HMDA & CRA Adjustments Are Here The Powerful Role of Data in Community Bank Innovation President’s Message LEGISLATIVE PREVIEW 2024 • Issue 1 The Nebraska Independent Banker
INVESTMENT PRODUCTS Municipal Bonds Mortgage-Backed Securities Govt. & Agency Bonds Corporate Bonds Brokered CDs Money Market Instruments Structured Products Equities Mutual Funds ETFs FINANCIAL SERVICES Public Finance Investment Portfolio Accounting Portfolio Analytics Interest Rate Risk Reporting Asset/Liability Management Reporting Municipal Credit Reviews Balance Sheet Policy Development and Review Comprehensive SOLUTIONS 888-726-2880 FBBS believes the success of your team is the future of our firm. MEMBER FINRA & SIPC. INVESTMENTS ARE NOT FDIC INSURED, NOT BANK GUARANTEED & MAY LOSE VALUE. Lending Services Operational Services Audit Services The customer service that MIB provides to our community bank is exceptional. Tim Burns, our relationship manager, listens to our needs and helps our bank meet our goals. Their website protal we use for reports is very user-friendly and easy to navigate. We appreciate the relationship we have with MIB today! 800-347-4MIB mibanc.com MEMBER FDIC Tim Burns Jami Schmidt Jami Schmidt/CFO Henderson State Bank Henderson, NE WHY ? www.FBBSinc.com
4 ©2024 The Nebraska Independent Community Bankers are proud to present The Nebraska Independent Banker as a benefit of membership in the association. No member dues were used in the publishing of this news magazine. All publishing costs were borne by advertising sales. Purchase of any products or services from paid advertisements within this magazine are the sole responsibility of the consumer. The statements and opinions expressed herein are those of the individual authors and do not necessarily represent the views of Nebraska Independent Community Bankers or its publisher, The newsLINK Group, LLC. Any legal advice should be regarded as general information. It is strongly recommended that one contact an attorney for counsel regarding specific circumstances. Likewise, the appearance of advertisers does not constitute an endorsement of the products or services featured by The newsLINK Group, LLC. Nebraska Independent Community Bankers 1001 S. 70 Street, Suite 101 Lincoln, NE 68510 (402) 474-4662 nicbonline.com The Nebraska Independent Banker is a Publication of The Nebraska Independent Community Bankers Association Issue 1 • 2024 INSIDE TAKE A LOOK 12 14 NICB Executive Committee Chairman Rick Heckenlively Points West Community Bank Sidney Chairman Elect Dave Ochsner Commercial Bank Nelson Vice Chairman Jim Niemeier Citizens State Bank Friend President/CEO Dexter Schrodt Secretary Kelly Lenners First State Bank Nebraska Pickrell Treasurer Arnold Lowell CerescoBank Ceresco Immediate Past Chairman Corby Schweers Elkhorn Valley Bank Wayne 4 PRESIDENT’S MESSAGE Legislative Preview By Dexter Schrodt, President and CEO, NICB 6 FLOURISH Continuing the Climb for Our Communities By Rebeca Romero Rainey, President and CEO, ICBA 8 HMDA & CRA Adjustments Are Here By William J. Showalter, CRCM, Senior Consultant, Young & Associates Inc. 11 2024 ICBA Live 12 INNOVATION STATION The Powerful Role of Data in Community Bank Innovation By Charles E. Potts, Executive Vice President and Chief Innovation Officer, ICBA 14 Spread the Wealth Some Bond Sectors Performed Better Than Others in 2023 By Jim Reber, President and CEO, ICBA Securities 16 We Want to Feature You in Our Next Issue of The Nebraska Independent Banker! 17 IRS Issues Proposed Long-Term, Part‑Time Regulations By Ascensus 21 NICB Endorsed Partners 21 Associate Members 2024 22 February Bank Webinars
LEGISLATIVE PREVIEW By Dexter Schrodt, President and CEO, NICB PRESIDENT’S MESSAGE As the Nebraska Unicameral kicks off for a 60-day session, community banks find themselves at an essential juncture, eagerly anticipating the decisions that will shape the industry landscape in the coming year. As President & CEO of the Nebraska Independent Community Bankers, I stand at the forefront, representing the interests of our diverse membership and advocating for policies that foster growth and community prosperity. Nebraska’s community banks have long been the backbone of our state’s economy, serving local businesses, agriculture, and families with a personal touch that larger institutions often lack. This upcoming legislative session presents a unique opportunity to address the challenges and opportunities facing community banks, ensuring that they continue to play a vital role in Nebraska’s economic fabric. One of the key areas of focus for our association is pushing back against increased regulatory burden. While regulations are essential for maintaining a stable financial system, a balance must be struck to avoid stifling the growth and 4 NEBRASKA INDEPENDENT BANKER
