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.
… 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.
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! 😊
David M. Lipkin
David M. Lipkin, MSPA, FSA, Editor
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.