CARES Act Provisions Affecting Employee Benefit Plans

CARES Act Provisions Affecting Employee Benefit Plans

Employee benefit plans are impacted by the CARES Act. Here’s what you need to know about coronavirus-related plan distributions and which of your employees may qualify for them

CARES Act Provisions Affecting Employee Benefit Plans

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress. The CARES Act provides immediate and temporary relief for retirement plan sponsors and their participants with respect to employer contributions, participant distributions and participant loans.

The provisions of the CARES Act may be effective and operationalized immediately, prior to amending the plan document. Plan amendments are not required until December 31, 2022.

Plan amendments for for coronavirus-related distributions

The Act provides that qualified defined contribution plans may be amended to allow participants to take up to $100,000 “coronavirus-related distributions” prior to the end of 2020. The distributions are exempt from the 10% early withdrawal penalty and taxable over three years. Participants can take up to three years to repay all or any part of those distributions. The repayment would be treated as a tax-free rollover when repaid to the plan.

Coronavirus-related distributions from defined benefit plans would not be permitted because of the in-service distribution restrictions generally applicable to such plans.

Repayments delayed

The Act increases the maximum permissible plan loan amount to $100,000 or 100% of a participant’s vested account balance (whichever is less) for individuals who qualify for a coronavirus-related distribution. The Act delays for one year repayments for currently outstanding plan loans that are due during the remainder of 2020 for those individuals who qualify for a coronavirus-related distribution.

A “coronavirus-related distribution” is a distribution made in 2020 to an individual who is diagnosed with COVID-19, has a spouse or dependent diagnosed with COVID-19, or experiences adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, or the closing or reducing hours of a business owned or operated by the individual due to COVID-19.

The Act also extends the due date to January 1, 2021 for all 2020 minimum required employer contributions for single-employer defined benefit plans.

Concerned about your employee benefit plan?

If you have further questions or concerns about employee benefit plans, contact Qiming Liu at [email protected] or 201-655-7411. You can also check our Coronavirus Resources Page for more updates.

Partial Termination of an Employee Benefit Plan

If your company has an employee benefits plan, here’s how it may be impacted if you’ve had to reduce staff during the recent economic downturn.

Employee reduction during the coronavirus pandemic will affect an employee benefit plan (“Plan”) differently depending on whether employer chooses to layoff or furlough employees. While a furlough is a temporary leave of absence from work, a layoff is a permanent separation from employment.

Furloughs vs. layoffs

Furloughed workers do not receive a paycheck, but are still considered employees; therefore, the furlough does not affect your Plan. Laid off workers on the other hand are no longer considered part of the company and your Plan can be partially terminated.

Your Plan may havePartial Termination of an Employee Benefit Plan a partial termination if more than 20% of your total Plan participants were laid off in a particular year. Partial terminations can occur in connection with a significant corporate event such as a closing of a plant or a division, or as a result of general employee turnover due to adverse economic conditions or other reasons that are not within the employer’s control.

Employers should consult with their ERISA attorneys on whether their Plan has been subject to a partial termination under the law as soon as they expect layoffs of more than 20% of total Plan participants.

Affected employees and partial terminations

The law requires all “affected employees” to be fully vested in their account balance as of the date of a full or partial plan termination. They must become 100% vested in all employer contributions (including matching contributions) regardless of the plan’s vesting schedule. Employee salary deferrals are always 100% vested.

An affected employee in a partial termination is generally anyone who left employment for any reason during the Plan year in which the partial termination occurred and who still has an account balance under the Plan. Some Plans wait until an employee has five consecutive 1-year breaks in service before he or she forfeits their nonvested account balance. For these Plans, employees who left during the Plan year of the partial termination and who have not had five consecutive 1-year breaks in service are affected employees.

The IRS can potentially disqualify the Plan if companies fail to fully vest terminated employees, which would result in underpayments to former participants.

Get help with your employee benefit plan

If you have further questions or concerns about employee benefit plans, contact Qiming Liu, CPA, at [email protected] or 201-655-7411. You can also check our Coronavirus Resources Page for updates related to the pandemic’s impact on individuals and businesses.

Now Is the Time To Revisit Your Estate Plan

COVID-19 has made estate planning even more complicated. Here’s what you need to know now.

