Metro Newsletter #105

December 23, 2020

To our clients and friends:

This is another in a series of newsletters designed to keep you clearly informed of current events in the area of retirement plans.

Plan Document Updates:

As required by the IRS, we will soon be restating all 401(k) plan documents, as required by the IRS. These plan documents need to be redone (“restated”) every 6 years, to reflect current rules and regulations. The restatement deadline is 7/31/22. We recently sent out a short letter on this topic, and have already begun this process. This would be the perfect time to let us know if you’d like any changes made to your plan design.

In addition, you may recall that 2 recent pieces of legislation, called the SECURE Act and the CARES Act, have had a significant effect on qualified retirement plans. These Acts streamlined retirement plan operation, and made it easier for employees to access their retirement funds if needed due to the pandemic. Metro will also be updating your plan documents to reflect this required language. These amendments will be due by 12/31/22. It should be noted that we are still awaiting final guidance from the IRS for these amendments.

As a result, you may receive your plan document restatement first, with the SECURE and CARES Amendments to follow shortly thereafter, or you may receive them both at the same time. We will try to make this process as user-friendly as we can.

For those with defined benefit and cash balance pension plans – the amendments referred to above are still due, but the document restatement will be due in about 4-5 years, since these plans are on a different six-year cycle.

CARES provisions expiring

By the time you read this, the time period for allowing employees easier access to their funds, via an in-service distribution, shall have expired. Also, this Act provided for an optional “suspension of loan repayment” provision. That is also expiring, so those loan payments will now need to recommence. A lot of this activity will be driven by the fund “platforms”, who do the recordkeeping for 401k Plans. Please let your Metro Analyst or Managing Consultant know if you have any questions on this issue.

Is it too late to adopt a Plan for 2020?

Well, it’s funny you should ask. Until now, the answer would have been that YES, it is too late, unless the plan document is signed by 12/31/20. But no longer.

The SECURE Act provided more time to adopt a Plan. This was done to make it easier for Employers to adopt a new plan, hence increasing coverage of employees. (This goal for increased employee coverage is a guiding force behind many of Congress’ actions in creating retirement plan legislation.) The deadline for adoption of a new plan is now the tax return due date for the current fiscal year (i.e., you can adopt a plan retro to 2020 until the extended due date of your 2020 tax return, which is generally 3/15/21 or 4/15/21, plus possibly six months if extended.)

There are a couple of implications. If you wait too long, this extended adoption due date will not work for defined benefit plans. That is because the entire funding for a year is due by 9/15 of the following year. (Ex: 2020 funding requirement due 9/15/21.) If you adopt a DB plan near or after this date, retroactively to 2020, then you will encounter difficulty in meeting this funding deadline, which will likely incur an excise tax. (yucch).

There are also some logistical concerns about later adoption of a 401k Plan. Remember that part of the 401k funding is done via “salary deferral”, i.e., the employee contribution comes out of their paycheck. So, if you adopt a 401k Plan in 2021 (retro to 1/1/20), it will be impossible to fund this source retroactively. However, a lot of fun could still be had relative to Employer contributions for 2020 with the 401(k) salary reduction provisions starting prospectively in 2021. The good news is that the year-end stress of setting up new plans quickly can be alleviated.

Update on Required Minimum Distributions and 1099 Forms

This is your annual reminder that there are two year-end events that you should be aware of. First, some of those over age 70 ½ must receive their annual Required Minimum Distribution (RMD). This would normally be due by 12/31/2020, but because of the CARES Act, there is a waiver of RMD’s due in 2020, but only for 401k and profit sharing plans. It’s important to note that this waiver does not apply to defined benefit plans or cash balance plans. For defined benefit and cash balance plan first-timers, you can elect to delay your initial RMD until 4/1/2021. (If you do delay, you’ll have two payouts during 2021.) Also, note that there is an exception for those still working who are not 5% owners. These “late retirees” need not receive any RMD until they actually retire. Finally, recall that this age 70 ½ cutoff has been modified, and will now apply at age 72. This age 72 cutoff applies to those reaching age 70 ½ on or after 1/1/20 or later.

Further, 1099-R forms must be sent by 1/31/2021 to all plan members who received a 2020 payout. This form is due even if the employee elected a rollover, with no taxes due. If your plan is on a “platform” with a financial institution, then they normally prepare the 1099-R forms. Otherwise, we can help out.

Where are we in the annual cycle?

As we celebrate the Holiday Season, we are also preparing your 12/31/20 year-end data requests. Please check your (e-) mail box for this. We try to make it as easy as possible for our clients in this regard. We also like to try to obtain investment information directly from the fund companies, minimizing the Employer’s hassle. If you are aware of potential efficiency improvements in this regard, we’d be interested in hearing from you.

Poker Actuarial

Here is an important number, but only if you play poker. In a typical game of Texas Hold-em, (5 community cards face up and each player has 2 cards face down), just before the last card is dealt, each person would have seen 6 cards (4 face up and 2 face down.) Assuming we are playing with a full deck (my wife sometimes doubts this), 46 cards remain. So, any particular card has a 1/46 chance of coming out = 2.2%. You need to know this if you plan on winning at poker.

Example: You are drawing to a flush, and there are nine remaining cards that would help you win the pot. (Perhaps you have two diamonds, and there are 2 more on the board.) There is $ 50 in the pot. Someone bets $ 5. There is one card to go. Your chance of winning is 9 * 2.2% = 19.6%. (9 good cards for you, each with a 2.2% chance). But your “payoff” is 10 to 1 (bet $ 5 to win $ 50).

In this case, you should call the $ 5 bet, since your chances of winning are 4 to 1. (80.4% chance of losing, 19.6% chance of winning = about 4 to 1). Your payoff is 10 to 1, so this is (very) good! Note that if the bet had been $ 25 instead of $ 5, the payoff would have only been 2 to 1 (bet $ 25 to win $ 50), and your 4 to 1 odds look much less attractive. In this case, you should fold. Let me know if you’d like to chat about or play poker.

Quick Metro Update:

We are weathering the storm, hopefully just like you. (We almost made it thru as a pandemic-free issue of Metro news). Our offices in Pittsburgh and in Ripley, WV remain open, with about 20% of our staff regularly work at the office in a socially-distanced set-up. The other employees are working remotely from home, or some combination of remote/in office. We remain committed to delivering “gold level” client service, hopefully in a pretty seamless way.

A Couple of Pension Plan Updates

I like defined benefit plans a lot because (a) I am an actuary, and (b) they are fun. The maximum benefit limits for these plans have increased for 2021, from an annual benefit of $ 225 K per year, to a new limit of $ 230K. This is the highest limit one can fund for. In reality, most of our plans are designed to create a lump sum at retirement, rather than a monthly benefit. Nevertheless, the basic “promise” for all defined benefit and cash balance plans is a monthly benefit, and that is why the IRS defines the limit using this parameter. The maximum lump sum is simply the equivalent value of this maximum benefit. (Fancy people call this “actuarially equivalent”.)

Bottom line, the new limits will allow a lump sum of $ 2,946,527 at age 62, so that is something to consider if this type of plan fits your needs. This is a lot! A defined benefit/cash balance plan can be combined with a 401k, creating potential annual deductions approaching $ 250 – 300 K/year, if you are close enough to retirement. We’d be happy to prepare an illustration if this sounds interesting enough.

One other note, for those who already have such a plan. Interest rates used to determine lump sums continue to drop, so 1/1/21 lump sums will be about 8-9% higher than 12/31/20 lump sums. This last comment does not apply to cash balance plans – only traditional defined benefit plans. Some people prefer cash balance plans for just this reason – the lump sum doesn’t fluctuate with interest rates.

Best Wishes and Happy Holidays ! 😊

David M. Lipkin, FSA, MSPA  Editor

[email protected]

(412) 847-7600

Metro Benefits, Inc. is a regional consulting firm, based in Pittsburgh, PA and Ripley, WV. We provide a wide range of services for qualified plans. While we make every effort to verify the accuracy of the information that we present here, you should consult with your Plan attorney or other advisor before acting on it.

