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”:
- Unreimbursed medical expenses for you, your spouse, or dependents.
- Purchase of an employee’s principal residence.
- 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.
- Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.
- For funeral expenses.
- 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!
My wife and I recently spent a few days in Switzerland, and this is what we learned:
- 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!
- 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.)
- 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.
- 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. 🙂
David M. Lipkin, MSPA, FSA, Editor
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.