personal information. Invalid Electronic Address - Email delivery systems must include invalid electronic address alerts. Once an invalid address has been identified (e.g., email is returned as undeliverable), the problem must be fixed by sending the notice to a secondary email address on file (work email vs. personal email). If this issue is not able to be resolved, the individual must be treated as if they had opted out of electronic delivery and be sent a paper version of the documents as soon as possible, until a new valid email address has been obtained. -
Small Business Paycheck Protection Program and 401(k)s
Small Business Paycheck Protection Program and 401(k)s Understanding rules surrounding Paycheck Protection Program funds with respect to employer contributions can help ensure they qualify for loan forgiveness. The Paycheck Protection Program (“PPP”) is a $660 billion aid program of the CARES (Coronavirus Aid, Relief, and Economic Security) Act to provide loans to companies with 500 or fewer employees. The loans may potentially be forgiven as long as the business utilizes the funds in accordance with PPP provisions. Eligible Costs that Qualify for PPP Loan Forgiveness Your business will need to repay PPP funds if the loan is used for anything other than payroll costs, mortgage interest, rent, and utilities payment. You may also owe money if you do not maintain certain staffing and payroll levels as follows: Staffing: Loan forgiveness will decrease as the full-time employee headcount decreases Payroll: Loan forgiveness will decrease if salaries and wages are decreased by 25% for any employee who made less than $100,000 in 2019 If you did make staffing or payroll decreases between February 15, 2020 and April 2, 2020, you have until December 31, 2020 to restore full-time employees and/or salaries. (NOTE: the original time frame was updated as part of the Flexibility Act.) Payroll Costs include Retirement Plan Contributions PPP funds can be used for payroll costs, including benefits such as health and retirement, until the earlier of 24 weeks from loan origination OR December 31, 2020. (NOTE: the original time frame was updated as part of the Flexibility Act.) Payroll costs may include 401(k) employer contributions such as match and profit sharing. In addition, in its Interim FAQ Guidance, the Treasury Department clarified that these employer contributions are not counted towards the $100,000 employee compensation cap within the CARES Act definition of payroll costs. Considerations regarding 401(k) Contributions made with PPP Funds Although 401(k) plan contributions qualify as PPP payroll costs, employers should be aware that the timing of contribution allocations is important. Employee Elective Contributions made through paycheck deductions are eligible PPP payroll costs since they are compensation. Employer Matching Contributions are eligible PPP payroll costs. In addition, it’s possible (but not yet confirmed) that matching contributions that should have been allocated before the covered period but not paid out until during the covered period may be considered as (forgivable) payroll costs. However, it remains unclear as to whether matching contributions made after the covered period (including matching contributions typically made at the end of the plan year) will qualify under PPP. Employers may, therefore, want to consider ‘front-loading’ matching contributions by paying them out during the covered period to ensure that they are included as payroll costs and forgivable. (NOTE: The Flexibility Act extended the covered period from the earlier of 24 weeks from loan origination OR December 31, 2020.) We are waiting on additional guidance from the Treasury Department regarding employer contribution allocations. Employer Profit Sharing Contributions are often allocated at the end of the year. However, as noted with employer matching contributions, waiting until the end of the plan year to allocate may result in the contribution not being included as PPP payroll costs. In summary, any businesses receiving a PPP loan should be proactive in making employer contributions during the covered period. While uncertainties remain, the benefits of making employer contributions are clear: Increase in eligible (forgivable) payroll costs Meeting employer contribution obligations of the plan (per plan document) Providing additional retirement benefits to employees Are 401(k) Employer Contributions Made with PPP Funds Tax Deductible? IRS Notice 2020-32 states that PPP funds used for eligible expenses that would otherwise be deductible are not tax deductible if the payment of the expense results in loan forgiveness. In other words, if the company uses the funds to provide 401(k) employer contributions as an eligible expense and the loan is forgiven, those employer contributions would not be considered a deductible expense for the business because doing so would count as ‘double dipping’ on tax deductions. However, on May 5, 2020, the Senate introduced legislation (the Small Business Expenses Protection Act of 2020, S. 3612) that would overrule this notice to clarify that the expenses funded by the PPP are deductible. Betterment is keeping a very close eye on this and all legislation related to COVID-19 to provide our clients with the latest information. Betterment is not a tax advisor, nor should any information in this article be considered tax advice. Please consult a tax professional. -
