Metro News # 114

May 3, 2024

Springtime greetings from Metro Benefits, Inc! The purpose of these Metro Newsletters is to update our Clients and Friends on “current events” in the world of retirement plans and Metro.  We hope that you enjoy it. Let us know if you have any questions or if you’d like to chat ….

Payroll Integration – would this be helpful?

 Some clients find it a hassle to connect their payroll system to their 401(k) Plan. In some cases, they need to manually enter payroll data into the 401(k) system – certainly not efficient, nor to be expected in 2024. But this is the reality in many situations.

Most of our 401(k) Plans are on a “platform”, such as Empower, John Hancock, American Funds, Voya, PFG, and many others. (sorry if I left your platform out here). A “platform” is a website that the investment company provides, which is the information center of the 401k Plan. Payroll is uploaded. Reports are downloaded. Employees can view their information here. Depending upon the payroll provider (ADP, Paychex, etc.), this connection between the payroll report and the platform can be a manual process, which (of course) many people dislike, plus it can lead to errors. Metro can assist by entering the data for you, especially for a small plan.

Beyond this “payroll connection” issue, another issue is when an employee wants to make a change, perhaps increasing their 401(k) deferral from 3% of pay to 5% of pay. Again, this information needs to be coordinated between payroll (tell them to take out more) and the platform (send in the right amount of money, based upon the new deferral election.) Most platforms have developed a “bridge”, which connects the payroll to the platform electronically. It saves the hassles I described above. This connection goes by names such as “Payroll Integration”, or “Payroll 360” (Get it? It’s a circle between payroll, the Employer, and the Platform, thus the “360” name).

For example, an employee who wishes to change their deferral would go online to the investment platform and enter their desired change. This would then be communicated directly to the payroll system. Then, the platform would determine the required contribution (including the deferral change), and securely “grab” the right amount out of the Employer’s checking account. This removes this clerical responsibility from the Employer and is a more efficient system.

Said differently, it is a good way to make an “unbundled system” look “bundled”. These concepts have been around for a while, but it is (rapidly) becoming apparent to me that this is a valid solution for a real problem, at least for some plans. That being said, I don’t want to paint too “perfect” of a picture, as some people think that there can be drawbacks with this Integration idea. (“clunky”).

Let us or your Investment Advisor know if you are interested in learning more about this option.

Metro Staff Updates:

Since our last Metro News, we’ve added four new Analysts. Let’s meet them!

• Taylor Barton works in her Mom’s Unit (Diane Barton = Metro President). She is a recent graduate of Slippery Rock University, with a degree in marketing and information systems. You might also bump into Taylor at the bar that she tends on weekends.
• Derek Lengyel is originally from Bellefonte, PA. He enjoys spending time outdoors, such as fishing, kayaking, and hiking. Derek is a big sports fan, and he intends to pass the ASPPA (professional) exams quickly.
• Mackenzie Yetter has already passed her first ASPPA exam (QKA-1), She is from Selinsgrove, PA. Mackenzie is also an “outdoors” type of person, who enjoys exercising (!)
• Paula Eannetta is a remote employee for us, who lives outside of Tampa FL. She has a beautiful 4 year-old boy (Miko). In her spare time (if she has any), she really enjoys reading. She majored in environmental science at USF.

We are also pleased to report that Kimberly Snyder and Jordan Simko have each passed their first ASPPA exam. Further, Bryan Gold has passed both parts of his QKA exam (1 and 2), so has now earned that important credential. These ASPPA exams are not easy, and we are pleased that so many Metro employees have invested their own time in passing them and attaining these important credentials.

By the way, the QKA designation stands for “Qualified 401(k) Administrator”.

It is Not too late …

To adopt a retirement Plan for 2023. In the old days, you needed to have a signed plan document done by 12/31/23 (for example) to have a plan in effect for that year. Recent legislation extended that date to the due date (including extensions) of your tax 2023 return. So, it may be possible to implement a 401(k) or defined benefit plan retroactively for 2023.

In the case of a 401(k), it is (obviously) too late to allow for 2023 employee pre-tax deductions (“salary deferrals”), but it is not too late to make an Employer contribution. So to that extent it would function as a “Profit Sharing Plan” for 2023 (no employee deferrals), and then open up as a full 401(k) for 2024.

Similarly, one could implement a Defined Benefit or Cash Balance plan for 2023. Depending upon your age, this could provide an annual deduction of well over $ 200K per year. By the way, after the 2024 CPI update, a DB/CB can provide a lump sum payout of over $ 3.5 MM, at age 62. This requires 10 years of participation (but wow!).

Another thing that it isn’t too late to do is to convert a SIMPLE retirement plan (like a Junior/easy 401(k) Plan) into an actual 401(k) plan in the middle of the year. This used to not be allowed, but (again) recent legislation opened this up. You need to provide a Notice to employees that you are terminating the SIMPLE Plan, and you should have a written document to actually do so.