Metro Newsletter #104

July 22, 2020

To our clients and friends:

This is another in a series of newsletters designed to keep you informed of current events in the area of retirement plans.

Wow!

There have been a LOT of developments over the past few months. So this is actually “newsy”. We’ve issued Metro Bulletins on a couple of them. Let’s take a moment to review some of this activity, and what it means to you. We won’t go into too much depth here, since this is more of a summary.

  1. Hardship Regs – On 9/23/19, the IRS finalized their “Hardship Distribution” regulations.
    1. A Plan participant is no longer required to suspend their 401k contributions for 6 months if they take a hardship distribution. (The old rule, requiring suspension, was designed to “prove” that a financial “hardship” existed”).
    2. Also, a plan participant no longer needs to apply for a plan loan before being allowed to take a hardship payout. This rule is optional, although we are administering our plans this way.
    3. Hardship payouts are now allowed from all types of money. Previously, access to investment income on employee deferrals had been restricted. (Note: Even under these new rules, 403 (b) plans still have this restriction.)
    4. Technical changes to the “casualty” reason for a hardship. Now, you need to be in a federally-declared disaster area.
  2. SECURE Act – The link to our (lovely) Bulletin is here.
    1. Required payout age of 70 ½ replaced by age 72. No such payouts are required for 2020. This applies to those who reach age 70 ½ after 12/31/19.
    2. “Multiple Employer Plans” will be allowed, even if there is no relationship among the Employers in the group. This will lead to the creation of “mega-plans” in the future (for better or worse).
    3. Increase in tax credit for an Employer who sets up a new Plan. This defrays the expense of starting the Plan. Extra bonus tax credit if you design the plan with an auto-enroll feature. This covers 50% of the start-up and administrative costs, and can total up to $ 15,000 over three years ($ 5 K/yr).
    4. More time to adopt a new Plan – no longer bound by the old 12/31 deadline, now you may adopt until your tax return due date
    5. More time to establish a 401k safe harbor Plan – Old rule was that you had to adopt/announce by 9/30, in order to enjoy the benefits (auto-pass on testing!) of a Safe Harbor. New deadline is 11/30, although you can adopt even later than that if you give an extra 1% of pay (4% vs 3%). No relief was granted for the “matching” version of Safe Harbor, only the 3% “non-elective”. Note, too, that the annual “Safe Harbor Notice” will no longer be required, for Plans which use the 3% version.
    6. Since the day that President Ford signed ERISA (9/2/74), the standard has been 1,000 hours to be able to enter a plan. (An Employer could always be more generous, however.) The SECURE Act will now allow employees who work 500 hours in 3 consecutive years to join a plan, as well. This will allow part-time workers to be covered, which has been one of Congress’ goals for a while. Note that hours worked before 1/1/21 don’t count for this requirement, so the soonest anyone can be brought in this way would be 1/1/24. Note, too, that these employees need not get any Employer contribution; they just need to be allowed to defer.
    7. The maximum penalty for filing a late tax return (“5500 Form”, normally due by 7/31, but extendable to 10/15) has increased from $ 25 to $ 250 per day late. Maximum penalty of $ 150K per form. (wow/be careful!)
  3. CARES Act – On 3/23/20, Congress passed the CARES Act, to provide (financial) relief relative to the pandemic. We provided another Bulletin on this Act, found here.
    1. Easier access to funds for employees, even while they’re still working. Each Employer must decide whether to adopt these more relaxed procedures for their plans. (Fortunately, many of our clients’ employees have not been too adversely affected. As a result, in our conversations with our clients, most have decided to not adopt these optional provisions, preferring to protect employees’ retirement accounts in this way.)
    2. These options include a doubling of the loan limit to $ 100K, access to funds while still employed (premature payout tax is waived, you may repay these payouts, and you may spread out your taxes over 3 years.) This enhanced accessibility applies to the end of 2020.
    3. Loan repayments due in 2020 can be delayed for up to a year.
    4. Required minimum distributions are waived for 2020, but not for defined benefit plans.
    5. Some of our clients sponsor defined benefit or cash balance plans. Contributions required during 2020 can be delayed until 1/1/21. (Congress may be cooking up more pension funding relief shortly.)
  4. Plan document Update – 403(b) Plan documents had been due on 3/31/20, while cash balance and pension plan documents were due 4/30/20. The CARES Act extends these due dates by 90 days.
  5. Here is something that neither Congress nor the IRS has addressed – the due date for 5500 tax forms for calendar year plans, normally due 7/31/20.
    1. I would have expected some relief, as they had already granted more time for forms due earlier than 7/31. Not yet. An automatic extension would have been nice.
    2. Even better, it might be time to get rid of this whole (silly) extension game (since they are automatically granted), and just change the due date to 10/15.
  6. Electronic Disclosure – The DOL has released their final regs on this topic. Our industry has been lobbying for this improvement for more than 15 years, and this is important.
    1. Instead of distributing paper notices (and there are a lot of them), these new regs allow the sponsor to email them, instead. This will save a lot of time and money.
    2. There are, of course, some rules to follow, to ensure that people are able to receive these emails. In addition, employees can opt out of these e-notices and request paper statements.
    3. We expect the financial institutions’ recordkeeping systems to take the lead on implementing these procedures. Please let us know if we can assist, or if your plan is not on one of these “platforms” and you wish to explore further.
  7. More Plan Documents coming Up! – The IRS is on a 6-year cycle for plan documents. As a result, all 401(k) documents will need to be restated by the middle of 2022. The exact date has not yet been announced.
  8. IRS Notice 2020-52 – Ability to suspend Safe Harbor contributions mid-year
    1. As a result of the pandemic, many Employers have been unable to make the (promised) 3% of pay Safe Harbor contribution into their 401(k) Plan.
    2. If you want this relief, then you need to adopt a plan amendment by 8/31/20, and you can cease these contributions. (Both types of Safe Harbor are covered; the matching type and the 3% “non-elective” type.)
    3. Then, you need to provide the employees with a Notice.
    4. The “price” you pay for this is that you lose the free ride that the Safe Harbor would normally have provided on the 401k discrimination test. As a result, if the test is failed, then the Highly-Compensated” plan members will probably get a (taxable) refund in 2021.

Was that too much information? We hope not. This is why you (hopefully) have Metro looking out for you.

Quick Metro Update:

We are proud to announce that we have relocated our WV office to a new building in Ripley, WV. We are fortunate to have five professionals there, to serve the needs of our West Virginia clients.

Finally, please note that ….

We sincerely hope that you are holding up OK during this pandemic, both personally and professionally. Let us know if we can assist …

Best Wishes 😊

David M. Lipkin, FSA, MSPA  Editor

[email protected]

(412) 847-7600

Metro Benefits, Inc. is a regional consulting firm, based in Pittsburgh, PA and Ripley, WV. We provide a wide range of services for qualified plans. While we make every effort to verify the accuracy of the information that we present here, you should consult with your Plan attorney or other advisor before acting on it.

Metro Newsletter #103

November 19, 2019

To our clients and friends:

This is another in a series of newsletters designed to keep you informed of current events in the area of retirement plans. There are some new developments to report.

Hardship rules simplified:

We recently released a Bulletin on this topic. You can find it here:
https://metrobenefits.com/new-irs-regulations-on-hardship-distributions/

The new procedures make the hardship distribution process easier for everyone. We have described the specific changes in our Bulletin. Please let us know if you have any questions on this important change.

DOL allows electronic disclosure of Notices:

Last month, the DOL announced that an Employer, if they follow certain rules, may now distribute various Notices electronically, instead of just on paper, as things had stood. Our professional association (“ASPPA”) had lobbied for over a decade for this change to be allowed. Obviously, it will greatly improve efficiency and reduce costs. (Estimated savings are $2.4 billion over 10 years). The new rules, once they are issued, will provide participants with an initial notice (on paper!), indicating that (a) plan information is available to them electronically, and (b) that they have an option to still get paper. More to follow as these proposed regs are finalized.