As we approach the meat of the Nebraska legislative session, the NICB stands ready to engage with policymakers, legislators, and community leaders. personalized touch that community banks bring to the table. We advocate for a regulatory environment that recognizes the distinct characteristics of community banks and allows them to thrive without compromising the safety and soundness of the financial sector. Additionally, we are closely monitoring proposed changes to tax policies that could impact community banks and their customers. A fair and equitable tax structure is crucial for supporting local businesses and fostering economic development. Our association will be actively engaging with legislators to ensure that any tax reforms take into account the unique contributions of small businesses across the state. Furthermore, we recognize the importance of holding local public funds to a bank and their community. This session offers an opportunity to collaborate with policymakers on legislation that evens the playing field when it comes to other entities holding public funds for investment. By empowering the policymakers of local political subdivisions with the knowledge and skills to make informed investment decisions, we believe the fleeing of public funds to these other entities will be minimized. As we approach the meat of the Nebraska legislative session, the NICB stands ready to engage with policymakers, legislators, and community leaders. Our goal is to ensure that the policies enacted reflect the needs and aspirations of Nebraska’s community banks, fostering an environment where they can continue to thrive and serve as catalysts for local economic growth. In the spirit of collaboration and progress, we look forward to working hand-in-hand with legislators to build a future where community banks remain resilient and integral to the financial success of Nebraska. The 2024 legislative session is an opportunity for positive change, and the Nebraska Independent Community Bankers Association is committed to leading the charge for a vibrant and prosperous financial future in the Cornhusker State. WHERE COMMUNITY BANKS BANK Member FDIC Scan to call now Traci Oliver Eric Hallman Tara Koester As a bankers’ bank we strive to help with every level of service and expertise, covering anything from loan participations, merchant services, ATM/debit and much more. We aim to answer your questions with, “…yes, we can do that too!” www.bbwest.com Bankers’ Bank of the West NEBRASKA INDEPENDENT BANKER 5
CONTINUING THE CLIMB FOR OUR COMMUNITIES By Rebeca Romero Rainey, President and CEO, ICBA I recently came across a quote from the Pulitzer Prize-winning poet Theodore Roethke: “Over every mountain, there is a path, although it may not be seen from the valley.” As an avid hiker myself, it resonated because as you look up toward the climb ahead, you may not see the route, but you know it’s there — not unlike the situation we face in community banking today. As we enter 2024, we see a steep climb amid so many headwinds, including volatile interest rate and supervisory environments, emerging regulatory reforms, constant pressure on margins and more. Yet, with every step on the journey, we just get stronger. As we look back on 2023, we felt the impact of numerous challenges — failures of large, risky banks, fluctuating interest rates, increased In advocacy, education and innovation, we are working alongside you to power your potential and help you surmount the trials you face along the journey. FLOURISH 6 NEBRASKA INDEPENDENT BANKER
competition and more — and we not only survived but thrived. We championed new solutions like FedNow. We successfully advocated for the vast majority of community banks to be exempted from the FDIC’s proposed special assessment. We expanded our innovation programs, creating a center for community bank innovation. These previous experiences have positioned our strength, and today, as we climb toward that next peak, we’re honing new skills. Each step is an investment in the future to further fuel the community banking model. Our national campaign goes hand in hand with this work. By telling the compelling stories of the ways in which you make a difference, we’ll continue to bolster the work you do. In advocacy, education and innovation, we are working alongside you to power your potential and help you surmount the trials you face along the journey. And while this climb may be difficult, it will lead to new opportunities. As I reflect on my career, I realize some of the greatest learning moments were in the most challenging situations. That’s how I know community banks will find a way as an industry, as a network of community bankers, to find the right next step to provide for our communities. Rebeca Romero Rainey is the President and CEO of ICBA. Connect with Rebeca on X @romerorainey. Hikers will stand at the bottom of the peak and realize it looks a lot higher than it did when they were farther away, but they made the climb. As we take our first steps into 2024, it’s that same “bring it on” mentality that will continue to bring us strength and guide us. We’re ready to see what lies ahead, embrace the challenge and create forward momentum. Because while the path from the valley to the summit may be circuitous, community bankers will always continue the climb for the good of their customers and communities. SOCIAL ENGINEERING NETWORK MONITORING BY COMMUNITY BANKERS FORCOMMUNITY BANKS CivITas Bank Solutions was born from the needs voiced by community banks for affordable real-world technology and information security solutions. Anne Benigsen President David Philippi VP - Business Development Chris Tuzeneu VP – Information Security PENETRATION TESTING VULNERABILITY SCANS info@acivitas.com www.acivitas.com NEBRASKA INDEPENDENT BANKER 7
