Metro Newsletter #96

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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.

Metro Newsletter #95

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April 1, 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 …)

Tax Reform on the Horizon?

With politics moving so quickly, this information may be obsolete by the time you read it – but (as you know) Congress will be shifting their attention to tax reform.  Our industry gets a “HUUUUGE” tax break under the current system (value of retirement plan deduction > $ 150 billion per year).

This may or may not be at risk. Some legislators believe that the wealthy get most of the retirement tax incentives, so they justify a cutback on those grounds. Others are less interested in the logical details of fairness, and just want to raise revenue. That said, there is a chance that attention may not be focused on our industry, if another funding stream can be found to pay for the desired tax cuts. (“border adjustment tax” = ??).

Some of the proposals that have been introduced over the past few years would be very bad for us, for example, (a) freezing the maximum benefit (“415”) limits for ten years, or subjecting the tax deferrals of high earners to a supplemental income tax. So this is a really (potentially) big deal, and we’ll stay on top of it for you.

IRS backs off illogical stance on 401k’s:

Many of our clients maintain a “safe harbor” 401k plan. This is where the Employer makes a fully-vested contribution for plan members (either a generous matching arrangement, or else a 3% of pay contribution to all eligible participants). The key to this discussion is that these funds must be fully vested, as I just mentioned.

There has been an issue for these plans for almost a decade. Some of these safe harbor 401k plans also have additional Employer funds residing within participant accounts, called profit sharing contributions. These funds need not be fully vested. As a result, these plans keep a “forfeiture account” to hold these non-vested funds when non-vested members terminate employment. These forfeiture accounts can be used to defray plan expenses, or  can be reallocated to plan participants as if they were an additional Employer contribution.

However, the IRS has maintained that these non-vested funds could never be used to pay for the safe harbor contributions (ex: 3% of pay) themselves. The IRS has maintained that, because “safe harbor” contributions must be fully vested, they cannot originate from non-vested monies.

Until now. They have finally relaxed this illogical position. What strikes me about this IRS stance is that they pushed it  – not because of any rational logic – but (instead) because they could. They are powerful, and they don’t mind if you know that.

Two interesting Forms that may be helpful?

Here are two government forms that you may find to be useful:

  1. Form SSA-7050-F4 – “Request for S.S. Earnings Information” –  This form allows you to request a historical earnings record from Social Security. It can very much come in handy if you need those old records. (For example, to calculate a benefit from a defined benefit plan.)  When the results come back, they designate both the amount of compensation and the Employer which paid them. The user fee is $ 115, and the person’s signature is required.
  2. IRS Form 5329 – Additional Taxes on Qualified Plans (Including IRA’s) – One of the most common errors in retirement plans is missing the required payout upon reaching age 70 ½. (Note that this mandatory payout does not apply if the plan participant is still working beyond that age, assuming that they are not a 5% owner or direct relative of one.) Normally, there is a 50% excise tax on the missed payout. By filing this form with an explanation, you can request that the IRS waive this penalty. The other advantage is that it starts the clock on the IRS statute of limitations.

Wow that’s a lot of $$

With the new 2017 IRS limits in place, you may now accumulate up to $ 2,684,000 at age 62 in a defined benefit plan, assuming that you have at least 10 years of plan participation and also have compensation in excess of $ 215,000 per year. Let us know if you would like our help in working on this type of plan for you or your client.

Metro Updates:

Welcome to Rachel Warnock, our new receptionist. (Our prior receptionist, Courtney Porto, has been promoted to Assistant to Diane Barton, Metro’s President). Welcome to Jeffrey Geiger, recently hired as an Analyst to work on 401k Plans. Finally, please join me in welcoming Sharon Duran, an Administrative Assistant in our accounting department.

We’ve also had some exam successes, as more of our Analysts pursue professional credentials. Emma Joyce has passed her first (major) ASPPA exam, called D-1. This will move her closer to the QKA designation. Shelia McLaughlin passed a different type of test, relating to 403(b) (“TSA”) Plans, so now we have an expert on staff for that specialty. Finally, Jessica Klauss and Jeffrey Geiger both passed introductory exams that will provide them with a background in retirement plan administration.

We appreciate the hard work that these employees have done to achieve these exam successes. It makes our company stronger.

Important New Regulations Proposed:

The IRS has released new regs governing the services of actuaries. Among the important provisions:

  1. Henceforth, actuaries will be known as “leaders of the universe”.
  2. Dark chocolate will be made available to them for free.
  3. As of 1/1/18, clever jokes about (geeky) actuaries will be encouraged even more.
  4. We will continue to be thought of as really cool people (?)
  5. (Please see the date of this Newsletter for additional guidance)

Balancing Defined Benefit tax deductions:

One of the reasons that people like defined benefit plans is that they can take a (very) big tax deduction. Often, they are paired with a 401k plan, as a “combo plan”.  The tax code has some provisions about the maximum combined deductions for these paired plans. The important dividing line is whether the defined benefit plan is covered by the PBGC insurance program or not. If so, then you can take a full 401k deduction, plus a full defined benefit deduction. (PBGC coverage is avoided for one-person plans and for plans of “professional employers” with fewer than 25 employees).

If the defined benefit plan is not covered by the PBGC, then the combined deductions are limited and tricky. If one limits the 401k deduction to 6% of payroll, then you can take the full available defined benefit deduction. But if you go a penny over that 6% limit on the 401k side, then your defined benefit deduction is limited to 31% of payroll, less the 401k deduction. So be careful in coordinating these combined deductions!

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 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 #94

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December 19, 2016

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 …)

Year End Edition – Happy Holidays!