Why did “recent legislation” do all these things? The concept of the two SECURE Acts (1.0 and 2.0) was to “expand coverage” of retirement plans. You can see how these changes accomplish these goals.

But it is too early ….

To actually implement some of the other changes that are already “legal” in SECURE 2.0:

One would think that if the new law says that you can do it then you actually can do so, but perhaps not:

• The main provision that is not ready is the ability to elect to treat Employer contributions as “Roth” after-tax money. The hold-up is the lack of IRS regs on how to deal with tax withholding. However, if you really love this idea (as some of our clients sincerely do), you can accomplish the same thing by using an “in-plan Roth conversion”, i.e., convert the funds to Roth after they are deposited. Almost all plan documents that we prepare allow for this conversion. We find that this conversion works best for 401(k) Plans that are on a platform, rather than Plans that utilize individual brokerage accounts. (too much paperwork).
• Also, the force-out limit increased from $ 5 K to $ 7 K. If a terminated employee doesn’t respond promptly, a plan has permission to force their funds out to them. Some platforms are not quite ready for this change, while others are forcing all of their clients into the higher amount, although (technically) it is an Employer decision.
• One other (important) tidbit about lingering SECURE 2.0 issues – be aware that most new Plans adopted after 12/29/22 (the adoption date of that law) will need to have automatic enrollment (with escalation), starting 1/1/25. There are some exceptions (ex: Plans less than 10 employees). We will provide more information on this later.

Defined Benefit/Cash Balance Documents are due ….

By 3/31/25. All plan documents must be re-stated by then. This is the IRS’ 6-year cycle for plan documents.  We’ll be in touch if this applies to you. This is an efficient time to make any design changes, since we’ll be dealing with the document anyway. We’ve already saved up some ideas to discuss with certain clients, to make their plans work better.

401(k) Plans – don’t feel too left out – you are on a different 6-year cycle, so we can leave you alone til then.

One last detail on SECURE 2.0 + “oops”

We have been discussing the issue of “long-term part-time” (“LTPT”) ees for several years now, since SECURE 1.0 made special rules for them. The concept is that, to expand coverage, people who work 500 hours for 3 years in a row must be allowed into the Plan. (SECURE 2.0 revised this 3-year requirement to 2).

Well now we are finding people that should have been let into the 401(k) Plan as of 1/1/24 (for example) but have not been. This creates special challenges to fix (and protect) the Plan. This could, potentially, involve the need to make an extra Employer contribution on their behalf.

If this happens to you, we should have a pleasant chat to plan out the best solution. (or, better yet, don’t let it happen to you!) The key is to act promptly, in order to minimize potential damage). Silence is not always golden!

That’s all for now. Thanks for reading this far. Let me know what you think about these or any other retirement plan (or baseball/poker) issues.

David M. Lipkin, FSA

Consulting Actuary

[email protected]

Editor

Metro News # 112

July 4, 2023

Greetings from Metro Benefits, Inc! We hope that you are enjoying a fabulous/fun summer. This issue will start with an update on recent (important) legislation, called SECURE 2.0. We’ll then move on to recent Metro hires, and touch on other interesting and fun topics. We hope that you enjoy …

SECURE 2.0 Reflections:

Our last issue was a “Bulletin” on this legislation, and you can find it here:

The purpose of this item is to briefly reconsider some important items that may soon need your attention.

1. Roth required for some 401k catch-ups, starting next year:

Starting 1/1/24, anyone earning over $ 145 K in the prior year, who desires a catch-up will be required to do so as a “Roth”, after-tax contribution. Many 401k Plans have already been amended to allow for Roth, but some have not. The burden will be on these unamended plans, as some work and decisions will be required.

The main decision is whether you wish to take advantage of catch-up (for the high earners) next year. If so, as explained above, the plan will be required to be amended to allow for Roth contributions by 12/31/23. Note that the Roth provision affects many aspects of the Plan document, so this amendment is not a quickie one-pager. We would likely need to restate the entire plan document, although we can do so efficiently. We need to know your intentions in this regard. If you have questions, this would be a good time to discuss them with your Analyst or Managing Consultant.

The other important issue for these plans (who have not previously allowed for Roth but may wish to do so) is payroll capability, i.e., your payroll system must be modified to allow for Roth. This would be a good time to start asking about this.

2. “Long-Term Part-Time Employees” (“LTPT ees”)

As described in the Bulletin, Congress wanted to allow people the opportunity to participate in 401k Plans, even if they did not work 1,000 hours in a year. Normally, these part-timers may never have been eligible to join the Plan. Before we go any farther, be aware that these newly eligible employees need not receive any Employer contributions; the only issue is that they must now be allowed to defer their own pay into the Plan. The tricky part is when this becomes effective.