New limits for 2020:

The IRS has announced the new benefit limits for next year. Here are some of the key features:

  1. The overall 401(k) limit has increased from $56,000 per year to $57,000. This includes both Employer contributions and employee salary deferrals. These deferrals include both the pre-tax deferrals and the Roth, after-tax portion.
    1. The “deferral-only” portion of this has increased to $19,500, for 2020. This is in addition to the Catch up allowance, described below.
  2. For those age 50 and over, there is an additional deferral available of $6,500. (“Catch up”). For these people, then, the overall contribution limit is $63,500. ( = $57,000 + $6,500.)
  3. A Defined Benefit Pension (or Cash Balance) plan can now fund for an annual benefit of $230,000 per year, assuming that the plan participant’s pay is at least that high. This is a powerful tool, and would allow one to accumulate up to approximately $2.9 million at age 62. Let us know if you’d like us to explore this option for you. These plans can be combined with a 401(k) plan for maximum deductions.
  4. Any plan member who has compensation of over $125,000 in 2019 will be considered a “Highly Compensated Employee” for 2020. This means that their benefits need to be tested for discrimination against those of the other plan members. The compensation limit for this designation will increase to $130,000 next year, so if one earns at least that amount during 2020, they’ll be considered as an HCE for 2021. (Of course, anyone who owns more than 5% of a company, plus direct relatives, are also considered to be HCE’s, regardless of compensation.)

Metro Updates:

Tiffany Cummings recently joined our West Virginia office as an Analyst. Please join me in welcoming her to our team!

It’s that time of the Year (again)

This is your annual reminder that there are two year-end events that you should be aware of. First, those over age 70 ½ must receive their annual required payout. (“Required Minimum Distribution”). This is normally due by 12/31/19, but first-timers can elect an initial delay until 4/1/20. (But if you do delay, you’ll get two payouts during 2020.) Also, note that there is an exception for those still working who are not 5% owners. These “late retirees” need not receive any RMD until they actually retire.

Further, 1099-R forms must be sent out to all plan members who receive a 2019 payout by 1/31/20. This form is due even if the employee selects an IRA rollover, with no taxes due. If your plan is on a “platform” with a financial institution, then they normally prepare the 1099 Forms. Otherwise, we can help out.

We are sending out a mailing on these topics to our clients, but please let us know if you have any questions.

Interest Rates are down, so….

This item is about lump sums that are payable from traditional defined benefit plans. As you probably know, the higher the interest rate, the lower the lump sum. Since the interest rate is re-set every January 1 (or whatever the plan anniversary is), this can create a big change in one day. (Math people call it a “discontinuity”).

Anyway, as of 1/1/20, we expect that the new interest rate will be quite a bit less than what it was a year ago, resulting in higher lump sums. We are seeing differences of 10-15%. So, again, an employee getting a lump sum will get quite a bit more on 1/1/20 than they would have gotten 12/31/19.

Yes, we take the security and confidentiality of your data (very) seriously:

At Metro, we take the security of your data seriously. There are so many risks today for any computer that is connected to the internet that a multi-product, tiered approach is required. Here are some of the things we do to keep your data safe:

  • When we send or receive sensitive data via email, we typically use Citrix Sharefile. Sharefile is an industry-leading security software that provides end-to-end encryption, removing the data itself from the email; sending instead a link to a secure website where the data can be downloaded only by the recipient.
  • We have regular employee training on data security
  • We have a robust backup system that performs hourly backups of all data to an onsite server segregated from our regular network. In addition, we have an off-site backup.
  • Our networks are protected by best-in-class firewalls. Every bit of data that comes into our network is scanned by a gateway antivirus program before being allowed in.
  • All of our computers have monitoring and management software installed that automates all updates, and scans for problems as often as every 15 minutes, notifying our IT provider of any issues detected.
  • All of our computers have both managed antivirus and managed anti-malware software that automate updates & scanning and provide 2 tiers of real-time protection at the desktop.
  • Our office in West Virginia has an encrypted, one-to-one private network connection to allow secure access to our data.

So, the answer is “Yes”, we do take computer and data security very seriously. Please let us know if you have any questions or concerns on this topic.

Presidential Mortality

Being an actuary, who is also a presidential history buff, it won’t be a shock to find this item here. President John Tyler (who replaced William Henry Harrison, who had died after one month in office in 1841) was born in 1790. George Washington had just started as President the year before.

It turned out that Tyler’s wife passed away, so he remarried a wife who was much (much!) younger. He had kids at age 70. One of his son’s had similar circumstances.

Bottom line – as of the end of 2018, two of his grandchildren are still alive. Wow! 😊

And of Course:

Please accept our Best Wishes for a Happy Holiday Season and a Prosperous New Year from Metro 😊

Best Wishes,

David M. Lipkin, FSA, MSPA  Editor

[email protected]

(412) 847-7600

Metro Benefits, Inc. is a regional consulting firm, based in Pittsburgh, PA and Ripley, WV. We provide a wide range of services for qualified plans. While we make every effort to verify the accuracy of the information that we present here, you should consult with your Plan attorney or other advisor before acting on it.

Metro Newsletter #102

June 28,  2019

To our clients and friends:

This is another in a series of newsletters designed to keep you clearly informed of current events in the area of retirement plans (plus other stuff I find interesting…).

Proposed Legislation – The “SECURE” Act:

Congress is now debating some big changes to the pension rules. While we never know, of course, if legislation will actually be passed, this one does appear to have bipartisan support. Even if it does not pass now, it is still useful to know what kinds of changes people are thinking about. Here is a brief summary:

  1. Make access to 401k plans easier – This is a theme with Congress, as they are concerned about the relatively low coverage rates among plan participants. (Background: They allow the retirement plan industry $140 Billion/year of tax savings, and they feel they are not getting the best bang for that buck. Billion with a “B”) Access would be easier by allowing for “group” types of 401k plans, where employers could sign up for a plan with lots of other Employers. This is called a “Multiple Employer” plan. Potential attractions might include lower fees and less fiduciary responsibility.

  2. Lifetime Income – this is another one of Congress’ long-term themes. They don’t want people to run out of retirement money. Apparently, too many people take a lump-sum and then waste it or use it up. The two relevant features of this bill would (a) force 401k plans to disclose, at least once a year, the amount of potential lifetime income that would be supported by the account balance, and (b) remove fiduciary liability for the Employer, regarding selection of an annuity provider.

  3. Relax the age 70 ½ forced payout rule – the SECURE Act would delay it until age 72, while other pieces of legislation might either increase it further, to age 75, or else provide a “deminimis” amount (ex: $ 100K) to simply ignore the concept altogether. The political drawback is that this helps rich people.

  4. Allow aged workers to save more – by removing the age 70 ½ restriction on putting more $$ into an IRA.

  5. Encourage automatic enrollment – This is another of Congress’ favorite ideas to encourage participation. It has already been proven that auto-enrollment does increase plan participation. (Background – this means that a newly-hired employee is automatically covered by a 401k plan unless they opt out.) This proposed legislation would provide a $ 500 tax credit (for administrative expenses) if the Plan includes this provision. One can see that it’s only a matter of time until this feature becomes mandatory. (Another tax credit in the legislation would increase the set-up credit for starting a new plan to up to $ 5,000, depending upon the number of employees.)

  6. A new exemption from the early (age 59 ½) payout penalty – up to $ 5 K for the birth or adoption of a child.

  7. Elimination of “stretch IRA” provisions – so that a beneficiary of an inherited IRA might have to wrap it up over 10 years, instead of their whole lifetime. This would raise revenue.

  8. More time to adopt a Plan – Currently, you have to adopt the new plan by 12/31 of that tax year. The proposal would allow the Employer to adopt it until their tax return due date for that year.