CARES Act FAQs for Employees
CARES Act FAQs for Employees More details about the special distributions and loan provisions that were made possible by the CARES Act. CARES Act FAQs for Employees Q: What is a Coronavirus-Related Distribution (CRD)? A: This is a new type of distribution available to 401(k) and other retirement plans that was created in 2020 to provide relief to those financially impacted by COVID-19. CRDs enabled eligible individuals to: Take a distribution of up to $100,000 in aggregate from 1/1/2020 - 12/30/2020; Avoid the usual 10% early withdrawal penalty; Elect to repay the distribution within 3 years from receipt of the distribution to avoid owing any taxes on the distribution. Q: Who was eligible to take this distribution? A: Individuals needed to meet one of the following criteria: Had been diagnosed with COVID-19 Spouse or dependent had been diagnosed with COVID-19 Had been experiencing financial hardship as a result COVID-19 including being quarantined, furloughed, laid-off, having to work reduced hours, or having lost childcare. Q: What was the maximum amount available to be taken as a CRD? A: Eligible individuals could take up to the lesser of 100% of their vested balance (amount owned outright) or $100,000 in aggregate across all tax-qualified defined contribution plans. This could be taken as a one-time distribution up to $100,000 or multiple distributions until 12/30/2020, as long as the aggregate amount does not exceed $100,000. Q: What are the tax implications of the CRD? A: Generally, any distributions taken prior to age 59½ are subject to a 10% early withdrawal penalty. The IRS has waived this 10% penalty for CRDs. Additionally, distributions are normally also subject to 20% federal tax withholding. You may have waived this withholding if you had elected to opt out on the CRD form. The distribution will be counted as taxable income unless you choose to repay the amount in full within three years from the date you receive the funds. Q: What are the tax implications if my CRD included any Roth funds? A: Roth 401(k)s distributions are not subject to any tax withholding if you are at least age 59½ and have contributed to your Roth account for at least 5 years. If you do not meet these criteria, the distribution is considered “unqualified,” and the earnings portion of the Roth 401(k) is subject to taxation. Q: How do I make repayments on the CRD and what happens if I don’t make the repayments in the given 3-year period? A: Here are two resources you may find useful: IRS Questions and Answers on CRDs The actual CARES Act bill, which includes a section on CRD repayments If you took a CRD and would like to repay it, you have the option to make an indirect rollover to an Individual Retirement Account (IRA)—at Betterment or elsewhere. (Note that Betterment does not accept indirect rollovers into 401(k) plans. However, if you make an indirect rollover to an IRA first, you can then rollover the funds to your 401(k) account if you wish.) To proceed with an indirect rollover at Betterment: Deposit the funds in a personal bank account linked to Betterment If you do not have an IRA with Betterment, you can start by creating an IRA account here. Log into your Betterment account and indicate the amount you’d like to rollover repay to a Betterment IRA via Deposit > Traditional IRA/Roth IRA > Indirect IRA Rollover. (Note: although Betterment only permits one indirect rollover per year, you have until 12/31/2023 to repay your CRD in full, so you need not pay the entire amount at once). You are responsible for documenting the CRD and its repayment when you file your taxes. If you decide to make an indirect rollover to an IRA, you will need to note this rollover of your employer-sponsored plan on Form 1040. If you took the CRD from a 401(k) with Betterment, we will provide you with a 1099-R. If you decide to complete an indirect rollover to a Betterment IRA, we will also provide a Form 5498 documenting the indirect rollover into the IRA. These two forms can be used as documentation that you took a CRD and made a repayment to an eligible retirement account. We will continue this practice while we wait on guidance from the IRS as it relates to whether individuals should also make this note with respect to CRDs. Q: Are CRDs eligible for rollover? A: No, CRDs were not able to be rolled over to another qualified account. However, if you decide to repay your CRD, it will go back into your 401(k) account and will be treated as a distribution eligible for rollover (direct trustee-to-trustee transfer). Q: Can I take a loan against my 401(k) Plan? A: If your 401(k) plan includes a loan provision, the usual available loan amount is the lesser of $50,000 or 50% of your vested account balance. Relaxed loan provisions that your plan may have adopted as part of the CARES Act expired in September 2020. Q: What was the maximum loan amount I could take under the relaxed loan provisions of the CARES Act? A: The CARES Act allows employees to take up to the lesser of 100% of the vested balance or $100,000. This is a temporary increase over the usual 50% of vested balance or $50,000. The increased loan limit is only applicable to loans initiated from March 27, 2020 to September 23, 2020 (180-day