We at Metro want to take a moment to express our sincere gratitude for having the chance to work with you. We appreciate having the opportunity to serve you, and we hope that you have a warm, comfortable Holiday Season. 🙂

Year End Edition – 2017 Limits:

The IRS has released the 2017 limits. The basic 401(k) salary deferral limits have not changed, remaining at $ 18,000 per year, plus an extra $ 6,000 (“catch up”) if you are age 50 or older. However, the overall plan limit has increased by $ 1,000, from $ 53,000 to    $ 54,000 per year – so there is room to accommodate another $ 1,000 per year of Employer contribution. (Note that the $ 54 K limit grows by an extra $ 6 K if you are age 50 or over at any time during 2017).

One calculation that I always like to do is to figure out what percent of pay must be provided for the employees, in order for the owners to reach the maximum limits. Going backwards, if we can get a head start (via salary deferrals) of $ 18K out of the $ 54K target, that means that we only need $ 36K more from an Employer contribution. Note that the maximum compensation amount that we can use has gone up from $ 265K to $ 270K. Thus, the $ 36K we need represents 13.33% of that pay. We always need to provide employees with at least 1/3 of the owner’s contribution rate, so in 2017, you’ll need to provide them with 4.45% of pay to max out the owner. (Note – this is “best case”, assuming that the employees are younger than the owner; and that the owner is at or above the maximum salary; your results may vary).

Finally, the defined benefit limits have also increased, so that we can provide an annual benefit of $ 215K, at age 62. This translates into a lump sum of $ 2,684,000 (approximately, and this depends upon the current interest rate.) So that is a lot, and if you start a plan like this at a later age, you can deduct well over $ 200K per year.

Let us know if you’d like to see a projection for yourself or a client.

Year End Edition – Age 70 ½ payouts

Nothing new to report here, you probably know the drill. (do you?) About 1/27 of the account balance needs to be paid out as taxable income, starting at age 70 1/2. You can start the first payout by the following April 1, but if you do, then you have a double payout for the first year. If you are a non-5% owner and still employed, then the required age 70 ½ payout rules do not apply.

There seems to be bipartisan interest in Congress to simplify this process, by making the age higher (perhaps 75, and lose the “1/2 year” thing), and creating a deminimis amount (ex: $ 100,000 minimum account balance below which this does not apply.) There are ways to ask/beg the IRS for forgiveness if this required payout is overlooked, but the better idea is to not overlook it to begin with.

Finally, don’t forget the big trap on this – any amount subject to the 70 ½ rule (they call it a “required minimum distribution”, or RMD) can not be rolled into an IRA. So don’t move the entire plan balance into an IRA and then try to do the payout from there. Again, the RMD portion isn’t eligible to be rolled into the IRA to begin with. It will trigger a penalty. Please call us if we can assist.

Vacation Planning Tip:

 Notice that the serving size for double chocolate Pepperidge Farm Milano cookies is two. So if you go away for a week, one bag of these cookies will almost exactly get you through that vacation. Save a dark chocolate one for me. 🙂

Exam Successes!

We at Metro place a lot of emphasis on professional development. Just look at our letterhead to see the importance that we place upon these credentials. We believe that this approach allows us to deliver a higher level of service to our clients. It looks like that letterhead may be getting more crowded in the future, as several Metro employees have recently had examination successes. Please join me in congratulating Chris Tollan, Adam Davis, Mae Davis, and Rodger Crawford on their recent ASPPA exam successes. (By the way, with this exam, Mae has achieved the credential of “QKA”, or Qualified 401k Administrator!) They have worked hard to pass these tests.

Update from Metro Report # 92 on the PBGC:

In that edition, I had noted that the PBGC deficit is $ 20 billion. To be more precise, as of 9/30/16, the deficit in the “single-employer” system is $ 20.6 BB (down from $ 24.1 BB), while the multi employer deficit is up to $ 58.8 BB. It makes me wonder about the long-term viability of this insurance system, and the potential for a taxpayer bailout.

Update from Metro Report # 93 on Church Plans:

In our last issue, I mentioned that it was possible that the “Church-related” plan issue might be decided by the US Supreme Court. The Court has taken this case and will decide next year. Again, the issue is whether a Church-related employer (like a hospital) has its qualified plans subject to ERISA. The IRS has said “no” so far, and this ruling may overturn that ruling.

From the Archives/Let’s Reminisce:

I have been writing these newsletters since I formed Metro in 1986. In fact, the first editions were from a firm called “Metropolitan Actuarial Services”, the name I cooked up that year. It also listed the Metro address as my home address, because it was. Here are some interesting (old) tidbits:

  1. (Issue #2, 1987) – The Tax Reform Act of 1986 will shorten the ERISA vesting schedules, to either 3 to 7 years (graded), or 5 years (flat). Amusingly, as you probably know, neither of these (new) schedules can still be used (2-6 graded or 3 year flat).
  2. (Issue # 4, 1988) – A new law, called OBRA ’87, will require quarterly contributions to pension plans. (Unchanged since then.)
  3. (Issue # 5, 1988) – I wrote an article called “How to Lie with Statistics” – not that I ever would, but is nice to know how others do so. My rant at that time was against “non-zero based graphs”, where the bottom of the graph does not start at zero. (Open any newspaper or magazine today and you can see what I mean.) This allows for visual distortion, as it allows the creator of the graph to make its shape appear however they want. (Remember I am an actuary).
  4. (Issue #9, 1989) – License plates in England – you can tell what year a car is from by the first letter of the license plate.
  5. (Issue # 11, 1990) – Don’t put works of art (or other hard-to-value assets) in your IRA or plan. (Still true, funny I broke that rule myself by mistake 🙁 ).

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.

Metro Newsletter #93

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July 29, 2016

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 …)

Best wishes for WV Flood recovery:

We have several employees, clients, and friends in the State of West Virginia. We were sorry to hear of the recent flooding, and we sincerely wish you a speedy recovery.