HMDA & CRA ADJUSTMENTS ARE HERE By William J. Showalter, CRCM, Senior Consultant, Young & Associates Inc. There are changes that arrived with the new year of 2024 to Home Mortgage Disclosure Act (HMDA) compliance for banks and thrifts in many areas. No, the Consumer Financial Protection Bureau (CFPB) is not repealing Regulation C or adding more detail to the required data we collect and report. The existing rule is still in place. The changes we will look at here are driven by the decennial (every 10 years) adjustments by the Office of Management and Budget (OMB) to geographic units used by the federal government, including the Census Bureau, for statistical purposes. The particular geographic units that impact bank and thrift HMDA compliance are Metropolitan Statistical Areas (MSAs) since they are a qualifying location factor for lenders in determining HMDA coverage. 8 NEBRASKA INDEPENDENT BANKER
The OMB’s changes will also have possible effects on bank and thrift compliance with the Community Reinvestment Act (CRA) in the drawing of institutional CRA “assessment areas.” These latest changes were effective when issued by OMB — July 21, 2023 — so they can impact 2024 HMDA coverage. OMB Action The OMB completed a process of delineating Core Based Statistical Areas (CBSAs) based on 2020 Census data and the American Community Survey and Census Population Estimates Program for 2020 and 2021. A CBSA is a geographic entity associated with at least one core of 10,000 or more population, plus adjacent territory that has a high degree of social and economic integration with the core as measured by commuting ties. The standards designate and delineate two categories of CBSAs: Metropolitan Statistical Areas and Micropolitan Statistical Areas. The general concept of a metropolitan statistical area is that of an area containing a large population nucleus and adjacent communities that have a high degree of integration with that nucleus. The concept of a micropolitan statistical area closely parallels that of the metropolitan statistical area, but a micropolitan statistical area features a smaller nucleus. The purpose of these statistical areas is unchanged from when metropolitan areas were first delineated: The classification provides a nationally consistent set of delineations for collecting, tabulating and publishing federal statistics for geographic areas. The new delineations are found in OMB Bulletin 23-01 by scanning the QR code. https://www.whitehouse.gov/wp-content/ uploads/2023/07/OMB-Bulletin-23-01.pdf HMDA Coverage Regulation C covers any “financial institution,” as defined by the regulation and its underlying HMDA statute. “Financial institution” means, in part, a bank, savings association or credit union that: • On the preceding Dec. 31, had assets in excess of the asset threshold established and published annually by the CFPB for coverage by HMDA, based on the yearto-year change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers, not seasonally adjusted, for each 12-month period ending in November, rounded to the nearest million — $56 million for 2024 HMDA coverage. • On the preceding Dec. 31, had a home or branch office in a Metropolitan Statistical Area (MSA). [Micropolitan Statistical Areas have no HMDA impact.] • In the preceding calendar year, originated at least one home purchase loan (excluding temporary financing such as a construction loan) or refinancing of a home purchase loan, secured by a first lien on a one- to fourfamily dwelling. • Meets one or more of the following two criteria: is federally insured or regulated; or the mortgage loan referred to in the previous bullet was insured, guaranteed or supplemented by a federal agency or was intended for sale to Fannie Mae or Freddie Mac. • Meets at least one of the following criteria in each of the two preceding calendar years: originated at least 25 closed-end mortgage loans that are not excluded by §1003.3(c)(1) through (10) or (c)(13), or originated at least 200 open-end lines of credit that are not excluded by the cited section of Regulation C. There are also similar qualification criteria for for-profit mortgage lenders that are not banks, thrifts or credit unions, which we will not detail here. The qualification criterion impacted by OMB’s action is the geographic one, the second bullet above. If a financial institution that otherwise meets HMDA coverage criteria has an office in an MSA on Dec. 31, then it is covered by HMDA for the following year. For many lenders, determining HMDA coverage is a one-time exercise (other than those who are right around the asset-size threshold). HMDA Impact In 2023, there was no impact on HMDA reporting because the new MSA delineations were not in effect on Dec. 31, 2022. However, they were in effect Dec. 31, 2023. If your institution has an office in any of the counties affected by the MSA changes, be sure to review how this action affects your HMDA compliance in 2024. CRA Impact MSAs affect the CRA compliance efforts of banks and thrifts, too. They come into play in drawing up an institution’s CRA assessment area (AA), as well as in the small business and small farm lending disclosure statements prepared by regulators annually for NEBRASKA INDEPENDENT BANKER 9