period). Q: What are the repayment rules? A: Employees with 401(k) loan repayments on new or existing loans that were due between March 27, 2020 and December 31, 2020 could have elected to delay them for one year. Interest (that you effectively pay back to yourself) continued to accrue and the term of the loan will be adjusted accordingly. Q: Was a different interest rate applied to my loan if I delayed my repayments for a year? A: The same interest rate continued to apply to any delayed repayments, but interest continued to accrue during this period which may increase the total loan repayment amount. To help ease the financial impact, the maturity date of the loan was able to be extended for up to one year. Q: How long were CRDs and relaxed loans available for? A: CRDs were available from January 1, 2020 to December 30, 2020. The relaxed loans were available until September 23, 2020. The one-year postponement of loan repayments was only applicable for repayments due between March 27, 2020 and December 31, 2020. Note that these provisions were not automatically available to all 401(k) plans; your employer had to decide to adopt them. This article is being provided solely for marketing and educational purposes. It does not address the details of your personal situation and is not intended to be an individualized recommendation that you take any particular action, including rolling over an existing account. When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. Specific factors that may be relevant to you include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account, consult tax and other advisors with any questions about your personal situation, and review our Form CRS relationship summary and other disclosures. If you currently participate in a 401(k) plan administered or advised by Betterment (or its affiliate), please understand that you are receiving this email solicitation as part of a general offering and that neither Betterment nor any of its affiliates are acting as a fiduciary, or providing investment advice or recommendations, with respect to your decision to roll over assets in your 401(k) account or any other retirement account. -
CARES Act Overview for 401(k) Plans
CARES Act Overview for 401(k) Plans The CARES Act provides some temporary relief for 401(k) plan sponsors and their participants. Here's everything you need to know about provisions specific to plans. The CARES Act, a $2 trillion economic stimulus package signed into law on March 27 after unusually speedy Congressional approval, provides some temporary relief for retirement plan sponsors and their participants. Below is a summary of provisions specific to 401(k) plans, although there are many details yet to be worked through. Eligibility: In order to be eligible for the Coronavirus Related Distributions (CRDs) and relaxed loan provisions, participants will be required to certify that they meet one of the following criteria: They have contracted COVID19 themselves Their spouse or dependent has contracted COVID19 They have lost a job, been furloughed or otherwise suffered a heavy financial burden because of COVID19 (including loss of childcare) CRDs and the relaxed loan provisions are optional plan features. Plan sponsors who decide to make these features available to their participants should inform their providers, who can offer guidance, additional details and assistance in communicating changes to your employees. Although plans will need to be amended to include these special features, you have until the end of 2022 to do so. Betterment for Business has been in touch with clients regarding the CARES Act and is waiving any related plan amendment fees. Coronavirus Related Distribution (CRD) Eligible participants (see above) can take up to $100,000 from employer-sponsored retirement plans and IRAs without being subject to the normal 10% early distribution penalty or the 20% mandatory tax withholding. In addition, although the CRD will be treated as regular income, it can be spread over three years for tax purposes, and the distribution can be repaid---without being subject to the regular contribution cap---within three years to avoid taxation. CRDs are available for the entire 2020 calendar year, so even 2020 distributions made prior to the enactment of the CARES Act may be treated as a CRD. Relaxed Loan Provisions The available 401(k) loan amount has been increased to the lesser of 100% of the vested balance (up from 50%) or $100,000 (up from $50,000). In addition, participants with loan repayments due between 3/27/2020 and 12/31/2020 can elect to delay them for 1 year. Interest will continue to accrue, but the term of the loan will be extended accordingly. Required Minimum Distribution (RMD) Waiver By law, participants turning 72 are required to start taking RMDs based on previous calendar year-end market values. (The RMD age was increased in 2020 from 70 ½.) So 2019/2020 RMDs based on 12/31/18 and 12/31/2019 market values would have forced individuals to sell investments at drastically reduced prices. The CARES Act waives all RMDs for 2020, including first-time 2019 RMDs, which individuals may have been waiting until April 1, 2020 to make. Any RMDs already taken in 2020 (including 2019 RMDs paid in 2020) are eligible for a 60-day indirect rollover (or 3 year repayment under CRD rules) and won’t be considered to have been taken as a distribution. If you have more questions about COVID-19 and the CARES Act, please see our FAQs. -