  9. More flexibility on Safe Harbor – this popular 401k provision (“free ride on the 401k test”) would allow the Employer to add this provision until the end of the year, if they select a “non-elective” contribution of 4%. This means that everyone gets it, i.e., it’s not a “match”. This is also 1% more costly than the regular 3% safe harbor, available for more timely adopters.

  10. One more coverage booster – Since Day 1 of ERISA, the rule has been that we could exclude those employees who work < 1,000 hours a year. Again, this may have made sense in 1974, when more people worked full time. But this is another opportunity for Congress to improve coverage, and the proposal would provide coverage of part-timers who work 500 + hours for 3 years in a row. These employees, however, could be excluded from discrimination testing.

Will this bill actually pass? The House passed their version last month, 417-3. The Senate is bickering about it. There are unrelated (but connected) issues like a “kiddy tax fix”, that people want to throw into here. (The tax rate for a child whose parent died in combat was set too high in the recent Tax Reform Bill, so they’re trying to fix it.). There are also some “529 expansion” issues that are being debated (can it pay for home schooling?), so the teachers unions are weighing in. But the fact that it is being worked on so early in the two-year Congressional Term is a positive sign. In any case, whether it passes or not, one can see Congress’ intentions here.

What do you think about this? Let me know ([email protected])

What’s cooking here at Metro?

  • Diane Barton, our (beloved/esteemed) President, was in West Virginia last week, networking among our Accountant friends and business partners, at their 100th anniversary annual convention. (WVSCPA)
  • Leigh Lewis, another of Metro’s owners, is a co-chairperson of the ASPPA Women’s in Retirement Conference (for the third year), being held now in Chicago.
  • Several of the newer Metro employees have passed the preliminary ASPPA exams, including Izaak Fulmer-Moffat, Sam Hopps and Ronelle, Flint (in our WV office).

Reminder on Plan Documents:

For those of you who sponsor either Defined Benefit, Cash Balance, or 403(b) Plans, be aware that those documents will all need to be redone by next Spring. DB/CB documents are due 4/30/20, while 403(b) documents are due a month sooner. The reasons for doing this are (a) to keep the plan documents current with all regs and legislation, and (b) because the IRS says you have to do this every six years.  Please let us know if you have any questions on this process.

Hope for underfunded Defined Benefit Plans?

For decades, now, I have seen forecasts of higher interest rates. While you may agree with this or not, the people rooting the hardest for an increase in interest rates are the Sponsors of (traditional) defined benefit plans, almost all of which have been (i)  frozen and (ii) underfunded, some severely so. The concept is that if interest rates go up, the liabilities for those benefits would look smaller, hopefully to the degree that assets would become sufficient to pay out all benefits and the plan could be (finally) wrapped up.

Not so fast. The current 10-year Treasury rate (upon which required funding is measured) is now below 2%, having dropped over a full percent in the past 6 months. So those required contributions won’t be disappearing anytime soon.

What’s Up with You?

Let me know.  Have a great summer! 😊

Best Wishes,

David M. Lipkin, MSPA, FSA, Editor

[email protected]

(412) 847-7600

Metro Benefits, Inc. is a regional consulting firm, based in Pittsburgh, PA and Ripley, WV. We provide a wide range of services for qualified plans. While we make every effort to verify the accuracy of the information that we present here, you should consult with your Plan attorney or other advisor before acting on it.

 


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Metro Newsletter #101

March 7, 2019

To our clients and friends:

This is another in a series of newsletters designed to keep you clearly informed of current events in the area of retirement plans (plus other stuff I find interesting…).

This is the Quick, pre-Spring “Update” Issue of Metro News:

Nothing too deep here. We’re busy at this time of year, and we assume that you are, too. As a result, we are just touching base on a few timely issues. Should be a quick read 😊

End of Season update  – 1099 Forms and Age 70 ½ required payouts:

Our 1099 season is basically complete. We have sent out the Forms to the plan members, and we will upload them to the IRS shortly.

Age 70 ½ required payouts are due by 4/1/19, for some people. These would be those who:

  1. Turned age 70 ½ in 2018, and
  2. Chose to not take their 2018 required payout by 12/31/18, and instead deferred it until 4/1/19.

These people will be due a second minimum required payout by 12/31/19. Please let us know if you have any questions on these issues.

Metro Updates:

We have added a new employee to our Ripley, WV team. Her name is Ronelle Flint, and she began working for us as a Pension Analyst last month.

Who Are We?

We sometimes get stuck in our daily, or annual routines when we work with you and your Plans. I wanted to step back, and take a moment and (briefly) remind you who Metro Benefits, Inc. is, and what we do.

We provide administrative services for over a thousand 401k plans. Our roles are to make sure that they are (a) well-designed, i.e., that they carefully accomplish the Employer’s goals, and (b) compliant, i.e., they are meeting the various aspects of Tax Law and IRS/DOL regulations. Sometimes the compliance aspect can be very technical and confusing.

We also provide actuarial services to defined benefit/cash balance pension plans. We assist plan sponsors in evaluating and addressing various aspects of pension risk for these (fun) plans.

When we design a plan, we typically prepare the plan document. Over time, as the regulations and laws change, we need to keep the plan document current, by amending it. The IRS requires that plan documents be restated every 6 years or so. Some plans choose to hire their own ERISA attorneys to perform this document work, and that is totally fine with us. We do make an effort to keep all of the various team members in the loop.

One thing that we do not do, nor are we ever likely to do, is provide investment advice. We leave this vital function to those properly trained to do so. We often team up with investment advisors to deliver services to a Plan.

And now, we are able to provide these services in a different way, if you wish. This gets into the topic of “3(16) Plan Administrator”. Section 3(16) of ERISA defines a role, called “Plan Administrator”. This is a legally-important role of keeping the plan straight, handling paperwork, notices, etc. Note the broad overlap between this job description and what we normally do.

To capitalize on this commonality, we are now offering “3(16) Fiduciary Services”. This would, legally, take the burden of “Plan Administrator” off of the Employer’s shoulders.  Rather than Metro preparing the work for the Employer to then “execute” it, by signing off or performing an e-transaction as “Plan Administrator”, we can simply accomplish that task ourselves, on your behalf. Let your Managing Consultant know if you’d like to learn more about the costs and benefits of this new service option.

It is also the Season for  ….

401(k) testing corrections.

Recall that, in the old days, this annual test was a really big deal for every 401k plan. It measures the difference between the rates of salary deferral for “highly compensated” employees (“HCE’s”), compared to the rank and file. If the HCE’s defer proportionately more, then they must get a refund. It used to be very exciting and hassly. What changed?

First, Congress amended the Tax Code to provide for “prior year” testing. Under this option, available to most 401k plans, the HCE’s could, for example, base their 2019 limits on the actual deferral averages of the other employees for 2018. So it’s like knowing the answer to the test before it even starts. (That being said, we still have plans that fail the test even knowing this information.)  This prior year option is selected in the plan document.

The other (big) improvement that Congress made was the creation of the “Safe Harbor” 401k. Under this arrangement, the Employer makes a 3% of pay, fully vested contribution for all eligible plan members. (This can also be done via a generous match, instead.) A Safe Harbor plan gets a free ride on discrimination testing, hence its popularity. We have lots of these.

So, back to the beginning of this topic. Any 401k plans that are not Safe Harbor, must have their 2018 testing done by 3/15/19. If the tests are failed, then a refund must be made to the HCE’s by that date. Otherwise, the Company will need to pay an excise tax on the excess. (An “excess excise”?). Further, the IRS regards it as a very serious violation if the excess is not corrected within 12 months after the plan year; it could disqualify your plan, taking away the tax benefits.  

And, finally ….

A new baseball season is upon us. Go Pirates!  I don’t think it is a coincidence that the home opener this year is on April Fool’s day. But I am pretty sure that we can be hopeful for something?

Let me know what you are hoping for!

