QUESTION: Our company has always shied away from providing advice to participants regarding their personal retirement planning. We are concerned, however, that employees may not have sufficient information and professional advice to make good retirement planning decisions, so we would like to start making retirement planning services available. If we do, will those services be taxable, adding to our cost and administrative burden?
ANSWER: Retirement planning benefits are not taxable to employees if they meet the requirements of the exclusion for “qualified retirement planning services” in Code § 132(a)(7). The federal tax exclusion applies to the fair market value of any employer-provided retirement planning services—regardless of any amount employees contribute to the cost. The value of the services is also excluded from each employee’s wage base for employment tax purposes (e.g., income tax withholding and FICA).
In some circumstances, other fringe benefit exclusions may apply, but the Code § 132(a)(7) exclusion is the primary basis for excluding retirement planning benefits and—because it is likely to be sufficiently broad to cover the services you envision—we focus here on that exclusion.
“Qualified retirement planning services” include any retirement planning advice or information provided to an employee and the employee’s spouse by an employer maintaining a “qualified employer plan,” a term which includes tax-qualified plans and certain employer-sponsored IRAs. There are no regulations regarding the exclusion and no further statutory guidance regarding what constitutes “retirement planning advice or information,” so the precise scope of the exclusion is not clear. But we do know that the exclusion includes, and is not limited to, advice and information about the employer’s qualified plan; general advice and information on retirement; and information about how the employer’s plan may fit into an employee’s overall individual retirement income planning. The exclusion does not apply to services that might be related to retirement planning, such as tax preparation, accounting, legal, or brokerage services.
The lack of guidance defining excludable retirement planning services raises some interesting line-drawing questions. For example, what is “retirement” for purposes of the exclusion? And when is financial planning related enough to retirement to be excluded? If, for example, an employee cannot begin saving for retirement until outstanding debts are paid, could debt-reduction counseling be part of an employee’s retirement plan? Before settling on an advice provider, you should consider whether the provider’s services will enter these or other gray areas and, if they might, consult with your advisors to discern the boundaries of what your company can treat as excludable.
Note that the exclusion only applies to benefits received by highly compensated employees if the benefits are available “on substantially the same terms to each member of the group of employees normally provided education and information regarding the employer’s qualified employer plan.” For this purpose, “highly-compensated employee” has the same definition as it has under the retirement plan nondiscrimination rules. If you decide to provide the same retirement planning services to all plan participants, this rule should not be a concern.
Before you design and implement a retirement planning benefit, you will also need to understand how the benefit may be affected by the rules governing ERISA fiduciaries. Those rules—which (among other things) establish a crucial distinction between education and advice—are complex and beyond the scope of this answer, so be sure to consult legal counsel about them as you move forward.
For more information, see EBIA’s Fringe Benefits manual at Section XXIV.C (“Qualified Retirement Planning Services”). See also EBIA’s 401(k) Plans manual at Section XXVI.I (“Providing Investment Advice to Participants”).
Contributing Editors: EBIA Staff.