institutions reporting their data (all except for “small” retail banks and thrifts). The CRA rules require that an institution’s CRA AA generally consist of one or more MSAs or metropolitan divisions — using the MSA or metropolitan divisions boundaries that were in effect as of Jan. 1 of the calendar year in which the delineation is made — or one or more contiguous political subdivisions (e.g., counties, cities or towns). A CRA AA may not extend substantially beyond an MSA boundary or beyond a state boundary unless the assessment area is located in a multistate MSA. If a bank or thrift serves a geographic area that extends substantially beyond a state boundary, the bank must delineate separate AAs for the areas in each state. If a bank or thrift serves a geographic area that extends substantially beyond an MSA boundary, it must delineate separate AAs for the areas inside and outside the MSA. The regulators prepare annually, for each MSA and the nonmetropolitan portion of each state, an aggregate disclosure statement of small business and small farm lending by all institutions subject to reporting of that data (all except “small” retail banks and thrifts). Therefore, the redrawn MSA boundaries might have an impact on your institution’s CRA compliance. Each bank and thrift with the affected counties in its CRA AA should review its delineation to make sure that the changes do not require an adjustment to those delineations. If any adjustments are needed, they should be made by April 1 — when any updating of CRA public files must be accomplished (including the map of your CRA AA). The OMB Bulletin provides the six lists of statistical areas that are available electronically at the link stated previously or from the OMB website at www.whitehouse.gov/omb/information-for-agencies/bulletins/. The update, historical delineations and other information about population statistics are available on the Census Bureau’s website at www.census.gov/programs-surveys/metro-micro.html. William J. Showalter, CRCM, is a Senior Consultant with Young & Associates Inc. (www.younginc.com), with over 35 years of experience in compliance consulting, advising and assisting financial institutions on consumer compliance and compliance management issues. He authors and edits compliance publications and articles for Young & Associates. He can be reached at wshowalter@younginc.com. 800.228.2581 MHM.INC Now more than ever people want self-service options. With our core integrated ITMs we can make this a reality both in the lobby and in the drive-up of your branch. SELF-SERVICE BANKING 10 NEBRASKA INDEPENDENT BANKER
ICBA LIVE 2024 ICBA LIVE is the annual destination for thousands of community bankers, solution providers, and experts to exchange strategies and resources. Join us for three days of inspiration, learning, growing, and connecting. Share and gain ideas from your peers to power your potential as leaders in your bank and community. Learn more and register icba.org/LIVE2024. HELPING COMMUNITY BANKS FLOURISH
INNOVATION STATION THE POWERFUL ROLE OF DATA IN COMMUNITY BANK INNOVATION By Charles E. Potts, Executive Vice President and Chief Innovation Officer, ICBA 12 NEBRASKA INDEPENDENT BANKER
Charles E. Potts is ICBA’s Executive Vice President and Chief Innovation Officer. Potts drives ICBA’s innovation initiatives and financial technology strategies. Data is king. Everyone — from Big Tech to retailers to systems providers — prioritizes data for its ability to deliver on revenue expectations. Looking to improve the customer experience? Data tells a story. Want to strengthen fraud prevention? Data provides protections. Striving to prioritize the projects on your to-do list? Data leads the way. For these reasons and more, the overarching narrative for community banks in 2024 will center on all things data: how to uncover, understand, mine and activate the data you have for the benefit of the customers you serve. From our experiences with the PPP, we’ve learned the importance of identifying a need and reporting on the outsized role community banks play in servicing small businesses in their hour of need. But now the charge is to make sure we’re retaining those valued customers, attracting new ones and expanding our services to meet their evolving needs. The strategic approach to small business banking is predicated on better data analysis. Community banks have to ask, “Where are my small business customers moving money? Where am I losing deposits? What products and services are they getting from somebody else that I don’t have, or I do and they’re not using?” The answers to those questions come from existing data points, including payments. Community banks can investigate transactions, and the account they give may define product development’s next steps. Yet this data quarrying