Church Plans – Update:

Church plans are exempt from ERISA coverage, unless they voluntarily choose to be covered. However, there are other plans that “quack like” a Church Plan, and they are called “Church-affiliated” Plans. (“CAP”).  These plans may be for a church-affiliated hospital, cemetery, day care, camp, etc.  The status of these plans is becoming increasingly murky, and this may be important for you to know. These organizations maintain hundreds of plans, and some of them are quite large.

Since 1980, the IRS has issued most of these plans a ruling that says that these CAP’s are not covered by ERISA. However, since 2013, some of these affected participants have sued over this issue, claiming that the plans should be subject to ERISA. The participants want to have the protections afforded them by ERISA.

Two of the “circuit courts”, i.e., the ones just below the Supreme Court, have already ruled that the IRS is wrong, and that CAP’s are subject to ERISA. (including the 3rd circuit, which covers PA.) Lower courts have not uniformly ruled this way, and a “circuit split” is possible, thus leading to a potential Supreme Court review within the next year or so.

This is a very big deal, especially if applied retroactively. Many of these hospitals maintain a defined benefit plan, which would need to be brought up to snuff on ERISA required funding. PBGC coverage would also be at stake. So, even the IRS letter ruling that such a plan may have gotten will not protect them if the courts rule (as they have so far) that the IRS was wrong.

401(k) Corner – Hardship Distributions:

Most successful 401(k) plans have either a hardship or a loan provision, or sometimes both. Some employees won’t commit their own money (“401k salary deferrals”) into the plan unless they can see a back door exit, so they can get their money back out in case of emergency.

Which one is better – hardship or loans? Some people view the loan option as better for the participant, since they avoid the 10% excise tax that applies to hardship withdrawals for people under age 59 ½. One downside of loans is that the interest on the repaid loan is taxed twice. Other people want to avoid the administrative hassle of loans. Beyond that, it is a matter of personal preference which provision the Employer chooses to include.

Most of our plans choose the “cookie cutter” definition of “hardship”, which the IRS publishes and is actually called a “safe harbor”:

  1. Unreimbursed medical expenses for you, your spouse, or dependents.
  2. Purchase of an employee’s principal residence.
  3. Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.
  4. Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.
  5. For funeral expenses.
  6. Certain expenses for the repair of damage to the employee’s principal residence. (Note – this is for a big event, and not deterioration).

There is another way to go, if you’d prefer, called “facts and circumstances”, where the Employer looks at the situation and simply declares whether it is a “hardship”. We see very few, if any, of this type of design, since most Employers don’t want to get involved with a subjective process like this.

A plan can also choose to extend the above list to the beneficiary of the plan member, as well. We typically do not include this provision in the plan documents that we prepare. Note, however, that 1 and 3, above, already cover the spouse, so no such extension is needed in these cases to cover them.

Some of the bigger vendors recently came up with the idea of “self certification”, where the employee asks for the funds, and signs off that they promise that a “hardship event” has occurred. This would completely take the Employer out of the loop. We can see their motivation in trying to streamline the process, but the IRS isn’t amused. A recent publication suggests that the Employer needs to maintain proof of hardship.

As you can imagine, sometimes people are desperate to get at their money. Congress intentionally made this hard to do, as the 401k system is supposed to be a “Retirement System”, and not a piggy bank. For example, it is not that unusual to see employees quit their jobs in order to take out their 401k funds. This is allowable. The impermissible action is a “fake quit”, where the (clever) employee quits and is rehired the next day. This is not allowed. In fact, if you come back before you actually receive the check, then the whole transaction is no good. The IRS discourages this “fake quit” practice.

Welcome to Metro!

Since our last e-news, Metro has hired both Alex Romano and Lori Brazill. Alex is an Analyst in our defined benefits area, preparing actuarial work. Lori is a new Administrative Assistant. Please join me in wishing them well here at Metro!

Happy Cows:

My wife and I recently spent a few days in Switzerland, and this is what we learned:

  1. They want their cows to be happy. All tethered cows must be allowed outside at least 90 days per year, by law, of which 30 must be in the winter. Perhaps happy cows do give more milk!
  2. The Swiss version of Social Security provides for full retirement at age 65, but only if you are male. You can retire at 64 if you are female. (Note: ERISA would not allow this here.)
  3. We toured the old, pretty windmills. One thing I learned is that they actually do stuff when they spin around, hence they are “mills” (duh.) For example, the one we toured was sawing logs, while others grind oils, paints, etc.
  4. It is expensive to live there.

Pass thru of fees to plan Members:

It is not unusual for 401k plans to “pass thru” plan fees to plan members. This would typically include a distribution processing fee, a loan fee, time spent in analyzing a divorce order (“QDRO”), etc. In extreme cases, the plan sponsor also charges our fees (for administering the plan) back to the employees. The one type of fee that can never be passed thru is for what are called “settlor functions”. This means activities that benefit the Employer, but not the plan members themselves. This might include costs of establishing or terminating the plan.

While this activity is common on the 401k side, it is not allowed for a defined benefit plan. This is because the plan is “promising” a certain payout to the employee, and so nothing can detract from that.

Sports Mortality Actuarial:

The oldest living baseball player is now 99 ¾ years old, while the oldest living hockey player is now age 97.  Does this strike you as odd? (it does me.) With such a large number of former players, I’d certainly expect some even-older people to be alive. What might be some of the reasons?

  • Players in the old days didn’t take care of themselves that well (ex: no year-round conditioning). Society, in general, wasn’t as health conscious.
  • Back then, the pay was much lower, so they often had to take 2nd jobs, some of them physically demanding. They also had to take jobs after they retired from sports.
  • In baseball, there is a preference for left-handed players, and it appears that lefties don’t live as long.
  • Not sure yet about poker mortality but I’ll let you 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 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 #92

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March 31, 2016

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 …)

Plan documents update:

I have been regularly updating you on this issue. Bottom line: All 401(k) and profit sharing documents must be restated by 4/30/16. We have gotten thru the bulk of these documents, but there are still a few left. Let us know if you have any questions.