Betterment for Business Coronavirus Update
Betterment for Business Coronavirus Update Learn about the measures we have taken to ensure our team will be available as usual for you and your employees. In light of the growing concerns about COVID-19, also known as the coronavirus, we’d like to make you aware of the steps we have taken to ensure that our team will be available as usual for you and your employees. Operational Continuity: We have always had a flexible work environment at Betterment where employees can work remotely. In addition, we have opened two new offices (Philadelphia and Denver) in the past year which provide additional geographic diversity. In the event that we need to employ a mandatory work from home policy for our team, we are well-equipped to continue with business as usual and have implemented protocols and tools to minimize potential adverse impacts and maintain continuity of our operations. Market Volatility: We know that market volatility can be stressful. Your employees will see a message about market volatility when they log into their account. We encourage you to reinforce that message by directing employees to Betterment articles and remind them that 401(k)s are long-term investments meant for retirement. The best path to long-term investing success is for investors to be sure they are taking the right amount of risk for their goals, saving, and sticking to their plan. Rollover Checks: Effective immediately, all rollover checks should be sent to our lockbox at: If regular mail: Betterment 401(k) PO Box 208435 Dallas, TX 75320-8435 If overnighting by special courier: Lockbox Services 208435 (include above in Reference Section) Betterment 401(k) 2975 Regent Blvd, Suite 100 Irving, TX 75063 Kindly update your internal guidance to provide employees with this information. Checks that are already on their way to our NYC office will be forwarded to the lockbox; however, there may be some short delays as a result. Distributions: As a reminder, termination distributions can be done online, and all other paper distributions should be sent to Betterment via our secure upload site. We know that this can be a stressful time. If you need anything from us or have any questions, please let us know. -
The SECURE Act is Changing the Retirement Landscape
The SECURE Act is Changing the Retirement Landscape The SECURE Act improves access to tax-advantaged retirement accounts, allows people to save more, and encourages employers to provide retirement plans. On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) into law. An extensive piece of bipartisan legislation, the SECURE Act improves access to tax-advantaged retirement accounts, allows people to save more, and encourages employers to provide retirement plans. What Does the SECURE Act Mean to You and Your Employees? As an employer, you’re tasked with working with your retirement plan provider to implement the provisions of the SECURE Act that impact your employees. One of the most exciting benefits of the SECURE Act is valuable tax credits for small businesses, but there are many other important considerations you should know about. Read on for details about these new rules (and how they can impact you). 1. Tax credit for new plans Thanks to these new rules, substantial tax credits will be available for employers with 100 or fewer employees. That’s great news for small businesses who’ve been on the fence about starting a defined contribution plan because of cost concerns. Prior to the passage of the SECURE Act, the Retirement Plans Startup Costs Tax Credit was $500. However, effective January 1, 2020, you may now be able to claim tax credits of 50% of the cost to establish and administer a plan, up to the greater of: $500; or the lesser of: $250 per eligible non-highly compensated employee eligible for the plan; and $5,000 Plus, the new rules state that you can claim this credit for the first three years of the plan. That means up to $15,000 in tax credits! And remember, unlike tax deductions that reduce your company’s taxable income, tax credits actually reduce the amount of tax you owe dollar for dollar. It’s important to note that this tax credit is only available when you’re establishing a new retirement plan, such as a 401(k) plan. Ready to learn more about starting your own retirement plan? Betterment can help. 2. Tax credit for adding eligible automatic enrollment Small businesses can now earn an additional $500 tax credit for adding an eligible automatic enrollment feature to their new or existing plan. This tax credit—known formally as the Small Employer Automatic Enrollment Credit—is available for each of the first three years the feature is active, for a total of $1,500 in tax credits. Beyond the tax credit, automatic enrollment correlates with higher plan participation rates—and helps employees save for a more comfortable future. In fact, according to research by The Pew Charitable Trusts, automatic enrollment 401(k) plans have participation rates greater than 90%! Learn how your small business can benefit from a 401(k) plan with automatic enrollment now. Does your small business qualify for these valuable tax credits? Your small business may be eligible if you can answer “yes” to the following questions: Do you have 100 or fewer employees? Did you pay each of them at least $5,000 last year? Was there at least one “non-highly compensated employee” who earned less than $120,000 last year? If so, you could enjoy valuable tax credits—and help your employees save for retirement in the process. Want to learn more? Talk to Betterment. 