doesn’t have to be a manual process. Fintechs can help banks automate the review, pull out the central narrative and prioritize actions around it. Finding the right partner can be as simple as checking out our current ThinkTECH Accelerator cohort, which is focused on small business needs and data analytics (see sidebar). We heard from bankers that these are two key areas where they need solutions, and the companies in this cohort directly reflect that input. So, as the new year gets started and priorities abound, I come back to an often-repeated phrase: It’s about working smarter, not harder. Data analytics offers a tool to do just that, helping community banks excel in new ways by identifying the right opportunities. Data may be king, but ultimately, community banks will reign supreme if they can harness it to benefit their customers and communities. Accelerator Introduces Small Business and Data-Centric Fintechs Join ICBA for their sixth ThinkTECH Accelerator, featuring fintechs that can help community banks with small business banking and data analytics. Banks are welcome to sign up for one-onone or group sessions with the cohort. To schedule a time, visit icba.org/thinktech. The strategic approach to small business banking is predicated on better data analysis. NEBRASKA INDEPENDENT BANKER 13
S PRE AD As we have navigated the holiday season and hopefully had some time to wrap up some gifts as well as a successful 2023, let’s now spend a few minutes looking into pockets of relative value in the bond market. To get there, we should remind ourselves of the vagaries and ironies of fixed-income investing. In my 35 years of portfolio management participation, I’ve noticed some recurring themes and doctrines, which have both positives and less-than-positives: • Higher rates = lower prices. • Selling bonds at a loss, versus a gain, has positive cash flow implications. • Community banks buy more securities in lower rate periods. • Higher coupons have less price volatility than lower coupons. • Yield spreads usually widen when rates fall. Let’s stay with this last bullet point for a minute. In practice, this means the value of a “risk” asset, which we’re defining here as anything other than a treasury note, will improve less than a similar duration treasury, given a drop in rates. There are several reasons for this reaction. One is that rates fall when investors expect the economy to slow down, so presumably, credit quality will become sketchier. Another is that the lower market rates translate into greater call risk since the likelihood of a bond ending up “in the money” to be redeemed increases. Usually, Not Always The corollary to the preceding paragraph is that spreads narrow as rates rise. In the year just completed, in which Treasury yields fell thanks to a fourth-quarter rally, we saw an amazingly diverse set of returns for the various bond sectors that community banks like. Most of the mortgage sector, for example, saw their spreads widen. The genesis of the wider-spreads/higher treasuries dynamic was, of course, the demise of several large banks beginning in March. Silicon Valley Bank, in particular, with its $200 billionplus of mortgage-backed securities (MBS), caused that sector to have some indigestion through the summer as the FDIC’s bridge bank gradually disposed of the assets. Still, yield spreads were wider at the end of the year, partly the result of depositories in general not purchasing many bonds of any color or flavor. THE WE ALTH Some Bond Sectors Performed Better Than Others in 2023 By Jim Reber, President and CEO, ICBA Securities 14 NEBRASKA INDEPENDENT BANKER
Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income brokerdealer for community banks. Upcoming Webinars ICBA Securities and its exclusive broker Stifel will present 16 webinars throughout 2024. There will be several tracks, including balance sheet management, enterprise risk and economic outlooks. We will again offer CPE credits for these events. Be on the lookout for announcements starting early in the year. The MBS sector, in this column, includes traditional fixed-rate pass-throughs, collateralized mortgage obligations (CMOs) and even adjustable rate pools (ARMs). In the counter-intuitive world of bond investing, mortgage pools’ underperformance in 2023 would seem to indicate a pocket of value heading into 2024. Munis for the Bid? You may ask, “If MBS are cheap, what’s expensive?” On the other side of the past-performance spectrum are municipal securities. The muni market has other machinations going on that resulted in relatively low yields and spreads by the end of last year. Demand for munis is determined not so much by institutional investors but by the retail sector. Well over 60% of existing muni bonds are owned by individuals either directly or through municipal bond funds. Appetite for retail munis has generally grown over time as baby boomers retire, and except for temporary “headline” selloffs such as those related defaults by Detroit or Puerto Rico some years ago, demand has been steady and growing. Recent credit-quality performance in the sector has been solid. The supply side of the municipal market