The physical and financial health challenges caused by the COVID-19 pandemic gave us time to rethink our priorities and expectations. Estate planning is one area that has received a lot of attention, and for good reason. Here are three basic areas to review as you reassess your estate plan:

Now Is the Time To Revisit Your Estate PlanDocument review: Are the papers in place?

The COVID-19 crisis has caused many people to recognize that things can happen unexpectedly that turn your life upside down. Review your estate plan — or create one if you don’t have one in place. The documents that should be reassessed include the following:

  • Your health care directive. This document, which is sometimes called by different names, memorializes your wishes concerning your medical treatment should you become ill or incapacitated. It includes directives about your end-of-life wishes as well as other decisions about your care and treatment. It also names the individuals you want to act on your behalf if you are incapacitated and gives them the right to access your medical records. The latter point is especially important because without a legal document in place, privacy laws may prevent a hospital or doctor from releasing your records to them.
  • Your durable power of attorney. This document allows you to designate an agent to access your assets and act on your behalf regarding financial decisions if you are incapacitated.
  • Your will and trusts. Reviewing these documents is especially important if there have been changes in your family or financial situation since the documents were originally executed.

Financial review: Make sure you’re on track

Historically low interest rates make this a good time to review the financial aspects of your estate plan. Some tax planning strategies have become more advantageous because of the current financial and economic environment. These include:

  • Considering intra-family loans to children or certain trusts. The interest rate for these loans uses the applicable federal rate, which is the lowest interest rate that can be charged on a loan. The proceeds of the loan can be used for purposes ranging from purchasing company shares to funding a mortgage. There are pros and cons to these loans that need to be considered, but overall they can be very attractive at current interest rates.
  • Creating one or more grantor-retained annuity trusts allows the grantor to transfer assets to a trust for a term of years in exchange for an annual annuity. This annuity is taxed at the IRC § 7520 rate, which is based on the AFR.
  • Converting a traditional IRA to a Roth IRA is another consideration, since the income tax on the conversion is based on the IRA’s value at the time of conversion. Doing the conversion when the assets’ value is lower can substantially reduce the income tax cost.

Seek expert advice

All these aspects are complicated. Before making any decisions, be sure to discuss your specific situation with your financial and legal advisors. Your specific goals and circumstances will guide the decisions that are best for you, your family and your beneficiaries. But one thing is certain — when the times change, your circumstances do too. Remember, KRS CPAs is available to help with your estate planning.

Personal Bankruptcy: Making Hard Decisions

For debtors drowning in bills, bankruptcy can seem like the only solution. But they must first exhaust other possibilities first.

Personal Bankruptcy: Making Hard DecisionsKey steps to take before pursuing bankruptcy include:

  • Speaking with a legitimate credit counseling agency.
  • Seeing if they can work something out with their creditors. If they declare bankruptcy, the creditors may get little or nothing, so creditors have an incentive to be flexible.
  • Considering whether they can sell something. Do they need that second car, for example?
  • Trying to get a second job. Even a few hours a week can make a difference.

However, sometimes individuals get so deeply in debt that there’s no way they can realistically pay it off. They have been unable to negotiate further with their creditors and their liabilities exceed their assets. At that point, they should talk with attorneys and financial professionals about getting a fresh start with bankruptcy.

Filing for personal bankruptcy

Bankruptcy comes with long-lasting and serious implications, so filing should be a last resort. Credit cards and all kinds of loans, including mortgages, may be impossible to obtain for many years. Once the decision is made, the debtors file under either Chapter 7 or Chapter 13, based on their situation and a variety of other factors.

In a Chapter 7 bankruptcy, the court appoints a trustee to liquidate assets to pay creditors according to an established priority list. After the assets are gone, the court discharges the debts — the debtor is not on the hook for them. However, the debtor will likely still have to pay alimony, child support, certain government debts, income taxes and federal student loans.

A Chapter 13 bankruptcy is less severe: Debtors create a plan to reorganize their finances and gradually pay back creditors over three to five years. The court must approve the plan, and the debtor will give the monies to a court-appointed trustee, who will distribute them to the creditors according to the plan. A particular advantage of a Chapter 13 bankruptcy is that it can allow the debtors to retain their homes, if the approved plan includes mortgage payments.