Best Wishes,

David M. Lipkin, FSA, MSPA  Editor
[email protected]
(412) 847-7600

Metro Benefits, Inc. is a regional consulting firm, based in Pittsburgh, PA and Ripley, WV. We provide a wide range of services for qualified plans. While we make every effort to verify the accuracy of the information that we present here, you should consult with your Plan attorney or other advisor before acting on it.

Metro Newsletter #100

December 14, 2018

To our clients and friends:

This is another in a series of newsletters designed to keep you clearly informed of current events in the area of retirement plans (plus other stuff I find interesting…). Wow this is issue #100! It only took 31 years.

Happy Holidays:

We hope that you and your families enjoy a pleasant Holiday Season. We really enjoy working with you, and we are honored to have the privilege of providing services to your retirement plans.

Correction/Amplification from last time:

In Metro News #99, I had reported that the tax on a hardship distribution could now be spread evenly over 3 years. That was not true, as it applied only in very limited circumstances. I apologize for any confusion. 🙁

Nevertheless, there are still some big improvements for hardship payouts, starting in 2019. One of the biggest is that the mandatory 6-month suspension goes away. (Under the old rule, a plan member taking a hardship payout was not allowed to defer their pay into the 401(k) plan for 6 months.)

While a plan amendment is required to take advantage of the new rules, we understand that you may be able to implement the new rules as of 1/1/19, and to amend the plan “later,” retroactive to 1/1/19. This is still unclear, however, so check with your plan’s legal counsel on this.

It’s Also the Season for 1099’s and Age 70 ½ required payouts:

In November and/or December you may be receiving (or have already received) information from us regarding two very important year-end issues: (a) age 70 ½ Required Minimum Distributions (RMD’s) and (b) IRS 1099-R tax forms reporting 2018 distributions. Please watch your email (or mail) for communication from us and, if requested, respond by the stated deadline.

Age 70.5 RMDs must be processed by December 31, 2018. Note that an extension is available if this is the first year the participant is required to take this distribution, but it will require two such payouts during 2019.

If your Plan is on a “investment platform”, then they will likely prepare and mail the 2018 Form 1099-Rs to each participant who took a distribution in 2018. Plans whose investments are in other accounts, such as brokerage accounts, need to be aware of the possible need for Form 1099-Rs.

If we believe your Plan may need 2018 RMDs and/or 2018 Form 1099-Rs, we will provide you with additional information in the next few weeks. Please let us know if you have any questions.

2019 Limits:

  1. The 401(k) annual deferral limit is increasing from $18,500 to $19,000. (While we’re at it, let me remind you that this limit is always on a calendar year basis, regardless of the Plan Year. So the handful of 401(k) plans that are not operating on a calendar year basis have some extra work to do to monitor this; consider switching to a calendar year.) The 401(k) “catch up limit” for those turning age 50 or older during 2019 remains at $6,000. Thus, the overall limit for these people is now at an even $25,000. ( = 19,000 + 6,000)
  2. The Overall defined contribution limit (including deferrals, catch up, and Employer match + profit sharing) increased from $61,000 to $62,000. If you are under age 50, then the catch up does not apply, and your annual limit is $56,000.
  3. The highest annual benefit payable from a pension plan at age 62 has increased from $220K to $225K. This is a lot! This allows for a large tax deduction, for those of you approaching retirement. Please let us know if you’d like an illustration.

As part of this, it is good to know the “magic number,” i.e., what percent of pay must the Employer contribute for non-owners (in a 401k)  in order to max themselves out? It’s about 4.405% of pay. If the owner defers the maximum allowable 401(k) amount, they can supplement this with a profit-sharing contribution. By contributing 4.405% of pay to employees, they can often triple this rate for themselves (13.214% of pay). If you apply this rate to the highest amount of compensation we can use (now $280K/year), it results in a profit-sharing contribution of $37,000. Combined with the salary deferral, this allows the owner to reach the overall maximum limit ($62,000, including the catch up) in the most efficient way.

Note that this only works if:

  1. The owner earns at or above that maximum salary, and
  2. The ages are “right,” i.e., the owner is (generally) older than the average employee. (We can test for this)

Please let us know if you’d like us to run an illustration for you on this basis. It will be fun.

Metro Updates:

Please join me in congratulating Alex Romano, who recently passed (yet) another professional exam, and will soon be a “Qualified Pension Administrator” (“QPA”).

Also, we have added several new members to our happy team. Three Administrative Assistants: Heather Fierst and Mackenzie Torchia here in Pittsburgh, and Allee Miller in our West Virginia office. Joe Gliozzi came aboard as our new Controller.

Important news for Pension Plans:

Traditional pension plans allow for a lump sum payout as an alternative to the monthly payment. These lump sums depend upon the interest rate used to calculate them. As interest rates go up, lump sums go down. That is what is happening now.

The IRS-mandated interest rates are increasing as of 1/1/19. One example that we recently saw would have the retiree’s lump sum go down from $825K to $765K, based upon a delay of one day, from 12/31/18 to 1/1/19.  The impact will vary by age.

Plan Sponsors should be careful in handling this delicate situation. Please let us or your plan counsel know if you have any questions in this regard.

A Couple of Odd “Matching” Items:

401(k) and 403(b) Plans are often designed with a matching contribution, to provide the employees with an incentive to save their own money. Here are some observations on matching arrangements:

  1. Don’t make them too generous. Some plans match 3% if the employee contributes 3% of their own funds. While it may be a good idea in certain circumstances, this provides an incentive at too high of a cost. A better use of those employer dollars may be a 50% match on the first 6% of pay that the employee defers. This would provide the employee with an incentive to defer more. (However, changing the match from the 100% of the first 3% to 50% of the first 6% may, itself, create some challenges.)
  2. While you may offer different matching formulas to different groups of employees, those formulas require some extra testing, to ensure that each formula covers a broad cross-section of employees. For example, you can’t provide a richer formula for the owners.
  3. Finally, when people compare a 403(b) plan to a 401(k) plan, one of the basic differences is that the 403(b) gives you a free ride on testing. However, this automatic pass on testing applies only to the salary deferrals, and not to the match, which must still be tested.

Slots actuarial:

I don’t play slots. Do you? Something like 10–15% of everything you put in goes right to the casino. This can’t be a good idea. Nevertheless, if you do enjoy playing slots, here are some tips, courtesy of a brochure I picked up at MGM Resorts, called “How slot machines really work”:

  1. Q:  “I’ve been playing for a long time. I must be due for a win soon, right?”
    A: “No. With slots, persistence doesn’t pay off. Slots are never due for a win.”
  2. Q: “The machine I just left paid out a jackpot. If I had stayed, would I have won?”
    A: “Probably not. A slot machine uses a random number generator, which continuously cycles through numbers. If you had continued to play, it’s highly unlikely you would have had the same result as the player who followed you.”

I’ll leave the rest for you to figure out. In general, I’ve found that the less work that you are willing to do at the casino (as in life), the more you pay for that privilege. Slots is the easiest game to play–no thinking needed. So you pay a premium for that. I continue to believe that the house edge for each game should be prominently displayed at the casino.

What do you think?

P.S. Have a good New Year!

 

Best Wishes,

David M. Lipkin, FSA, MSPA  Editor
[email protected]
(412) 847-7600

Metro Benefits, Inc. is a regional consulting firm, based in Pittsburgh, PA and Ripley, WV. We provide a wide range of services for qualified plans. While we make every effort to verify the accuracy of the information that we present here, you should consult with your Plan attorney or other advisor before acting on it.