3. More flexible safe harbor rules A safe harbor 401(k) plan offers a great way to avoid the stress of annual nondiscrimination testing while helping your employees build a more comfortable future. The SECURE Act modifies a few of the safe harbor provisions to give you more flexibility—and your employees the opportunity for increased lifetime income. Here’s what changed: More relaxed nonelective employer contribution requirements Before—Your plan document had to include the 3% nonelective safe harbor provision—and participants had to be provided with the safe harbor status notice—before the beginning of the plan year. After—The SECURE Act eliminated the participant notice requirement for nonelective contributions. Plus, you can amend the 401(k) plan as late as 30 days before the end of a plan year to provide for a 3% nonelective safe harbor contribution. Alternatively, a 401(k) plan may be amended as late as the end of the following plan year, if a 4% nonelective safe harbor contribution is provided. (Note that these changes don’t apply to safe harbor matching contributions.) Increase in the automatic deferral rate for qualified automatic contribution arrangements (QACA) Before—A QACA safe harbor was permitted to automatically increase a participant’s deferral election up to 10% of eligible compensation. After—The SECURE Act increased the cap from 10% of eligible compensation to 15% of eligible compensation. That means that you have an even greater opportunity to help employees save the lifetime income they need to thrive in retirement. Need help with your safe harbor 401(k) plan? These new SECURE Act changes have many implications, including revisions to your policies, procedures, participant notices, plan documents, and more. Betterment can help. 4. Expanded eligibility for long-term, part-time employees Currently, 401(k) plans can limit access for employees who work under 1,000 hours per year, which averages out to about 20 hours per week. However, the SECURE Act changes that rule—helping part-time workers get a jumpstart on retirement saving. Beginning in 2021, plans must provide access for part-time workers who haven’t met 1,000 hours in one year, but have worked for over 500 hours for an employer for at least three years. This change is a great opportunity for large and small companies alike to improve retirement access for all individuals in their workforce. Plus, offering part-time workers a 401(k) plan is an effective way to boost your recruiting efforts. 5. Bigger penalties for late filing To improve deadline compliance, the new rules increase the penalties for late retirement plan document filings: Failing to timely file Form 5500 can be assessed up to $250 per day, not to exceed $150,000 per plan year. (Before the SECURE Act, the penalty was $25 a day, not to exceed $15,000.) Failing to file Form 8955-SSA can be assessed up to a daily penalty of $10 per participant, not to exceed $50,000. (Before the SECURE Act, the daily penalty was $1 per participant, not to exceed $5,000.) Failing to provide income tax withholding notices can be assessed up to $100 for each failure, not to exceed $50,000 for the calendar year. (Before the SECURE Act, the penalty was $10 for each failure, not to exceed $5,000.) So, what do these new rules mean to you? Well, it’s more important than ever to file your forms in a timely manner—or face significant financial repercussions. To make it easier for you, Betterment helps you prepare your Form 5500—and offers the support you need throughout the process. 6. Higher required minimum distribution (RMD) age Prior to the passage of the SECURE Act, employees needed to take RMDs from their IRAs and qualified employer-sponsored retirement plans (like 401(k)s) at age 70 ½. Now, they can take them beginning at age 72—allowing extra time for earnings to potentially accumulate. This is great news for retirement savers who now have more opportunity to accumulate the lifetime income they need. It’s important to note that unlike Traditional IRAs and 401(k) plans, there are no RMDs for Roth IRAs during the account owners’ lifetime. So if employees have a Roth 401(k) account, they can roll it into a Roth IRA, avoid taking RMDs, and continue building lifetime income. 7. Penalty-free withdrawals for birth/adoption expenses and student loan payments Offering a welcome financial respite, the SECURE Act provides provisions for two brand-new penalty-free distributions: Birth or adoption—Now people can withdraw up to $5,000 from their qualified retirement accounts—without paying the usual 10% early withdrawal penalty—to cover expenses related to a birth or adoption. However, account owners will still be liable for the applicable income taxes, including those for any capital gains. Student loan payment using 529 plan—Now, people can use their 529 plan to pay the costs of apprenticeship and student loan payments. Specifically, account owners can withdraw up to $10,000 during the beneficiary and their siblings’ lifetimes. For example, a family with three children can take a $10,000 distribution to pay student loans for each child—for a total of $30,000. However, it’s important to note that any student loan interest that’s paid with tax-free 529 plan earnings can’t also be claimed as a tax deduction. Both of these new penalty-free distributions offer more flexibility to pay for important lifetime expenses. With this newfound freedom, individuals have greater opportunity to pay down debt and gain more secure financial footing. 