Retirement plans protected

One advantage of either kind of bankruptcy is that retirement plans are protected. ERISA-governed qualified plans, such as 401(k) plans, are off the table in a bankruptcy proceeding. Debtors can keep them in their entirety. Non-ERISA qualified plans such as IRAs are partially protected — funds under a certain amount (currently about $1.3 million) are safe, but the rest can be used to satisfy debts. Also, debtors who owe back taxes to the government, or alimony or child support, may find the government can seize funds “hidden” in retirement plans.

We’ve got your back

This is just a summary of a complex process with many rules and exceptions. The bottom line is that debtors are not financial experts and are further hampered by the emotional turmoil that comes with their situation. They should not make any decisions regarding bankruptcy without talking with qualified professionals, who can dispassionately explain their options.

If you are considering bankruptcy, reach out to the professionals at KRS CPAs who can help you through the process.

SBA Issues More Regulations for PPP

Paycheck Protection Program loan guidance

The U.S. Small Business Administration (SBA) issued more regulations for the Paycheck Protection Program (PPP).

The new regulations relate specifically to loan disbursement and corporate group eligibility.

Loan Disbursement

  • The disbursement of the PPP loan proceeds by the lender to the borrower must be done within ten (10) days of loan approval and in one disbursement.
  • Lenders are required to cancel an approved, undisbursed loan if the borrower has not submitted the required loan documentation within twenty (20) days of loan approval.

Corporate Group Eligibility

  • The aggregate amount of PPP loans that any single corporate group may receive is now limited.
  • A single corporate group (businesses that are majority owned, directly or indirectly, by a common parent) may not receive more than $20 million of PPP loans in the aggregate.
  • The limit will apply to any loan not yet fully disbursed as of April 30, 2020.
  • The borrower is responsible to notify the lender if the aggregate limit applied for or received has been exceeded, and to withdraw or request cancellation of any PPP loan application or approved loan not in compliance with the aggregate limit.
    • Failure by the applicant to do will be considered an unauthorized used of PPP funds and the loan will be deemed unforgivable.
  • The single corporate group rule is in addition to the affiliate rules and limitations.

KRS professionals are available and happy to assist with loan and grant applications. We continue to update our Coronavirus Resources Page. Please contact us if you have any questions, concerns, or need advisement during this unprecedented time.

IRS Clarifies Deductible Expenses

Updated IRS rules offer guidance for deductible expenses which may have been murky as a result of the Tax Cuts and Jobs Act

IRS provides guidance on deductible expensesThe rules being updated involve using optional standard mileage rates when figuring the deductible costs of operating an automobile for business, charitable, medical or moving expense purposes, among other issues.

The full details are available in Revenue Procedure 2019-46 and Revenue Procedure 2019-48.

There are more succinct rules to substantiate the amount of an employee’s ordinary and necessary travel expenses reimbursed by an employer using the optional standard mileage rates. But know that you’re not required to use this method and that you may substantiate your actual allowable expenses, provided you maintain adequate records.

Miscellaneous itemized deductions clarified

The TCJA suspended the miscellaneous itemized deduction for most employees with unreimbursed business expenses, including the costs of operating an automobile for business purposes. However, self-employed individuals and certain employees, armed forces reservists, qualifying state or local government officials, educators, and performing artists may continue to deduct unreimbursed business expenses during the suspension.

The TCJA also suspended the deduction for moving expenses. However, this suspension doesn’t apply to a member of the armed forces on active duty who moves pursuant to a military order and incident to a permanent change of station.

Entertainment vs. food & beverage expenses

The IRS has also made it clear that the TCJA amended prior rules to disallow a deduction for expenses for entertainment, amusement or recreation paid for or incurred after Dec. 31, 2017. Otherwise allowable meal expenses remain deductible if the food and beverages are purchased separately from the entertainment, or if the cost of the food and beverages is stated separately from the cost of the entertainment.

More resources from KRS

KRSCPAS.com is accessible from your mobile device and is loaded with tax guides, blogs, and other resources to help you succeed. Check it out today!

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What To Know About Getting a Tax Refund

Is your tax refund slow in arriving in your mailbox or bank account? One of these may be the culprit.