(Beyond that….) – Is this even a good idea? The IRS thinks so, because they have made this process mandatory, so there is no choice. Whether it is a wise use of “plan funds” is an entirely different question. It certainly helps keep the plan documents up to date with current laws and regs, but it makes me wonder if there is a better way.  If there were a desire to make the 401(k) system more efficient, a better place to start might be the large amount (“may I say “plethora”?) of required Notices to plan participants, many of which cannot be electronically delivered.

Simplify our lives?

There are a couple of “Simplified” types of plans available. The more recent generation is called “SIMPLE” plans, both in the form of a SIMPLE 401(k) and a SIMPLE IRA. (For whatever reason, the 401(k) version of this never really took off.)  Both of these can be viewed as “Junior 401(k) Plans”, with lower annual limits, small mandatory Employer contributions, and no need for “paperwork”, i.e., annual tax forms or plan documents. However, there is typically a very short document to sign to initially set this up. This is a good fit for many smaller plans. (Note: No vesting schedule is allowed, which makes these plans less attractive to some.)

The older version of these plans is called a “SEP”, which stands for “Simplified Employee Pension”.  This can be compared to a “junior profit sharing plan”, so a SEP does not allow for the pre-tax employee contribution. Only an Employer contribution is allowed, and you can’t be too sophisticated about how you allocate it. (Typically everyone gets the same percent of pay.)

The oddball in this family (every family has one, right?) is called a “SARSEP.” It stands for “salary reduction SEP”, and it was a very primitive attempt at the Junior 401(k) Plan that I described above. When they invented the SIMPLE plans, Congress decided to not allow any new SARSEP’s after that date. So if you have one, you are special. The reason I am telling you this is because the IRS is now getting around to auditing some of these SARSEP plans, and they are ripe for errors. We just had a discussion with a law firm that is being asked for a $ 250 K clean up!. These plans are very tricky; let us know if we can assist.

Recent IRS Regs:

The IRS recently announced a welcome change for 401(k) Safe Harbor plans. For whatever reason, they had not allowed mid-year amendments to these plans. You could only change them on their “Anniversary Date”, typically 1/1. Their thinking was that if you inform the eligible employees that you intend to have a Safe Harbor plan for the following year (and you inform them via a required notice in November), then you should not change that deal, i.e., bait and switch. However, they made this prohibition so strong that you couldn’t change a single thing, even adding a loan provision, or making plan eligibility more generous. This is the kind of stuff that happens when government gets an attitude. After about 7 years of industry lobbying, the IRS has relaxed this prohibition. So as long as you don’t change something that is vital, you are OK to amend mid-year.

The second important regulation is proposed, and not final. It will not become effective until after it is finalized. The problem is that this proposed regulation may would put a crimp in the common industry practice of defining each eligible employee as their own allocation group. This gives the Employer the flexibility to pick and choose who gets how much of the contribution, assuming that the resulting allocation would pass the required discrimination tests. The IRS position is that the allocation groups must also pass a “reasonable business classification test”. So we are very eager to see how this turns out. Our industry is lobbying heavily to retain this flexibility. Let us know if you have any questions or concerns on these changes.

Did you know that …

In some places it is illegal to back into a parking spot? You can get a ticket for it. Feel free to google this and let me know what you think.

Defined Benefit/Cash Balance Updates:

While most of our clients maintain 401(k) plans, some maintain the traditional defined benefit (“DB”)  (or newer Cash Balance) (“CB”) “Pension Plans”.  I always enjoy these plans because they require an actuary to certify their funding every year, plus they are (usually) fun and interesting. So this section is for those interested in these types of plans. There are a few important things going on with them:

a) The IRS is likely to adopt a new mortality table in 2017. People are living longer, so that seems like good news. However, for the traditional DB plans, this will likely cause an increase of 10-15% of the lump sum payout. Note that this issue does not affect CB plans, because the benefit is paid as an account balance, Said differently, the employee bears the mortality risk for CB plans.

b) PBGC premiums are going up and up and up. This applies to plans that are covered, which includes all DB and CB plans except certain smaller ones (for professional corps.) When President Ford signed ERISA on 9/2/74 (Labor Day!), the premium was $ 1 per person per year. Recent legislation will soon increase this to $ 89 pp. They need to do this because the system is $20 billion underwater. (With a “b”!) There is something that you can do to help yourself, and that is to fund the plan robustly. This is because part of the PBGC premium depends upon how well funded your plan is.

c) The funding system for DB/CB plans looks like a drunk driver weaving all over the road. (Cue the comparison to Congress here). Congress shored up the DB/CB funding rules with a law called “PPA ‘06”, but then before the ink was dry, they loosened the funding requirements again. Bottom line: if all you do is to contribute the minimum required amount, you will not properly fund the promised benefits. Again, you can help yourself here.

Again, let us know if you have any questions on these issues.

Metro Updates:

Our two offices (Pittsburgh, PA and Charleston WV) have had some positive changes recently. We have hired a new receptionist, Courtney Porto. We have also recently added a new Analyst to our West Virginia staff, Melissa Riggs. At the same time, we have promoted several of our Senior Analysts to the Account Manager role, which we call “Managing Consultant”. They are Jennifer Stenson, Michael Steve, Christine Lestitian, and Shelia McLaughlin. We think that this change will allow us to provide our clients with (even) better service.

Finally, and I say this with sadness, Maureen Pantanella has decided to retire, after long and meritorious service, the last 18 years here at Metro. I have relied on her for her advice and expertise over these years, and we all will miss her kindness and leadership here at Metro. Her last day will be 4/30/16. Please join me in congratulating Maureen on her upcoming retirement.

 

What’s cooking with you?  Let me know at the e-mail below ….

 

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 #91

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December 10, 2015

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 …)

Year End 2015 Edition!