Metro Newsletter #99

July 9, 2018

To our clients and friends:

This is another in a series of newsletters designed to keep you clearly informed of current events in the area of retirement plans. (plus other stuff I find interesting …)

Follow-up from last time – more on law changes for Hardships and Loans:

In our last Issue # 98, I discussed some changes that will relax the Hardship Distribution rules on 401(k) plans in 2019. This will require a plan amendment to become effective. One other important Hardship change that I didn’t mention is that the taxability has been greatly improved. If the payout is less than $ 100K, then you may not believe this good tax deal:

  1. No 10% excise tax if you are under age 59 ½
  2. You may spread your income tax on the payout evenly over three years

Another significant improvement, effective immediately, has to do with outstanding loans when a plan participant terminates employment. Typically, this results in (a) a defaulted loan, and (b) taxes, plus perhaps the 10% excise tax, on the defaulted loan amount. The new law (“Tax Reform Act”) relaxes these provisions. Now (effective immediately, no plan amendment required), the plan members can pay the loan back to themselves and avoid this taxation. They would do this by putting the money still owed into their IRA, by the due date of their tax return for that year. They would still receive a 1099 Form, but the distribution would not be considered “taxable”.

It is good to see Congress recognizing these problems with the system and fixing them!

QDRO corner:

We rarely discuss the issue of QDRO’s, so this is the time 😊. Most plan documents have a provision for a QDRO. What is a QDRO? It is a “qualified domestic relations order”, signed by a Judge. It is a tricky area, so we all need to be careful. Without a valid QDRO, a plan does not have permission to pay out any of the plan members’ account to an ex-spouse. With a QDRO, it must do so.

The QDRO itself is negotiated as part of the divorce settlement. It starts out as a DRO (lacking the “Q” for “qualified”.)  Then, it’s presented to the Plan Administrator. (We often assist here as the third-party administrator, or TPA,) The Plan Administrator then must determine if it meets all of the fancy QDRO rules. If it does, then it is deemed to be a “Qualified” order, and it is enforced. It typically says that the plan member must now share some of their plan benefit with their ex-spouse.

There is also a notification process at each point along the way, where the Administrator first notifies all affected parties that it got a DRO. At that point, it places a freeze on the plan member’s account. Once it determines if it is a QDRO, it follows up and tells them that result.

To be deemed “qualified”, the Order must contain basic information, such as the Plan name, the parties’ names, SSN’s, addresses, etc. It must not create new rights or forms of payouts under the Plan. It must clearly specify the amount of benefit payable to the “Alternate Payee”. It can’t step on the toes of any other Alternate Payee already specified. Plus other legal stuff. Let us know if you have any questions on this technical, yet important area. A printout of the Plan’s QDRO procedures may also be helpful, so let us know if you’d like to see a sample.

Poker Actuarial Department:

As regular readers may recall, I like to play poker (a lot.) I’ve observed a couple of things, and I’m wondering if you notice them, too? Obviously, many more players are male than female. Without exception, 5 – 10% of all players are female. Why is this? I have my own ideas, but I’d like to hear yours. Beyond that, I notice that most players do not wear a wedding ring. Why is that? It is not uncommon to see not see any player at all with a ring, although there are more ring-wearers in Pittsburgh than in LV. There are some theories about this, but I’d like to hear yours. (If you like this topic, we can talk about poker players and other people washing their hands after using the restroom next time – or not.)

Trends in 401(k) Payouts:

We are always working with investment company “platforms” (ex: John Hancock, Empower, American Funds, Mass Mutual, to name just a few) in coordinating payouts to terminated or retired plan members. This is, obviously, a pretty vital function, along with potential security risks. Accordingly, we are seeing trends towards greater security protocol, as may be expected. For example, payouts of over $ 20,000 from Transamerica will result in a phone call from them to the participant, to confirm the correctness. The industry is much more on the lookout for large transactions.

In the interest of making this large volume of transactions more efficient, we are also seeing trends toward more electronic payouts, rather than having the employee submit “paperwork” to get their money. For example, at Principal, payouts can only be done this way. The point of this article is not to highlight any specific firm, as they are all good and things are constantly changing. Instead, just to call your attention to the rapidly changing landscape.

‘ sup at metro?

We are pleased to congratulate Emma Joyce and Alex Romano, both of whom recently passed an ASPPA exam along the way to their next professional credential goal of Qualified Pension Administrator. (“QPA”). We also must congratulate Ingrid Peet for passing the ASPPA DC-1 Exam.

We also want to welcome Josh Byers to our team, working in our Ripley, WV office. Josh had previously been at United Bank, working in their Retirement Plan area. By the way, we are looking for an Administrative Assistant for that office, if you know anyone?

We are also very pleased to bring back Jessica Klauss, as an Administrative Assistant. Jess had been with us for several years, and we are very pleased to reconnect with her.

One thing that I learned a couple of decades ago, amidst high turnover at Metro, was the importance of building a solid team, where people could follow a career path, perform challenging and important work, along with other professionals, with reasonable compensation. Obviously, Diane, Russ, and Leigh (the 3 Metro owners) are continuing that tradition. Here is the list of Metro employees who have been with us for more than 5 years:

  1. David Lipkin, 32 years
  2. Diane Barton, 29 years
  3. Shelia McLaughlin, 24 years
  4. Russ Smith, 21 years
  5. Leigh Lewis, 19 years
  6. Mike Steve, 18 years
  7. Michele Cieszynski, 18 years
  8. Leann Malloy and Bryon DiGiorgio, 12 years
  9. Linda Fulton and Jen Stenson, 11 years
  10. Chris Lestitian, 10 years
  11. Krysta Powell and Nancee Labella, 8 years
  12. Jaymie Philson, 7 years
  13. Tracey Farquhar, 6 years
  14. Chastity Crihfield and Kristie Guzik, 5 years

Please join me in congratulating these fine people for their dedicated service here at Metro Benefits!

Best Wishes,

David M. Lipkin, MSPA, FSA, Editor

[email protected]

(412) 847-7600

Metro Benefits, Inc. is a regional consulting firm, based in Pittsburgh, PA and Charleston, WV. We provide a wide range of services for qualified plans. While we make every effort to verify the accuracy of the information that we present here, you should consult with your Plan attorney or other advisor before acting on it.

Metro Newsletter #98

April 3, 2018

To our clients and friends:

This is another in a series of newsletters designed to keep you clearly informed of current events in the area of retirement plans. (plus whatever other stuff I find interesting …)

Tax Reform – Conclusion:

I think that all of you know by now that Tax Reform did pass. Thanks to some last-minute lobbying by the President, the 401k limits were not reduced. (If not for his intervention, the limit would likely have been reduced from $ 18,500 to $ 2,400 per year on a pre-tax basis.) So our industry dodged a bullet there.

The other interesting wrinkle was the tax credit available to “pass-through” entities, like LLC’s and subchapter S corporations. Some people fear that lowering their tax rate would make a retirement plan tax deduction less valuable, by comparison. And, as a result, that some plan sponsors would decide to not implement a plan. But this is a pretty small tax difference. Have you seen people decide to not do a retirement plan for this reason? (I have not yet).

Hardship Rules Loosened:

The Budget Act included some changes to the hardship rules, which are nice improvements:

  1. The 6-month suspension is eliminated. Old Rule: If you took a hardship distribution, you were unable to continue to defer for a period of 6 months. Note how goofy this rule was to begin with. The law requires that a participant have insufficient financial resources to fulfill their financial need, so this 6-month suspension was supposed to be a token for that requirement.
  2. No longer a need to take all available plan loans before you could request a hardship distribution.
  3. All 401k plan funds can now be accessed for a hardship. Previously, some of the sources (like investment return, and certain kinds of Employer contribution) were not allowed to be touched. This will simplify the process, and how often do we get to say that?
  4. Payouts to cover a “casualty loss”, like a flood or fire, will be restricted to a “federally-declared disaster”, at least until 2026.

Most of these changes will take effect in 2019 (the casualty loss change applies in 2018). To take advantage of these improvements, however, the plan document will need to be amended. We assume that most of our clients will want to adopt this amendment. We’ll be in touch later this year. Please let us know if you have any questions in the meantime.

Speaking of Plan Documents:

The IRS has announced that all defined benefit and cash balance plan documents will need to be restated by 4/30/20.  Further, all Tax -Sheltered Annuity (“403b”) plan documents will also need to be amended around the same time. We’ll be in touch if this applies to you.

And speaking of Defined Benefit Plans ….

