Metro Newsletter #92
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
(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.