The IRS has announced the changes in the maximum plan limits for 2016 and, drum roll please, there are no changes. This is because inflation didn’t cause the index to go up, just like Social Security. So the 401(k) “salary deferral” limit remains at $24,000 (age 50 or over) and $18,000 (under age 50). The overall 401(k) plan limit, including the Employer contributions, remains at $59,000 (age 50 or over in 2016) or $53,000 (under age 50)

There are some other “housekeeping issues” that you need to keep in mind at this time of the year:

2015 Required Minimum Distributions and Form 1099-Rs:

Any participant who is a 5% owner and has reached age 70 ½ must receive their Required Minimum Distribution by December 31st. In addition, any other participant age 70 ½ or older who is no longer employed must also receive a distribution by December 31st. Metro clients received correspondence from us on or around November 25; please review and respond at your earliest convenience so that we can assist you with the coordination of any RMDs that still need to be processed before year-end.

The IRS Form 1099-R reports distributions to the IRS and to the recipient. Participants that received distributions in 2015 must receive a 2015 Form 1099-R by January 31, 2016. If Metro Benefits, Inc. prepares these forms for a plan, please note that we will be emailing (or mailing) important information concerning the 2015 Form 1099-Rs the week of December 21st. Please watch for this correspondence and provide the requested information in a timely manner so that all needed forms can be prepared and mailed by the IRS deadline. (Thanks to Linda Fulton for this item)

New Plan Deadline:

If you are thinking about establishing a new plan in order to get a 2015 contribution or tax deduction, the time limit for adopting the plan is 12/31/15. Please let us know asap if you want to set up a plan.

Metro Updates:

We are very pleased to announce exam successes for some of our Analysts. As loyal readers and clients know, we are very professionally committed, so for us it is a big deal when our employees achieve professional credentials. Please join me in congratulating Adam Davis and Kristie Black on attaining their QKA designation (“Qualified 401(k) Administrator”) and Chastity Crihfield on passing the DC-1 exam. 🙂

Plan Documents are us:

As you probably know, all 401(k) plan documents will need to be restated by 4/30/16. Many of our clients have already gone through this process. One new technique we are using this time is electronic adoption. While this may not seem as satisfying as actually signing a piece of paper to adopt the plan, the e-adoption process is more efficient, and you can rest assured that forests are being preserved for your grandchildren. Please let us know if you have any questions or concerns about this process. Note that defined benefit and cash balance plans will be re-done in about 2 years.

Lotto Actuarial:

Many of us (not me) play the daily number, and some people have better odds than others. Why? A recent article in the Wall Street Journal (10/11/15, “Lucky Lotto Numbers Will Only Win You Less”, by Jo Craven McGinty) discusses the reasons for this.

Most people play their “lucky” numbers, their kids’ birthdays, or select a pattern of numbers on the card itself. Everyone has the same chance. The problem is when people play “popular” numbers, perhaps the date or another popular set. Apparently, there was a series of numbers in the TV show “Lost”, which people played a lot (more than any other combination, in fact.)

The problem with this “popular” approach is that if there are multiple winners, the prize is divided up among more people, and so you win less. This is, mathematically, a big problem. The option of letting the computer pick random numbers for you is a better option.

One point that the article left out – almost every lottery is a 50/50 deal, where only ½ of the pool is paid out. This can never be a good bet for the player. I am always intrigued by the lack of transparency on this, and I wonder if lotteries’ popularity would go down if this were made clearer.

IRS audit triggers:

At a recent “ABC” meeting in Pittsburgh, an IRS auditor presented a slide that indicated potential retirement plan audit triggers. Here are a few:

  1. A large number of terminated plan members who leave without full vesting
  2. A high percentage of assets classified as “Other”
  3. Significant payouts
  4. Top-heavy 401(k) plans
  5. 401(k) Plans for self employed individuals.

He also mentioned that not responding to a survey or letter might increase audit risk. 25-40% of all audits result in no change, although that range decreases to 15-25% in the Mid-Atlantic region of the IRS. Let me know if you’d like to be invited to these informative, quarterly meetings. We get to hear a variety of speakers.

Preparing for an Efficient 2016:

With a new year quickly approaching, please remember to keep the participant information up to date on your record keeping platform (if you are using one). All address changes and name changes should be updated on your recordkeeper’s plan sponsor website.  Also, please remember to update the platform if an employee leaves employment.    By entering this date, many platforms will automatically send a distribution form directly to the individual for completion.  If you have any questions about the services offered by your recordkeeper, please let us know.  (Thanks to Shelia McLaughlin for this item.)

Wild and Wonderful West Virginia!

Due to a recent change, we now have four positions in our Ripley, WV office. (About 35 minutes from Charleston).  The problem is that we now only have three employees there to fill them. If you know of anyone with a math or accounting background who would like to be part of the Metro team, please let us know. We have a rapidly-growing client base in that State. (Personal note – I really enjoy my trips to visit clients and associates there; people are so friendly. I feel fortunate to be able to live and work in this part of the country = Western PA + WV; this is from someone who grew up in NY and CT.)

What’s cooking with you?  Let me know at the e-mail below ….

 

Happy Holidays

From the entire team at Metro Benefits, Inc.

 

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.

Metro Newsletter #90

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August 10, 2015

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 …)

Updates on Defined Benefit and Cash Balance Plans:

For those of you who work with pension plans, the IRS has implemented some new rules and is about to implement some others.

The first new ruling deals with retirees who are receiving a monthly income. In the past, some (typically larger) plan sponsors have knocked on these retirees’ doors and asked them if they’d like to replace their monthly income stream with a lump sum.  However, under Notice 2015-49, the IRS has said that you can no longer do this. Although, this technique may still be possible upon plan termination.  The IRS view is that the annuity form is sacred under a Defined Benefit Plan.