What To Know About Getting a Tax RefundIn a recent statement, the IRS noted that most taxpayers are issued refunds by the IRS in fewer than 21 days. If yours takes a bit longer, here are six things that may be affecting the timing of your refund:

  • Security reviews—The IRS and its partners continue to strengthen security reviews to help protect against identity theft and refund fraud. Your tax return may be receiving additional review, which makes processing your refund take a bit longer.
  • Errors—It can take longer for the IRS to process a tax return that has errors. Fortunately, electronic filing has reduced the number of errors, which are more common in paper returns.
  • Incomplete returns—Here again, electronic returns make the most sense. It takes longer to process an incomplete return. The IRS contacts a taxpayer by mail when more info is needed to process the return.
  • Earned income tax credit or additional child tax credit—If you claim the earned income tax credit (EITC) or additional child tax credit (ACTC) before mid-February, the IRS cannot issue refunds as quickly as others. The law requires the IRS to hold the entire refund. This includes the portion of the refund not associated with EITC or ACTC.
  • Your bank or other financial institutions may not post your refund immediately—It can take time for banks or other financial institutions to post a refund to a taxpayer’s account.
  • Refund checks by mail—It can take even longer for a taxpayer to receive a refund check by mail. Direct deposit is a better bet.

The IRS Explains

In an unusually poetic statement, the IRS explains that “tax returns, like snowflakes and thumbprints, are unique and individual. So too, is each taxpayer’s refund.” So keep this in mind. Fortunately, you can track your refund status online by entering your Social Security number and other key information.

KRSCPAS.com is accessible from your mobile device and is loaded with tax guides, blogs, and other resources to help you succeed. Check it out today!

Form W-4: What Changed and Why it Matters

Form W-4 was revised after the 2017 Tax Reform Act. Here’s what you need to know to complete it accurately.

Form W-4 is completed by employees to advise their employers of the amount of federal income tax to withhold from their paycheck. Your employer will then remit the money withheld to the IRS along with your name and social security number. The tax withheld will be applied against your total income tax liability when you file your tax return in April.Form W-4: What Changed and Why it Matters

In the past this has been a relatively simple and straightforward form to complete. However, the Form W-4 has been changed as a result of the passing of the TCJA back in late 2017.

Revised W-4 adds more detail

The major factor here is that the passing of the TCJA has gotten rid of all personal and dependent exemptions which affects the necessary and required amount of tax that needs to be withheld from your paycheck.

The revised Form W-4 issued by the IRS was intended to assist employees in making a more accurate determination of their income tax withholding needs based on the tax law changes. This new form is more detailed and includes various sections of specific withholding related information to help guide employees in accurately calculating the proper withholding amount.

Page one of this form includes questions relating to the various sources of income you may have, dependents you can claim, and other income affecting adjustments. Step One involves providing general personal information as seen on the previous form. You will list your name, address, social security number, and filing status. The following steps two through four should only be completed if they apply to you.

Form W-4 Step One
Step Two is for persons who work multiple jobs and have working spouses. There are three different methods to accurately calculate what the proper withholding should be based on your situation. You will need to calculate the correct amount of withholding based on the income earned from all jobs.

Form W-4 Step Two
Step three accounts for certain tax credits associated with claiming dependents. Step four allows you to use your discretion to make any other adjustments to your withholding based on other income, deductions, and extra withholding that you may need to consider.

Form W-4 Step ThreeThese form changes have been implemented as a response to the withholding issues that arose during the first year of the new tax law changes.

We’ve got your back

Tax season is getting underway. Are you ready? Trust KRS CPAs to help you with your tax strategy and preparation. Contact me at [email protected] or 201.655.7411 to learn more.

Sources:

https://www.cicplus.com/w-4-changes-for-2020/
https://www.irs.gov/pub/irs-dft/fw4–dft.pdf
https://www.staffone.com/resources/w-4-forms/

Determining Basis of a Principal Residence

Selling your home? Understand ‘basis’ to save tax dollars.

Determining Basis of a Principal Residence
You are probably aware you may be able to claim itemized deductions on your income tax return for real estate taxes and home mortgage interest. Most other home ownership costs are not currently deductible. However, many of these costs will increase your “basis” in the home.

