Even though the holidays loom large in most people’s minds this time of year, retirement plan sponsors and participants also need to keep an eye on the fast approaching Dec. 31 deadline for certain moves they’ll want to make with their 401(k)’s or other retirement plans.
Sponsors and participants that meet their deadlines can maximize retirement plan flexibility while also complying with tax code mandates. Conversely, a failure to act by Dec. 31 could cause the loss of certain tax advantages or land the offender in hot water with the IRS.
Here’s a partial to-do list for participants and plan sponsors as 2017 comes to a close.
Getting Money Into or Out of the Plan
For plan participants, key concerns center on putting money into their retirement accounts by Dec. 31, and the clock is also ticking for some retirees to take money out of their retirement plans. For instance, participants should pay attention to:
• Catch-up contributions;
• The retirement savers’ credit; and
• Required minimum distributions.
Catch-up contributions are basically extra amounts employees can contribute to their 401(k) accounts once they reach age 50. For younger employees, the maximum pre-tax contribution in 2017 is $18,000, but employees eligible to make catch-up contributions can put an additional $6,000 into the plan.
That not only translates to a bigger retirement nest egg, it also enables eligible employees to reduce their 2017 taxable income by a total of $24,000 if they contribute the full amount to their 401(k) plan.
The retirement savers’ credit, also known as the “Retirement Savings Contribution Credit,” provides low and middle income taxpayers with an income tax offset of up to 50 percent for the first $2,000 contributed to a retirement plan. The credit is available on a sliding income scale.
To recognize the savers’ credit on their 2017 taxes, eligible employees must have their elective salary deferrals in place so the contributions to their retirement plan occurs by Dec. 31, the IRS reminded taxpayers recently.
Required minimum distributions are something for retirees to pay attention to before year’s end. These are basically annual amounts that retirees must withdraw, converting some of the money they’ve socked away through the years into taxable income that Uncle Sam can take a bite out of.
In general, minimum required distributions commence once a retiree reaches 70½, although the start date can be delayed for individuals who continue working beyond that age.
The first year the requirement kicks in, the retiree must take a minimum distribution by April 1. After that, however, retirees can choose the timing as long as they withdraw the minimum required amount from the plan by Dec. 31.
Plan Sponsors’ Year-End Actions
Year-end deadlines also apply to certain actions by retirement plan sponsors, including the following:
• Making plan amendments, including those for partial annuities;
• Nondiscrimination testing; and
• Pension funding carryovers.
The process of making amendments becomes an issue whenever sponsors change their retirement plans. And for those plans that operate on a calendar-year basis, the deadline for reflecting any 2017 changes in the official plan documents will be Dec. 31.
Sponsors of defined benefit pension plans have another amendment deadline at year’s end if they want to introduce partial annuity distribution options.
There are anti-cutback rules under the Employee Retirement Income Security Act that prohibit plan sponsors from amending plan documents in ways that reduce plan participants' accrued benefits or eliminate optional forms of benefits. However, Treasury Department regulations grant limited relief for sponsors of defined benefit pension plans that wish to add partial annuity options, provided that the changes are reflected by Dec. 31 in amendments to the plan documents.
Such changes, if adopted by pension plan sponsors, basically add flexibility for plan participants in how they take accrued benefits, allowing them to receive a portion as an annuity and the remainder as a lump sum or other accelerated form.
Nondiscrimination Testing and Carryovers
For retirement plans to retain their tax-favored status under the Internal Revenue Code, they must be subjected to nondiscrimination testing at least annually to ensure they don’t function in a way that disproportionately benefits highly-compensated employees. For calendar-year plans, Dec. 31 will be the last day to complete any nondiscrimination testing that’s conducted on an annual basis.
The Dec. 31 deadline is also significant for pension sponsors with more money in their plans than what’s needed to satisfy minimum funding requirements. For pension plans that operate on a calendar-year basis, the sponsors have until the last day of the year to decide how they'll treat the "extra" funds, which can include carrying over a credit balance that they'll apply to minimum funding requirements in 2018.
Other to-do items will also vie for your attention as 2017 winds down, but try not to lose track of these retirement plan deadlines. The list is pretty short, and you can always check it twice to make sure you don't overlook anything. One last thing: Happy holidays to you and yours!
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