is another story. According to the Federal Reserve, the entire muni market grew by only $50 billion between 2010 and 2022, or barely more than 1%. More recently, in 2023, there were a number of issues postponed into the future, presumably to chase lower interest rates. The amount of new paper issued in 2023 was over 20% less than in 2021. While some of that was due to fewer calls being exercised, the continued supply shortage has pulled down tax-equivalent yields for institutional buyers, including community banks, into “through the curve” levels. For maturities out to 10 years, investment-grade munis could yield up to 50 basis points (.50%) less than benchmark treasuries. Cogito, Ergo I Swap? The previous two sections would seem to suggest a tidy bond swap strategy. The first step in any simultaneous purchase and sale is to find the most efficient securities to sell. Those would be the ones with the lowest return to the buyer, otherwise known as a “take-out yield.” Bonds that have lower returns than treasuries are hard to come by, but that’s exactly where shorter municipals were trading at the end of 2023. Securities to replace them? I’d start with some kind of MBS. Recently, strategists from Stifel have been suggesting “hybrid ARMs,” which have reasonable yields today and the possibility of maintaining them in the future even if rates fall. Most of them come with offering prices below par, which is another rarity. Ultimately, the theme of this column is that opportunities are abound for your bond portfolio at the start of the year. Some sectors look historically expensive, while others seem to offer uncommon value. Acting early in the year can get the momentum started for a prosperous 2024. BancMac provides correspondent and wholesale lending and is your Community Bank Mortgage Partner to help your financial institution originate fixed-rate secondary market loans including: PROGRAMS • Conventional Loans • USDA Rural Development Loans • Rural Living (Hobby Farm) Loans • VA Loans • Jumbo Loans • FHA Loans OUR PARTNERS RECEIVE: • Superior Service & Competitive Pricing • No Minimum Volumes • Significant, Non-Interest Fee Income • Non-Solicit Protections & More BANCMAC COMMUNITY BANC MORTGAGE CORP. YOUR COMMUNITY BANK MORTGAGE PARTNER bancmac.com mortgages@bancmac.com 888.821.7729 | NMLS# 571147 NEBRASKA INDEPENDENT BANKER 15
We Want to Feature You in Our Next Issue of The Nebraska Independent Banker! The Banker Showcase shines a light on those employees that make a difference. To be featured, please email Dexter at dexter@nicbonline.com. Is your business in the dark? ADVERTISE IN THIS MAGAZINE AND SHINE A LIGHT ON YOUR COMPANY. QR Code: website /ad-space CONTACT US TO LEARN MORE. 801.676.9722 • 855.747.4003 sales@thenewslinkgroup.com 16 NEBRASKA INDEPENDENT BANKER
IRS ISSUES PROPOSED LONG-TERM, PART-TIME REGULATIONS By Ascensus The Internal Revenue Service (IRS) has released a proposed regulation reflecting statutory changes related to long-term, part-time (LTPT) employees made by the SECURE Act of 2019 (SECURE Act) and the SECURE 2.0 Act of 2022 (SECURE 2.0). This proposed regulation would amend Treasury Regulation (Treas. Reg.) 1.401(k)-5 to reflect the rules for LTPT employees, including specific eligibility and vesting requirements. The proposed regulation also provides guidance regarding employer contributions with respect to LTPT employees and the impact that LTPT employees will have on nondiscrimination, coverage testing and top-heavy benefits. Background Historically, employers could design their 401(k) plans to prevent part-time workers from entering a plan by requiring employees to be credited with NEBRASKA INDEPENDENT BANKER 17
at least 1,000 hours during a plan year in order to become eligible to participate. In 2019, the SECURE Act changed the eligibility requirements so that LTPT employees who are credited with at least 500 hours in three consecutive years must be allowed to participate under a 401(k) plan’s salary deferral provision. In 2022, SECURE 2.0 reduced the wait from three years to two, effective for plan years that begin after Dec. 31, 2024, and expanded applicability to ERISA-covered 403(b) plans. This proposed regulation provides answers to some of the open questions regarding the administration of LTPT employees and paves the way for new plan design concepts. The highlights of the proposed regulation are described below. Definitions The proposed regulation provides clarity on the criteria that need to be met in order for an employee to be considered a LTPT employee and also defines a new classification identified as former LTPT employees. • LTPT Employee: Under this proposed regulation, a LTPT employee is defined as an employee who is eligible to participate in a plan solely by reason of ◻ being credited with at least 500 hours of service during each of two consecutive 12-month periods (three consecutive 12-month periods for plan years beginning before 2025); and ◻ attaining age 21 by the close of the last of the consecutive 12-month periods. LTPT employees do not include employees described in Internal Revenue Code Section (IRC Sec.) 410(b)(3), including union employees