Required Testing and 5500:
If your Plan Year ends on 12/31 and is subject to required testing, you should expect to receive a data request from your service provider. The accuracy and timeliness of this information determines the accuracy and timeliness of your Testing. This information then flows through to your Plan’s Tax Form 5500 if required.
Required Automatic Enrollment of Employee Deferral Contributions:
Starting January 1, 2025, most new 401(k) and 403(b) Plans established after December 29, 2022, must automatically enroll eligible employees at an initial rate of at least 3% but not more than 10% of pay.
The deferral rate for continuing participants must increase by at least 1% per year, up to at least 10% but not more than 15%. Unless the employees choose to opt out of automatic enrollment or any annual increases. Employees must have at least 90 days to opt out and take a distribution of any automatic deferrals, using the EACA feature.
This does not apply to:
- New businesses that have been in business for less than three years. Once a new business has existed for three years, it is no longer exempt from the requirements. At that time, the Plan must begin automatically enrolling the eligible employees.
- Small businesses that normally employ ten or fewer employees. However, once a small employer normally employs more than ten employees, it is no longer considered a small employer and is no longer eligible for the exception. The requirements are effective one year after the year in which the employer normally employs over ten employees.
- Governmental Plans, church Plans or SIMPLE 401(k) Plans
- 401(k) and 403(b) Plans in existence before December 29, 2022
Required Offering of Employee Deferral Contributions to Part Time Employees:
Do you employ part time employees that work at least 500 hours a year on average? Does your Plan have eligibility that would normally exclude them from Participation? Thanks to the SECURE Act they may now be eligible to participate for Employee Contributions.
Prior to 2024, 401(k) Plans could exclude part-time employees if they did not work at least 1,000 hours of service in a 12-month period or were under age 21. These rules have prevented many part-time employees from the opportunity to participate in 401(k) Plans.
The SECURE Act provided relief by requiring Plans to permit any employee who has worked at least 500 hours in three consecutive 12-month periods (but excluding periods before 2021), and who is age 21 or older by the end of the three-year period, to start making elective deferrals. This allowed many previously ineligible part-time employees hired in 2021 or earlier to start participating on January 1, 2024.
In SECURE 2.0, Congress kept the age-21 requirement but shortened the consecutive 12-month periods from three to two (but excluding periods before 2023). This means many part-timers hired in 2023 or earlier and not already eligible will be able to start saving as of January 1, 2025.
What to Avoid Regarding Front Loading Employee Deferrals and Per Payroll Match:
If your Plan offers a Matching Contribution per Payroll, you may miss out on Match monies if you do not spread your Employee Deferrals over the entire Plan Year and the Plan does not offer a True up Calculation at year end. This is because most payroll systems and providers turn off the Match feature once Deferrals are stopped.
Required Minimum Distribution (RMD) Reminders:
- Roth Account owners are not subject to RMDs over their lifetime.
- The RMD starting age is 73 from 2025 through 2031.
- If the still working exception is being used to delay RMDs from an eligible account, the RMD is due 4/15 following retirement rather than 12/31.
- The maximum penalty for missing the RMD deadline has been reduced to 25% (or 10% in certain situations).
Inherited RMD Reminders:
Beneficiaries must take RMDs in 2025 as the penalty is no longer available.
Beneficiaries must generally empty the account within 10 years of the account owner’s death.
- Any penalty waivers that were used in prior years had no impact on this 10-year clock.
Beneficiaries must generally take annual RMDs if the original account holder passed after the required beginning date (RBD).
- Roth account owners are treated as having passed away before their RBD.
529 to Roth Rollover Reminders:
The SECURE Act created a new option for unused 529 funds to be rolled over to a Roth IRA.
529 to Roth Rollover Criteria:
- The 529 Plan must have been maintained for at least 15 years.
- Any contributions made within the past five years (and earnings on those contributions) are ineligible to be moved into the Roth IRA.
- $35,000 lifetime limit per beneficiary.
- The Roth IRA must be in the name of the beneficiary of the 529 Plan.
The annual limit on the rollover is the lesser of:
- The IRA contribution limit for the year less any other IRA contributions; or
- The beneficiary’s earned income for the year
- The beneficiary’s income is otherwise irrelevant.
Only a Plan-to-Plan or a trustee-to-trustee rollover are allowed.
Retirement Plan Tax Credits Available:
There are four credits available, each with their own criterion. One is for the cost of setting up a new Plan, one is for Employer Contributions funded (cannot deduct amounts and take credit), one is for providing a benefit to Military spouses, and one is for offering automatic enrollment for the deferral feature of the Plan.
Tax Credits for setting up new Retirement Plans should be reported on Form 8881 and filed with the tax return.
Additional details can be found here: https://www.irs.gov/retirement-Plans/retirement-Plans-startup-costs-tax-credit.
Be Sure to Update Your Beneficiary:
The simplest way to avoid probate court for your family is to keep your Retirement Plan Beneficiary form up to date.
Your 403(b) Plan Requires Most Employees to Participate in Employee Contributions Immediately:
A 403(b) plan must satisfy the universal availability requirement with respect to elective deferrals. All Employees of the Employer must be eligible to make Elective Deferrals if any employee has the right to do so, with certain limited exceptions. Certain part-time employees may be excluded from eligibility to make elective deferrals.
For more information, contact Heather Sinclair-Smelley at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Employee Benefit Plans Services. Sign up here to receive our blogs, newsletters and Client Alerts.