Metro Newsletter #94
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:
- (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).
- (Issue # 4, 1988) – A new law, called OBRA ’87, will require quarterly contributions to pension plans. (Unchanged since then.)
- (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).
- (Issue #9, 1989) – License plates in England – you can tell what year a car is from by the first letter of the license plate.
- (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
(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.