and employees who are nonresident aliens with no United States source income. If an employee becomes eligible to participate in the plan under any other service condition (or lack thereof), the employee is not a LTPT employee. For example, if a newly hired employee is immediately eligible to participate in the plan for deferral purposes, she will not be considered to meet the definition of a LTPT employee. Similarly, an employee who becomes eligible to participate using the elapsed time method would not be considered a LTPT employee because the individual would not have met the service requirement solely by completing the applicable number of consecutive 12-month periods during which the employee is credited with at least 500 hours of service. Enjoy your association news anytime, anywhere. Scan the QR code to visit our online publication to stay up to date on the latest association news, share articles and read past issues. nebraska-independentbanker.thenewslinkgroup.org 18 NEBRASKA INDEPENDENT BANKER
• Former LTPT Employees: This proposed regulation also defines a former LTPT employee. A LTPT employee will become a former LTPT employee as of the first day of the plan year beginning after the earlier of ◻ the plan year in which the employee is credited with at least 1,000 hours during a 12-month period; or ◻ the plan year in which the employee becomes an ineligible employee (due to an eligibility requirement other than age or service). Eligibility and Participation Criteria • Determining Eligibility Service: The proposed regulations generally leverage existing rules for determining LTPT employees, including the methods for counting hours and determining the 12-month periods during which hours must be counted. ◻ Equivalency Method: In addition to counting actual hours, the proposed regulation will permit employers to use an otherwise permissible equivalency method to determine if an employee is credited with at least 500 hours of service during the applicable number of consecutive 12-month periods. The hours of service credited will not be affected by an employer classifying an employee as part-time. For purposes of LTPT eligibility, the IRS did not choose to reduce the number of hours that normally would be credited to an employee under the applicable equivalency method. ◻ Eligibility Computation Periods: All computation periods beginning on or after Jan. 1, 2021, must be considered when determining if an employee has completed the LTPT service requirements. The initial eligibility computation period begins on the employee’s date of hire and ends on the anniversary date of the date of hire. Subsequent eligibility computation periods may continue as the anniversary date of hire or may switch to the plan year depending on the terms of the plan, which may result in overlapping eligibility computation periods. • Class Exclusions: The proposed regulation confirms that certain classes of employees may continue to be excluded from participation in the plan, notwithstanding the LTPT requirements, so long as the class exclusions are not a proxy for imposing an age or service requirement that forces an employee to complete a period of service that extends beyond the earlier of ◻ age 21 and one year of service; or ◻ the applicable number of consecutive 12-month periods during each of which the employee is credited with at least 500 hours of service. • LTPT Entry Dates: A LTPT employee must be permitted to enter the plan under the same entry date rules that apply to all other eligible employees. This means a LTPT employee must be permitted to enter the plan the earlier of ◻ the first day of the first plan year beginning after the date the employee satisfies the eligibility requirements; or ◻ six months after the date the employee satisfies the eligibility requirements. • Break in Service Rules: The proposed regulation does not include any provision similar to existing eligibility break in service rules. Therefore, once an employee becomes eligible under the LTPT provisions, the completion of any 12-month period where she is credited with fewer than 500 hours does not affect her LTPT eligibility. In addition, if a LTPT employee terminates service and is rehired by the employer maintaining the plan, then the employer must take into account the previous 12-month periods during which she was credited with at least 500 hours for purposes of whether they are eligible to participate. • Deferral Restrictions for Non-HCEs: In order to give effect to the statute, the proposed regulation limits the ability to impose restrictions on the right to make deferral contributions by a LTPT employee who is an eligible non-highly compensated employee (non-HCE). The right to make deferral contributions cannot be restricted in any manner that would not be permitted for a non-HCE under a safe harbor plan. Therefore, the permissible restrictions are limited to ◻ restrictions on election periods; ◻ the amount of deferral contributions; ◻ the types of compensation that may be deferred; and ◻ limitations under the IRC (e.g., 402(g) and 415 annual additions limits). Vesting Service Regulations The proposed regulation would require employers to credit LTPT and former LTPT employees with one year of vesting service for each year that an individual is credited with at least 500 hours during a 12-month vesting computation period. Therefore, former LTPT employees will continue to be credited with vesting service under the LTPT vesting NEBRASKA INDEPENDENT BANKER 19