8. Required retirement projections for employees Rather than just reporting a lump sum of what employees have saved, retirement plans will now be required to project expected income at retirement. With this retirement income projection, employees will have a better idea of what their future will look like (and whether they’re on—or off—track for retirement). While the retirement income projection requirement is a new rule, Betterment for Business already offers this level of insight for current 401(k) plan participants. In fact, our intuitive investment platform ensures that employees can get advice on all of their financial goals in one place. We aim to help employees set a clear, realistic retirement goal and stay on track to achieve that goal. In this way, it is an elaboration on the fundamentals of our goal-based approach to financial planning. We aim to include the following components of retirement planning: Projecting an estimate of desired spending in retirement -- We use several factors to help estimate retirement spending, including how earned income will grow over time, what the local cost of living will be like, and what an individual’s spending habits look like before retirement. Determining the total pre-tax savings amount likely needed to achieve that spending level with high confidence -- we can figure out the total amount an individual should have saved by the time of their desired retirement date to have a 96% chance of success they will not run out of money during retirement. Considerations include expected lifespan, other retirement income sources, and taxes. Calculating how much should be saved during each period prior to retirement -- The savings amount required depends on how much time remains until retirement age, the level of risk someone is willing to bear in order to pursue higher returns, and how much certainty they feel they need to hit that balance. Prioritizing which retirement savings vehicles are likely to be most efficient -- Prioritizing which accounts people save into depends on their specific tax situation and access to retirement accounts. Our recommendation for retirement goals only incorporates the external accounts that an employee has synced and any Betterment accounts within their Retirement goal. As always, we recommend individuals contact a qualified tax advisor to understand their personal situation. 9. New regulations for pooled employer plans Starting in 2021, unrelated companies can join a single Pooled Employer Plan (PEP) in an effort to access greater economies of scale and cost efficiencies. Prior to the new rules, “open” Multiple Employer Plans (MEPs) existed; however, there were concerns about how the DOL viewed them. This new regulation solidifies PEPs as an option for employers who are looking to lower their fees, reduce their fiduciary liability, and offer their employees a higher quality retirement plan. However, Betterment offers the key benefits of a pooled employer plan—lower fees and reduced fiduciary liability—with less complexity and greater personalization. Here’s how: Lower fees: Fees on Betterment plans are some of the lowest available, so there’s no need to compromise on a pooled plan that may not meet all of your needs or provide the flexibility you may want. Reduced fiduciary liability: We serve as a 3(16) administrative fiduciary and 3(38) investment fiduciary to your plan. This limits your risk exposure and allows you to focus more of your time on running your business--not your plan. Greater personalization: We’ll partner with you on your 401(k) plan design so you can tailor it to meet your company’s needs—from adding a safe harbor provision to electing an automatic enrollment feature. Don’t your employees deserve a better 401(k) plan? Get the Betterment 401(k) plan. 10. Deadline filing extension The SECURE Act also impacts the deadline for employers to establish a new 401(k) plan. Specifically, it extends this date from the last day of the tax year (December 31) to the due date of the tax return (April 15 of the next year). That’s good news for employers because you have an extra 3.5 months to set up a plan! Thinking about setting up a plan? Betterment can help tailor the plan that’s right for you. Want to learn more? We can help. The SECURE Act retirement bill contains 30 sections in all, which you can read about in more detail here. However, if you don’t want to sift through these dense regulations on your own, Betterment can help. As a full-service provider, we aim to make life easy for you by assisting with everything from compliance testing to plan design consulting. Not only do we provide highly optimized 401(k) plans, we also offer your employees high-tech retirement planning, a big picture view of their finances, and personalized advice—all at a fraction of the cost of most providers.