Metro Newsletter #90

/in /by

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.