These types of plans are very powerful and allow a highly-paid person to build up a payout of $ 2,832,610 at age 62, on a tax-deferred basis. Let us know if you’d like to learn more. While these types of plans are popular for such individuals and smaller firms, old corporate pension plans are not so popular or happy.

Almost all (big) corporate pension plans have been frozen or terminated. The only reason that they have been frozen, rather than terminated, is that the Plan Sponsor doesn’t have enough money to fully fund them, which is a requirement for termination. Congress didn’t help either, by (a) relaxing the minimum funding rules so that you can be in compliance with them, yet never arrive at a fully funded plan, and (b) quadrupling PBGC premiums. (We have plans paying over $ 500 K /yr. in premiums).  While we don’t have a magic wand solution for these plans, we can assist the Plan Sponsor in understanding their options.

The IRS has raised their User Fees. A lot ☹

A very popular IRS program has been their self-correction program. In the (very) old days, if you did something wrong, they might audit you, and if they did, they might find it and punish you, perhaps badly. A couple of decades ago, they invented a “self-correction” program (“EPCRS”). The user fees had been very reasonable, and were based upon the number of plan members. (Note the “past tense” here.)

The IRS has announced a big increase in these user fees. For most of our plans, the new fee will be $ 3,000. Previously, most of these fees for small plans were less than $ 500. This will require some careful judgement on the part of Plan Sponsors, as to whether or not to file. Let us know if you’d like to chat or learn more about this annoying change.

Correction:

Sorry to report a wrong figure in our prior MetroNews. The max compensation we can use for 2018 is $ 275,000. (I had reported it as $ 270,000 = oops = sorry).

Metro Updates:

Leann Malloy and Linda Fulton have passed an ASPPA examination and earned a Certificate on “Tax Exempt and Governmental Plan Administration”. (Example: 403(b) Plans). Courtney Porto has passed all the pieces of the Retirement Plan Fundamentals exam, an introductory course. Finally, Bryon DiGiorgio has earned his second credential, and we now should refer to him as a “QPA” = Qualified Pension administrator.

We also added a new employee to our West Virginia office, Bobbi Walsh. Bobbi is an Administrative Assistant for us in Ripley.

Are they really Missing?

When a Plan Sponsor wishes to terminate a 401(k) Plan, everyone (obviously) needs to be paid out. What do we do if a participant is non-locatable? This is a serious issue that could paralyze such a termination. Fortunately, the DOL has some (handy) rules for this:

  1. First, the Plan Sponsor needs to do enough work to declare them “non-locatable”. They must exhaust every possibility, including (all of) (a) certified mail, (b) checking related Employer records (ex: maybe they have a newer address in their health insurance records?), (c) ask their designated beneficiary in the 401k plan if they know where they are, and (d) using (free) internet search tools. If they do all of these things, then they can declare them “lost”, and move on, as indicated below.
  2. The Employer can roll their funds into an IRA. Although it is clear that this is the DOL’s preferred approach, it is a shame if their balance is small, as it will surely be eaten away by fees. Beyond that, they can set up a bank account in their name, or “escheat” the funds to the State, in their name.

Because we do a lot of work for the DOL in helping them to fix broken plans, we encounter this situation a lot. It is much worse (if not impossible) to follow these steps if we do not have a SS #. (Trust me.) That leaves us up a creek. Let me know if you’d like to discuss this further.

 What’s up with you?

Let me know at the email address below. I’d like to know! Have a glorious Spring! (Let’s Go Bucs! – they need our help)   🙂

Best Wishes,

David M. Lipkin, MSPA, FSA, Editor

[email protected]

(412) 847-7600

Metro Benefits, Inc. is a regional consulting firm, based in Pittsburgh, PA and Charleston, WV. We provide a wide range of services for qualified plans. While we make every effort to verify the accuracy of the information that we present here, you should consult with your Plan attorney or other advisor before acting on it.

Metro Newsletter #97

December 8, 2017

YEAR END EDITION/HAPPY HOLIDAYS!

To our clients and friends:

This is another in a series of newsletters designed to keep you clearly informed of current events in the area of retirement plans. (plus whatever other stuff I find interesting …)

What’s up with Tax Reform?

As I write this in early December, we don’t really know yet, but we have some hints:

– Likely no major damage for retirement plans – this is a big relief, especially in light of the various legislative proposals suggested earlier in the past decade, all of which would have reduced the available limits in 401k plans. Regardless of what you think of him, President Trump went to bat for our industry when he forcefully suggested/demanded that these limits not be reduced. They (likely) would have been reduced without this intervention.
– There are proposed lower tax rates on “pass thru entities”, like Subchapter S Corp’s and LLC’s. There is a concern that this may be a disincentive for business owners from having a retirement plans, since the tax rates would be lower. (25%). However, it appears that the lower tax rate may only be available to certain types of (capital-intensive) pass-thru’s, so hopefully any damage would be minimal.
– Not done yet. Keep your eyes open on this.

Year – End issues:

This is a reminder on two annual issues that arise at year-end – age 70 ½ required payouts, and 1099 – R forms. We can assist on both. I think you already probably know what these are about, so I’ll spare you that explanation. Let me know if you want to learn more.

401(k) Plans that are on a “platform” already (likely) have these needs taken care of. Plans whose investments reside in brokerage accounts or other “stuff” probably need to be aware of the need for a 1099 – R Form, which is required even if the payout is rolled over to an IRA.

We will contact plans that we think may need assistance within the next few weeks. Please let us know if you’re not sure, or if you have questions.

2018 Limits:

… have gone up with inflation. Here goes:

– 401k deferral limit from $ 18,000 to $ 18,500
– 401k catch up (over age 50 in 2018) unchanged at $ 6,000
– Overall defined contribution limit (including deferrals, catch up, and Employer match + profit sharing) increased from $ 60,000 to $61,000. Compensation limit up from $ 265,000 to $ 270,000
– Defined benefit limit on annual benefits up from $ 215,000 to $ 220,000

And here is my favorite annual calculation, which answers the question: How much must be contributed to employees so that the owners can max out? Answer: Assuming that the owner (a) makes at least $ 270,000, (b) is over age 50, and (c) defers the maximum of $ 24,500, then they must receive a profit sharing contribution of 61,000 – 24,500 =
$ 36,500. Divided by their (max) pay of $ 270,000, this requires a contribution of 13.52% of pay. If the ages are “right” so that we can contribute 3 times the rate for owners as we do for non-owners, then the non-owner rate = 13.52%/3 = 4.51% of pay.

To summarize, if you contribute 4.51% of pay to the non-owners, and the compliance testing can pass, then you can max out the owner(s) at $ 61,000 ! (“what a deal!”)

Auto-Enrollment of 401(k) plans:

This is a feature that you may choose to implement, whereby newly-hired employees are automatically signed up for the 401k plan, unless they opt out. It does increase participation (good), although some people think it is coercive or manipulative (bad.)

In any case, there are several varieties of auto-enroll, each one offering a different basket of features. One such arrangement includes an “auto-escalation” feature, whereby the newly-hired employee starts out at, say, a 3% of pay deferral rate, and it increases 1% each year until some cap (ex: 10%) is reached.

While it may be a useful tool, be careful with this. In discussing the concept with some friends, one person observed that “it’s not a matter of if a mistake will be made, but when”. In other words, if there is a delay in escalating on the payroll system, the IRS will regard this as an “operational plan failure” and you may be negotiating with them on the penalty. Just an observation. I’d be interested in hearing your comments and experiences on auto-enroll. (let me know …).

In any case, this is an important tool to assist employees to financially prepare for retirement.

Metro Updates:

Since our last issue, we’ve been named as one of Western PA’s “Best places to work”. Apparently, one of our best features, based upon the anonymous ee surveys, is our flexibility. I do feel like we have good teamwork, trust, and leadership here.