The upcoming IRS rulings involve an even drier subject, retiree mortality. People are living longer and the Society of Actuaries just released a new mortality table. This will impact both the funding of pension plans (you’ll need to contribute more) and also the amount of lump sum payouts. Those payouts could increase 10-15%, because of the longer life expectancy. The IRS hasn’t yet said when they will adopt the new table, but those trying to settle up their pension obligations in the least expensive way might want to cash people out by 12/31/15. (To avoid confusion – I mean cashing out new terminees and retirees who are not yet in pay status, per the above item.)

Quick Metro Updates:

We are pleased to report that one of our Analysts, Jayme Philson, recently passed her final ASPPA exam. She has now earned the designation “CPC”, or Certified Pension Consultant. This reflects a lot of hard work on Jayme’s part, and we are very pleased to have her as a member of our team. Please join me in congratulating Jayme.

We brought our employees (in both our WV and Pgh. Offices) to Pirate games for fun with baseball +food + family. Russ Smith won the “clay sporting” competition (like skeet shooting) among the Metro owners at 7 Springs, so you might want to be careful with Russ. Let me know what fun stuff you are doing this summer. ([email protected])

The 7 Best ways to mess up your Qualified Plans:

I am attracted to these lists of the most common errors in retirement plan administration. This list was published by Nevin Adams, Director of Communications at ASPPA, and (with permission) I have summarized (and amplified) it below:

  1. Not following plan provisions for loans/hardships
    1. The reasons set forth for hardship payouts must be clearly satisfied
    2. The loan amounts and repayments must be carefully monitored
  2. Failure to follow plan document eligibility/vesting rules
    1. Main chance to get eligibility wrong is for part time employees who may or may not work 1,000 hours. This must be measured carefully.
  3. Not keeping document current
    1. All 401k plan documents must be re-done before 4/30/16. We will normally handle this for our clients.
  4. Not starting age 70 ½ payouts on time
    1. This is one of the most common errors I see. Note that the 70 ½ rules do not apply to non-owners if they are still working. The excise tax can be as high as 50% of the unmade payouts, although the IRS can forgive this if you ask nicely.
  5. Not depositing employee 401k contributions on time
    1. I think most of our clients are sensitive to this issue; the DOL certainly is.
    2. The fact that a plan sponsor is desperate for money is not a good reason to “borrow/steal” the employee funds.  I am working on Plans for the DOL where the owner is doing hard jail time for this.
    3. Time frame for plans less than 100 members is 7 business days. (or “asap” if quicker)
  6. Failure to obtain spousal consent
    1. This applies mostly to Defined Benefit and Cash Balance plans, where you may not pay out a lump sum more than $ 5 K without valid spousal consent. This consent needs to be witnessed or notarized
    2. It also applies to Money Purchase and Target Benefit plans, although there aren’t many of those left.
    3. Spousal consent typically does not apply to 401k plans, since they are under the “profit sharing” (not “pension”) rules.
  7. Paying expenses from plan assets that are not “eligible” to be paid
    1. Such as setting up or terminating the plan; they call these “settlor” functions, that primarily benefit the Employer and not the employees

Nevin goes on to note that the IRS has corrective programs to help you fix these errors.

Fast Food Actuarial:

If you get breakfast at McDonald’s and if you like bacon (as I do), then beware. Their hotcakes can be ordered just by themselves, or as a combo with sausage. (Side note – upon further research in a 2006 yahoo chat thread, they call them “hotcakes” because it is a “regional colloquialism.”) Anyway, the trick here is to order the “hotcakes with bacon instead of sausage”. That way you get the combo price. Otherwise, if they ring it up as hotcakes plus a side of bacon, it costs a lot more.

A Clean Plan is a Happy Plan:

I think it is a good idea to pay out terminees promptly. There is really little upside for a plan to keep terminees’ funds. (One possible advantage – it makes your plan “bigger”, and with more assets you may get a price break). Disadvantages include (a) needless expense on the plan, (b) perhaps increased fiduciary liability, (c) potential difficulty in locating them down the road, and (d)  the expense of an outside audit, if the number of plan members reaches 120.

For terminees with balances under $ 5,000, most of our plan documents provide for an immediate payout.  Funds over that level cannot be forced out.  If your plan has the “old” cash out limit of $ 1,000, then you should consider amending this provision. Note that this is a “shall” force out and not a “may” force out. When someone does leave with a small balance, the Employer must take this action – it’s not discretionary.

Mortality Actuarial:

I promise this will be my last reference to mortality, at least for today. I was surprised to read recently that the oldest living hockey player had passed away at age 97. Upon further research, the oldest living baseball player is 99 years old.  My question is, as an actuary, shouldn’t we expect older people, given the large pool of people who have played. (Baseball players who ever played in the Majors > 18,000). I would certainly expect a few to be in their 100’s.

When I shared this on the actuarial bulletin board, some of the replies were interesting:

-This generation of athletes didn’t grow up with big money like today
-They didn’t take care of themselves as well; many had off season (hard) jobs
-A lot of alcohol back then.

What do you think? Does this puzzle you?

What’s cooking with you?  Let me know at the e-mail below ….

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.

Metro Newsletter #89

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March 13, 2015

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 …)

Oops I left this out:

 In the previous issue # 88, I summarized some “year-end” issues, but I left out a big one. I assume most of you already know this, but the 2015 IRS limits are as follows:

  • 401(k) deferral limit = $18,000
  • Catch up to 401(k) limit for those 50 and older = + $6,000
  • Overall 401(k) or p/s limit = $53,000 (+ $6,000 if over age 50)
  • Compensation limit = $265,000
  • Defined benefit limit (the annual benefit one may fund for) = $210,000

Metro Staff Updates:

 Please join me in welcoming our new receptionist, Emma Joyce. Also, we have hired three new “Analysts”, Nick Merolillo, Ingrid Peet, and Mae Davis. These new employees will allow us to better produce our Plan work.