For instance, if part of the home qualifies as a home office or if you rent out a portion of the house, a higher basis translates into a larger annual depreciation deduction. A higher basis can also save tax dollars when you sell the home.

Gain Exclusion

The tax law allows an exclusion from income for the part of the gain realized on the sale of one’s home. The exclusion is $250,000 for single and $500,000 for most married taxpayers.

Some practitioners feel the amount of the exclusion makes keeping track of the basis in the home relatively unimportant. I disagree, as more homes are being sold for greater than $500,000, and more are being sold for gains approaching that amount.

Costs That Are Basis and Additions to Basis

To be able to prove the amount of your basis, you must keep accurate records of your purchase price, closing costs and other purchase expenses, and any later expenses that increase your basis.

Save receipts and other records for all improvements and additions made to your home. Since this is likely to continue for a long period, you should keep these documents together in a folder or binder with a summary list from which you can easily determine your basis at any time. When you eventually sell your home, your basis will establish the amount of your gain. The supporting documentation should be kept for at least three years after you file your return for the sale year.

The principal element in the basis of your home is its purchase price. If you contract to have your house built on land you own, the basis is the cost of the land plus the amount it cost you to complete the house. This includes the cost of labor and materials, or the amounts paid to the contractor, and any architect’s fees, building permit charges, utility meter and connection charges, and legal fees directly connected with building the home.

If you build all or part of the house yourself, basis includes the total amount it cost you to complete it. Basis will not include the value of your own labor, or any labor you didn’t pay for.

Costs That Don’t Add to Basis

Amounts spent on the home that do not add to either the value of the life of the property, but rather keep the property in good condition, are considered repairs, not improvements, and cannot be added to the basis of the property. Repairs include:

  • interior or exterior repainting,
  • fixing gutters or floors,
  • repairing leaks or plastering, and
  • replacing broken window panes.

However, an entire job is considered an improvement if items that would otherwise be considered repairs are done as part of extensive remodeling or restoration of the home.

The cost of appliances purchased for the home generally don’t add to basis unless the appliance is considered attached to the house. Thus, the cost of a built-in oven or range would increase basis. However, an appliance that can easily be removed, such as a television set or home entertainment center, would not.

Need Help Determining Your Home’s Tax Basis?

Put the Real Estate Tax Guy on your team. For additional information on the basis of your home, contact me at [email protected] or (201) 655-7411.

Adjusting Your Income Tax Withholding

Adjusting Your Income Tax WithholdingWhen should you revise your tax withholding?

If you receive a large refund from the IRS when filing your income tax return, or owe the IRS a substantial amount when filing, you should consider adjusting your income tax withholding.

Your income tax withholding is based on the number of allowances you claim on your Form W-4, Employee’s Withholding Allowance Certificate. This form is typically filled out when you first start a job with your employer. This determines the amount of income tax that comes out of your paycheck each pay period.

If your withholding is too high, you are, in effect, giving the IRS an interest free loan. Although the overpaid tax will be refunded when you file your return, it would have been better for you to have access to these funds throughout the year. In this case, you should reduce the amount your employer withholds to increase your pay in your paycheck.

Do you owe the IRS too much?

On the other end, there are taxpayers who owe the IRS large balances when filing their taxes. Yes, they have access to their money all year long, but they will have to pay this back on April 15th. Most of the time, this repayment comes with tacked-on interest and penalties from the IRS.

It is your responsibility to change your withholding with your employer. At any time, you can provide them with an updated Form W-4 and adjust your withholding.

When to review your withholding

You should check your withholding anytime there is a significant financial change in your life, including the following:

– You getting married, divorced, or having children.
– Increase or decrease in working wages.
– You or your spouse start or stop working, start a second job.
– Changes in deductions such as: buying house, paying for child care, medical expenses.

It is never too late to change your withholding for the current year. If you believe that you may be substantially over or under withheld, you can make the necessary adjustments to correct that. This is one of the more complex issues that a taxpayer faces.

We’ve got your back.

If you think your situation calls for a withholding adjustment, please contact us today. Contact KRS manager Lance Aligo, CPA, MAS at [email protected]  or 201-655-7411.