We also continue to have some professional exam success, with Liz Prentice (our Controller) and Sarah Mattis (Admin. Ass’t.) both passing the intro set of exams (RPF). In addition, Adam Davis passed his “QPA” exam (Qualified Pension Administrator) and Alex Romano completing the requirements for “Qualified 401k Administrator” Please join me in congratulating these professionals.

Finally, I wanted to note that Leigh Lewis, one of our owners, has been contributing some of her time to our professional organization, called ASPPA. Leigh has been a Vice-Chair (and now Chair) of the Committee on the annual Women’s Business Owners Conference.

Where’s my Line?

I’m still a transplanted Pittsburgher, even after 35 years. I am always amazed and impressed by the true generosity and kind spirit of those who live here in this region.

I am also intrigued by how gently they queue up. Their main motivation seems to be never getting in front of someone else, even if by mistake. Kind of a culture shock for a transplanted New Yorker like me. I especially like the way that Pittsburghers line up (as one line) even when two lanes are open, just (calmly) feeding into the next open spot. However, as a warning to outsiders, we sometimes do this single line behind one of the two open registers, leaving the other open. It is “not cool” to assume that the empty line really is empty, and you will get some dirty looks and/or mumbles. Be warned! 😊

And have a Wonderful Holiday Season!

What’s up with You?

Let me know at the email address below. I’d like to know! 😊

Best Wishes,

David M. Lipkin

David M. Lipkin, MSPA, FSA, Editor
[email protected]
(412) 847-7600
Metro Benefits, Inc. is a regional consulting firm, based in Pittsburgh, PA and Charleston, WV. We provide a wide range of services for qualified plans. While we make every effort to verify the accuracy of the information that we present here, you should consult with your Plan attorney or other advisor before acting on it.

Metro Newsletter #96

August 18, 2017

To our clients and friends:

This is another in a series of newsletters designed to keep you clearly informed of current events in the area of retirement plans. (plus whatever other stuff I find interesting …)

Merge vs. Terminate?

If you have two plans which you’d like to combine, it is sometimes unclear whether it is better to “merge” them into one plan, or “terminate” one of the plans to get rid of it. There are pros and cons of each approach. To keep this discussion simple, I’ll assume that one of the plans is an old “money purchase” plan (common until 2002), and the other is a profit sharing or 401(k) plan.

The main thing to be aware of is that if you terminate a plan, it triggers full vesting for all members. Some people don’t care, while others do not want to give away full vesting. Merging is the way to go if you want to avoid this. Another issue has to do with “joint and survivor” provisions (“J & S”), where spousal consent is required if you want to get a lump sum over $ 5,000. This applies to the money purchase plan, but not the 401(k). If you terminate the money purchase, then you must go thru this spousal consent process, even if the employee desires to roll their money into the 401(k). Without spousal consent, the plan must, instead, purchase an annuity. On the other hand, merging avoids spousal consent now, but someone must remember to track that money in the combined plan, and to do the spousal consent later.

Finally, when a plan terminates, it creates a “distributable event”, which gives active employees “permission” to receive a payout while still working. Some Employers would prefer that this not occur. Thus, merging the plans (instead of terminating) makes it so employees can not touch that money just yet.

Special rule on Pension Payouts:

When a defined benefit or cash balance plan terminates, everyone gets paid out their full benefit and goes on their merry way. However, what if a “Highly Compensated Employee” is now being paid out in a lump sum form, but the plan is not terminating? This might happen in a Partnership, a medical practice, or other situations where there are several owners.

The IRS has thought about this carefully, and they want to make sure that this payout doesn’t cause the remaining plan members to be left holding the bag, i.e., with an underfunded plan after that payout. There is a “110% rule”, which mandates that the plan after the payout must be at least 110% funded.

It can still be a shock to hear that you cannot get the lump sum that you were counting on. If the 110% rule is not met, then the payments can still commence as a monthly benefit, just not as a lump sum. But people do like their lump sums. It is helpful to plan for this before Mr. Big retires. The easy way out is to make an extra contribution, to boost funding above the 110% threshold. Let us know if you’d like to learn more about this potential trap.

Yahtzee Actuarial?

My wife and I play Yahtzee almost every day. Do you? We have a house rule that if you roll a Yahtzee, you have to go to the nearest window and yell that word outside very loud. (Awkward at airports.)  I am going to be tabulating our scoresheets (“actuarially”, of course) to determine how common some of the combinations are, and to see if I can figure out optimal strategies. Let me know if you want to participate in this project. 😊

Metro Updates:

Welcome to Maria Hartwick, our new receptionist. Maria enjoys running, and spending time with her children. Also, Sarah Mattis, recently started as an Administrative Assistant. Sarah enjoys dance, and loves her two cats. Finally, please join me in congratulating Bryon DiGiorgio on passing one of his ASPPA exams.

Another Trap for Pension Plans:

I have been warning about this for the past few years, and now the IRS has dropped the other shoe – a new mortality table will be required for payouts done in the 2018 plan year. It reflects the fact that people are living longer, so that lump sums will probably rise 5 – 7% with this new table. This is why you are seeing some big companies do a “lump sum window” right now, so they can pay these amounts out the door before the new rules kick in. (Cleverly, Marsh & McLennan, for whom I used to work, is offering this temporary lump sum to its terminated employees, and the amount offered does not reflect the full retirement benefits payable at age 62.)

Plan Document Updates:

Plan documents for 403(b) plans (“Tax Sheltered Annuities”) will need to be restated by 3/31/20. Also, it is likely that all defined benefit and cash balance plans will need to be restated around this same time, depending upon when the IRS releases the final approved language. 401(k) plan documents seem “safe” for now, i.e., a restatement is several years away.

Bow Wow Actuarial

It’s only a word, but in places like Boulder CO, you are not the owner of your dog – you are its guardian! City Council changed this in 2000, to reflect a different mindset. It doesn’t change anything legally, as you can still sell the dog, and the regs define “guardian” as “owner”. Other municipalities have since enacted similar legislation. Some people liked this change more than others, who are suggesting that this is the first step towards a policy of banning pets overall.

401(k) Plan vs. SIMPLE Plans:

I get a lot of calls from people asking to set up a 401(k) Plan, and we are (usually) happy to accommodate. But let’s take a moment to see if this is really a good idea. There are some other plans out there for small businesses, which don’t cost as much as a 401(k); in fact, they don’t cost anything!

These are known as SIMPLE plans. There are two types of SIMPLE’s, an IRA version and also a 401(k) version. They are similar, and, since the 401(k) version never really got off the ground, I’ll focus on the SIMPLE IRA. It’s like a “junior” 401(k) plan, because the contribution limits are lower. However, a SIMPLE plan is free, so you don’t need to pay Metro (or anyone else) a dime! That is because no plan document is required, and no annual tax filings (5500 Forms) are needed.

While the employee limits for a 401(k) plan (assuming you are age 50 or older) for 2017 are $ 24,000, the limits on a SIMPLE are only $ 15,500. Note, too, that an Employer contribution is also required for a SIMPLE plan. This can take the form of either an (a) Employer match, where they put in 3% and you put in 3%, or (b) a contribution for all employees, of 2% of pay. The 3% match can be reduced to 1% in certain cases. Beyond that, there is no wiggle room on these Employer contribution amounts, i.e., you can’t do less or more.

By comparison, it is typical to have an Employer contribution larger than this in a 401(k) Plan, although some 401(k) plans have no Employer contributions at all. This Employer contribution can often be (legally) tilted in favor of the owners, ex: they get 9% and others get 3% of pay.  While we like to sell billable hours to administer 401(k) plans, we like it even more when our clients can accomplish their objectives efficiently!

 What’s up with You?

Let me know at the email address below. I’d like to know! 🙂

Best Wishes,

David M. Lipkin, MSPA, FSA, Editor

[email protected]

(412) 847-7600

Metro Benefits, Inc. is a regional consulting firm, based in Pittsburgh, PA and Charleston, WV. We provide a wide range of services for qualified plans. While we make every effort to verify the accuracy of the information that we present here, you should consult with your Plan attorney or other advisor before acting on it.