We also continue to invest in our Ripley, WV office. In the past few months, we have added a receptionist/administrative assistant, Ashley Barnette, and an Analyst, Stacey Rhodes.

Overall, we have grown to 33 employees (up from “one” in 1986!). We appreciate your business and we look forward to continuing mutual growth.

Another item to report – Kristie Black passed a professional exam in 2014, and is on her way to earning a “Qualified 401(k) Administrator” credential. Leann Malloy has passed a test module for Cash Balance plans. Please join me in congratulating Kristie and Leann for these achievements.

Take a look at our letterhead and you can see the wealth of credentials that our staff has earned. We take professionalism very seriously.

Efficient 401(k) Plan Design for 2015:

 Many of our clients have a goal that might be characterized as “maxing out the owners at a minimal cost for the others”. There is a pretty simple way to do this, especially if the “ages are right”. (This item is an update for a piece that I include each year.)

The least expensive way to max out an owner or key employee is to begin by maxing out their own 401(k) salary deferrals. Assume a 55-year old owner, who, in this example defers the limit of

$18,000 per year. Since the overall limit is $53,000, we need to get her an additional $35,000 in Employer contributions. Further, let’s assume that she earns at least as much as the compensation limit of $265 K. Thus, she needs an Employer contribution rate of $35,000/265,000, or about 13.21% of pay. If the plan allows for an “age-weighted” allocation (as most of ours do), then we could conceivably provide a contribution to the other employees of 1/3 of her rate, or 4.41%.

This is because the IRS regs on discrimination allow us to triple the employee rate for the owners, if there is a decent disparity in ages, i.e., if the owner is older. So the “answer” is 4.41%, and you should note this as it may appear on the test 🙂

Seriously, we want to work with you to design your 401(k) plan efficiently. Every situation is different, so your result may not be quite as effective. Let us know if you’d like us to run a scenario for you.

Also, beyond the 401(k), we can “double up” and add a pension plan, so that the owner could conceivably get an annual tax deduction of perhaps $200,000 – $250,000 per year for themselves. This is best done if the owner is willing to commit 7.5% of payroll (overall for the 2 plans) to the employees, and also this should not be done as a one-shot deal. Again, let us know if you are curious.

Defined Benefit (“DB”) Plan Topics:

Note – for those of you living only in the 401(k) world, feel free to skip this article – it is about pension plans

Some DB plans are covered by the PBGC, a government-run insurance company. The reason for this is that the Employer is promising future benefits to its employees, and creating (potentially) unfunded liabilities. If anything would happen to that Employer (i.e., bankruptcy), then those promises would be broken if the plan were not fully funded. The problem is that the PBGC is billions of dollars in the hole. As a result, Congress is raising premiums a lot, essentially doubling them over a 3 year period. The PBGC premium includes both a flat portion per person ($57 pp in 2015), plus a “variable” premium, based upon how well funded the plan is. ($24 per $1,000 of underfunding in 2015.) We have clients paying over $100,000 per year in these premiums. The strategy to minimize these premiums is easy – just fund the plan “fully”. In this case, it means making more than the minimum required contribution each year. By having assets build up to equal or exceed plan liabilities, the variable portion of the premium goes away.

Note that not all DB plans are covered by the PBGC. One-person plans and “professional” employers with < 25 ees are excluded from coverage. Please let me, your Managing Consultant, or your Analyst know if you have any questions or concerns in this area.

Very Oldie:

When Metro began in 1986, we needed a way to keep clients informed of “current events”. Thus, I created this newsletter. Issue # 1 discussed some legislative activity regarding how Employers could recover “excess” funds from a defined benefit pension plan without needing to actually terminate it. This seemed important back then. Issue # 2 discussed a proposal to raise the PBGC premium from its current level of $2.60 per person (see above.) The name of our firm was called “Metropolitan Actuarial Services” back then. As you can see from the firm name and the articles, our business model was much more DB oriented back then – until I realized that the world was looking for solid 401(k) administration as much, if not more, than pure actuarial work.

What do these people do?:

You may notice me tossing around terms like “Managing Consultant” and “Analyst”, and, in case you didn’t know, I’d like to take a moment to explain how the people doing these jobs interact with our       clients.

  • Managing Consultant – This person is in charge of delivering the work to a client on time, correctly, and at a fair They may consult with you on the design of the plan, and, at the end of the day, are ultimately responsible for the clients’ happiness. (365/24/7)
  • Analyst – Every other firm like Metro calls these professionals “401(k) Administrators”, but we don’t. This is because “administration” implies a rote methodology, which of course is a necessary trait to be successful. However, we want more than that – we want these people to (carefully) analyze a situation, hence the
  • Reviewer – You may or may not be familiar with the person who performs this important role for your plan. Often times, but not always, it is the same person as the Managing Consultant. Obviously, our goal is 100% accuracy, thus the need for a reviewer

What’s cooking with you? Let me know at the email below ….