Note that the original SECURE (1.0, although they didn’t call it that at the time) Act required that employees who had worked 500 hours in 3 prior years would be eligible to join 1/1/24. This rule remains unchanged. The modification is that the 3-year requirement is reduced to 2 years, but this doesn’t apply until 1/1/25.

So, the result is as follows:

As of 1/1/24 – if you worked 500 hours in 3 consecutive prior years you can now join the Plan to defer your own pay. Again, you need not get any match or other Employer contribution. Further, you will not be counted for the 401k discrimination tests.

As of 1/1/25 – the “3-year” rule” reduces to 2 years.

As you can see, Congress liked the original concept so much that they wanted to make it quicker in this new law.

3. Employee Election on Employer Contributions as Roth

Some people strongly advocate Roth, as they reason that paying taxes now leads to big advantages later. SECURE 2.0 allows for employees to have an option to treat all (vested) Employer 401k contributions as Roth, effective “immediately”. The problem is that the mechanics aren’t yet ready to offer this option.

We are waiting for IRS guidance to implement this feature. Among other things, we’ll need to know who would report the (Roth) taxable income, how that would be done, and how frequently the withheld taxes must be remitted. It’s also unclear whether this additional taxable “income” will need to be counted for Plan purposes. We’ll stay on top of this for you.

4. Treating College Loan repayments as if they were salary deferrals

We’ve been having some clients ask about this optional provision, effective 1/1/24. It allows college loan repayments to be treated as if they were 401k salary deferrals, and be eligible for an Employer match. Let us know if you’d like us to amend the Plan document in this way.

5. Hardship Distribution self-certification

One of the hassles of the hardship provision had been the need for the Employer to act as the “referee”, to certify that the employee really did have an approved hardship and no other funds to pay for it. This role (naturally) made some clients uncomfortable. No more! Starting now, an employee can “self-certify”. Much simpler but do bear in mind that if the Employer knows that the employee is lying, then they can’t rely upon that certification. Is it obvious that most or all Plans would want to adopt this provision? (let me know).

Ireland license plate – “actuarial”!

Having just spent some time in Ireland, I learned that their license plate system is interesting. Really observant/loyal readers will recall a similar topic from a 1989 edition of Metro News, regarding license plates in England. At that time, the first letter of the license plate told you what year the car was made if you knew the secret code.

The Ireland system uses the year of the car as the first two digits (i.e., a plate starting with “22” means it was made last year). Apparently, that system wasn’t precise enough, as a car made in January of 2022 has a different value than one made in December of that year; it’s almost a whole year older. They felt that they needed to improve the precision of this disclosure, since they wanted to ensure that their citizens got fair value if they sold or traded their car.

The solution was to add on more digit after the year (Ex: 22-1). A “1” signifies manufacture in the first half, while a “2” indicates second-half production. Is this odd? Rough justice? How finely do we tune this up? (Month? Day?) I suppose that the limitation is the number of digits, that if you go monthly, you’ll need an extra digit for months after September.

This is reminiscent of a discussion in a 2008 book by Malcom Gladwell (“Outliers”), about why some people out-perform others. Chapter 1 discusses the huge physical advantage in youth sports for those born just after the cut-off date, i.e., perhaps a year older than the other kids. I suppose that any cut-off date (kids or cars) can lead to this type of inequity.

(Oldie) – Reminder on 2023 audits for IRS 5500 Tax Returns:

As it comes time to file the 5500 tax forms for your plans (most are due 7/31/23, or can easily be extended to 10/15/23), one issue for some Plans is the required audit if there are over 100 people in the Plan. The rules for counting the “100” have changed in a big way!

Until now, you were considered a “plan participant” if you were eligible for the Plan, even if you decided not to join. So lots of people with a $ 0 account balance were considered against this threshold of 100.

The IRS recently issued guidance (via the 5500 instructions) to ignore people with no account balances, to the dismay of the accounting profession. This will start to apply for the 2023 Plan Year (which will be done next year).

Do extensions make you Nervous?

Some clients ask us to never file an extension for their 5500 tax forms. They believe that this could lead to an increased risk of IRS audit. Is there any basis for this concern? Perhaps there was, decades ago? Let me know what you think…..

Metro Hiring Updates:

We finally crossed the line and started to hire full-time remote employees, who do not live in Pittsburgh. There just aren’t enough local people to do this work, and with remote trends and technology we found it imperative to make this move. So far so good.

Please join us in welcoming Dingwen Sun, an Actuarial Analyst who resides in California, and also Michelle Appel, a 401k Analyst who lives in Kansas. We expect that you will enjoy working with these new Analysts!

That’s all for now. Thanks for reading this far. Let me know what you think about these or any other retirement Plan issues.

David M. Lipkin, MSPA

[email protected]

Editor