provisions, necessitating separate tracking of such participants for vesting purposes. Employer Contributions for LTPT Employees The proposed regulation stipulates that — except in the case of a SIMPLE 401(k) plan — employers are not required to provide nonelective and matching contributions to LTPT employees. This applies even if the employer makes contributions on behalf of other eligible employees. An employer that wishes to forego making matching or nonelective contributions on behalf of LTPT employees in a safe harbor plan must make an election — described below — to exclude LTPT employees for purposes of determining whether the plan satisfies the nondiscrimination and minimum coverage requirements. Impact on Nondiscrimination and Coverage Testing The proposed regulation permits an employer to exclude LTPT employees from several compliance tests, including the nondiscrimination requirements under IRC Sec. 401(a)(4), the actual deferral percentage (ADP) and actual contribution percentage (ACP) tests, ADP and ACP safe harbor provisions, and the 410(b) minimum coverage test. If the employer does not elect to exclude LTPT employees, those employees generally will be otherwise excludable employees for purposes of IRC Sec. 410(b)(4)(B). • Former LTPT Employees: Unlike LTPT employees, the proposed regulation does not permit former LTPT employees to be excluded from testing or be considered otherwise excludable because these employees have satisfied the minimum age and service requirements of IRC Sec. 410(a)(1). • All-Inclusive Testing Election: An employer’s election to exclude LTPT employees from nondiscrimination and coverage testing must apply to every nondiscrimination and coverage testing provision (as applicable). This election must also apply to all LTPT employees who are eligible to participate in the plan. • Testing Election Documentation: If a plan is an ADP or ACP safe harbor plan, the employer’s election must be included in the plan document and satisfy the safe harbor plan year requirements. If a plan is a non-safe harbor plan, the employer’s election does not have to be included in the plan document, but the plan’s terms must provide language that enables the employer to make an election to exclude LTPT employees from the nondiscrimination and minimum coverage requirements. • SIMPLE 401(k) Plan: An employer may not exclude LTPT employees for purposes of determining whether the plan satisfies the SIMPLE 401(k) requirements of IRC Sec. 401(k)(11) and (m)(10). Impact on Top-Heavy Benefits The proposed regulation permits an employer to exclude LTPT employees from the application of the vesting and minimum benefit requirements of the top-heavy test. For such an election to apply, the plan’s terms must provide that LTPT employees are excluded from the vesting and benefit requirements of IRC Sec. 416(b) and (c). The election would not apply for the purpose of determining whether a plan is a top-heavy plan and would not apply to former LTPT employees. With respect to safe harbor plans, a plan will not fail to be excluded from the definition of a top-heavy plan if the employer makes an election to exclude LTPT employees from the nondiscrimination and coverage tests and they do not make safe harbor contributions on behalf of LTPT employees (or they make nonelective or matching contributions in an amount that does not satisfy the requirements for safe harbor contributions). Employer elections regarding the nondiscrimination and coverage testing and the top-heavy benefits are considered separate elections. Next Steps Employers may rely on the proposed regulations prior to the date final regulations are published. If applicable, employers should consider the pros and cons of amending their plan’s eligibility requirements to avoid the application of the LTPT employee rules. For example, employers should consider how other variables — including the possibility of increased employer contributions and the loss of testing exemptions will affect their operation. To assist employers that choose to change their eligibility requirements, the proposed regulations provide that employers may change their eligibility requirements in operation and generally need not formally amend their plans for such changes until the end of the 2025 plan year, when other amendments for SECURE 2.0 are required. The IRS accepted written or electronic comments on the proposed LTPT regulations until Jan. 26, 2024. A public hearing is scheduled for March 15, 2024. Ascensus will continue to follow any new guidance as it is released. Visit ascensus.com for the latest developments. ERISA Operations at Ascensus consists of multiple retirement experts who work collaboratively to research and analyze new guidance as it is released. 20 NEBRASKA INDEPENDENT BANKER
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