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 #88

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December 9, 2014

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 …)

Some year-end issues to address:

  1. 1099 Forms are due
    1. These are used to report payouts (“distributions”) to employees
    2. These forms are needed, even if the distribution was rolled over to an IRA, and, therefore, is not currently taxable
    3. If your plan is on a “platform” arrangement with a fund family – those funds will typically provide the 1099 Forms
    4. Otherwise, we can provide them for Let us know if you are unclear on this.
    5. 1099 Forms are due to the employee by 1/31/15, and to the IRS shortly thereafter
    6. The IRS imposes a hefty penalty for each day that these forms are late.
  2. Age 70 ½ Require payouts
    1. People call this the “RMD”, or “Required Minimum Distribution”
    2. If an RMD is required, it is really important that you pay out < 12/31/14!
    3. This is because the IRS could hit you with a 50% excise tax if you don’t
    4. As you probably realize, the concept here is that the IRS wants you to have “taxable income”
    5. This does not apply to those who are still working past 70 ½; but if you are an owner or highly-paid person, you don’t get this free pass.
    6. The amount of RMD is not very much. At the start, only about 1/27 of your account needs to be paid out. This fraction grows each year, as your life expectancy shrinks (how depressing).
    7. Note that the RMD cannot be rolled over to an For example, you can’t just roll over your entire balance to an IRA, and then take the RMD from there
    8. Special rules may apply for defined benefit or cash balance plans
    9. If you absolutely hate the idea of RMD’s, then a Roth may be for The Age 70 ½ rules do not apply to Roth IRA’s. The strategy here is to use a Roth 401k Plan to accumulate after tax funds, and then roll this over to a Roth IRA, to avoid these RMD rules.
  3. Annual Administration
    1. Assuming that your plan is on a calendar year basis, then Metro will be sending you our annual data request soon, probably as an email
    2. The more “electronic” you can be about submitting your census (i.e., spreadsheet vs. paper), the more efficient the process will be for both of us
  4. Plan Design
    1. This is a good time to reconsider whether your plan is accomplishing your corporate goals. Is it?
    2. Questions to ask yourself:
      1. Is this plan even worthwhile? (We hope so)
      2. Is it the best type of plan for us? For example, should we add a 401k provision to our profit sharing plan? Should we consider a cash balance plan for higher deductions? Note that if you want a plan for 2014, it must be adopted by 12/31/14. This is ambitious at this point but possible.
      3. Are we allocating the right amounts of Employer contribution to the right people? There are a lot of options on this.
      4. Are the little things like eligibility, vesting, loans, hardships correct?

The common thread here is to be careful, and to please let us know if we can assist or if you have any questions. We at Metro sincerely wish you Happy Holidays and Happy/Healthy 2015! 🙂

PS – send me an email if you have any questions, comments, or concerns.

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 #87

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November 5, 2014

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 …)

One Further Update on Plan Documents:

 Our last issue provided an update on plan documents. Since then, we have provided all of our clients with a letter, with proposed time frames (due: April, 2016) and fees. If you are considering any changes in the design of your plan, this would be an excellent time to discuss them with us. This is a necessary but hassle-y part of having a plan.

Fiduciary Regs:

The investment community is very anxious about the impending release of (DOL/SEC) regulations on retirement plan investment advice. The theme of these regulations is the avoidance of “conflicted” investment advice.

A proposed draft, since withdrawn, would make all 401(k) investment professionals a “plan fiduciary”. While “advisors” are already considered as such, “brokers” are not. These proposed regulations also specified a “most suitable” standard, where the investments have to be selected only with the best interests of the client in mind. Again, while advisors are already subject to these standards, brokers are not.

Finally, in an effort to eliminate any “conflicts of interest”, there may well be limits on whether the plan’s investment professional can accept an IRA rollover for a terminating or retiring employee. The reason is that if the investment professional receives a different rate of compensation for the IRA investment (as compared to the plan rate), then that could cause another “conflict”. While this makes sense on one level, it ignores the reality that the investment professional may well already have an ongoing relationship with that plan participant. (Caveat: We here at Metro are not investment people. This is simply my understanding of the current situation, on an issue that affects all 401(k) plans. You should, perhaps, discuss this issue with your own investment professional.)

Metro Updates:

If you call us up, the young lady who answers the phone is Jessica Klauss. We are pleased to have her on board as a member of the Metro team. We realize, too, that even having a human being answering the phone is anachronistic, but this is part of our business model – to provide a high level of service that we believe our clients want and enjoy.

401(k) Corner – “Best Practices”:

 Usually, we discuss “high profile” plan design issues, which are clearly evident (eligibility, match, vesting, etc.) Today’s topic, however, is less visible – “election forms”.

The reason this is important is that it is one of the first things that the IRS wants to see upon audit. Every participant in every 401(k) plan must have (on file) a “salary deferral form”. This is what gives the employer legal permission to reduce that participant’s pay and to deposit it into their 401(k) account. This “salary deferral” choreography is the mechanism that allows the 401(k) pre- tax “magic” to happen.

Many plans’ forms are either non-existent or obsolete. You should check and/or periodically re- do these forms. While you’re checking, it is also worthwhile to take a look at the “beneficiary designation” form that you (supposedly) have on file for every plan member.

Remember, if a participant dies without a valid form, everything goes to their spouse or, if none, their estate. Also, if someone gets married, divorced, or if their spouse dies, then that form becomes invalid, and a new one is needed. Again, let us know if you would like a blank form for your plan.

One other wrinkle on beneficiary designations – in the new round of plan document restatements upon which we are embarking, (above item), we are switching one of the default specifications. We are going to provide that the existing beneficiary form automatically becomes invalid upon divorce. This would alleviate the situation where the money unexpectedly goes to your ex if you die.

Walk this way …. :

 Here’s an odd observation if you are walking on a busy sidewalk, mall, etc. In order to avoid bumping into people, you want to look at the feet of upcoming passers-by, and not their faces. Somehow, looking at their feet gives you a much better roadmap of where they are going. Feel free to pass your useful tips on making life easier to me to share with the other readers 🙂

Quick Update on Me:

For those of you who don’t know me, I founded Metro in 1986 (née Metropolitan Actuarial Services). In 2011, I sold the firm to Diane Barton, Russ Smith, and Leigh Lewis. I still provide actuarial and consulting services to Metro and its clients, averaging about 15-20 hours per week. My term as President of ASPPA concludes this month. (This is why it has been 6 months since the last Metro e-news; sorry!)

Quick Update on You:

 What questions, comments, or concerns do you have? Are you happy with your 401(k) plan? Are there  elements  of   it   that   you    find   frustrating? Can Metro assist?  Let me know at [email protected].

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.