Metro Newsletter #95
April 1, 2017
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 …)
Tax Reform on the Horizon?
With politics moving so quickly, this information may be obsolete by the time you read it – but (as you know) Congress will be shifting their attention to tax reform. Our industry gets a “HUUUUGE” tax break under the current system (value of retirement plan deduction > $ 150 billion per year).
This may or may not be at risk. Some legislators believe that the wealthy get most of the retirement tax incentives, so they justify a cutback on those grounds. Others are less interested in the logical details of fairness, and just want to raise revenue. That said, there is a chance that attention may not be focused on our industry, if another funding stream can be found to pay for the desired tax cuts. (“border adjustment tax” = ??).
Some of the proposals that have been introduced over the past few years would be very bad for us, for example, (a) freezing the maximum benefit (“415”) limits for ten years, or subjecting the tax deferrals of high earners to a supplemental income tax. So this is a really (potentially) big deal, and we’ll stay on top of it for you.
IRS backs off illogical stance on 401k’s:
Many of our clients maintain a “safe harbor” 401k plan. This is where the Employer makes a fully-vested contribution for plan members (either a generous matching arrangement, or else a 3% of pay contribution to all eligible participants). The key to this discussion is that these funds must be fully vested, as I just mentioned.
There has been an issue for these plans for almost a decade. Some of these safe harbor 401k plans also have additional Employer funds residing within participant accounts, called profit sharing contributions. These funds need not be fully vested. As a result, these plans keep a “forfeiture account” to hold these non-vested funds when non-vested members terminate employment. These forfeiture accounts can be used to defray plan expenses, or can be reallocated to plan participants as if they were an additional Employer contribution.
However, the IRS has maintained that these non-vested funds could never be used to pay for the safe harbor contributions (ex: 3% of pay) themselves. The IRS has maintained that, because “safe harbor” contributions must be fully vested, they cannot originate from non-vested monies.
Until now. They have finally relaxed this illogical position. What strikes me about this IRS stance is that they pushed it – not because of any rational logic – but (instead) because they could. They are powerful, and they don’t mind if you know that.
Two interesting Forms that may be helpful?
Here are two government forms that you may find to be useful:
- Form SSA-7050-F4 – “Request for S.S. Earnings Information” – This form allows you to request a historical earnings record from Social Security. It can very much come in handy if you need those old records. (For example, to calculate a benefit from a defined benefit plan.) When the results come back, they designate both the amount of compensation and the Employer which paid them. The user fee is $ 115, and the person’s signature is required.
- IRS Form 5329 – Additional Taxes on Qualified Plans (Including IRA’s) – One of the most common errors in retirement plans is missing the required payout upon reaching age 70 ½. (Note that this mandatory payout does not apply if the plan participant is still working beyond that age, assuming that they are not a 5% owner or direct relative of one.) Normally, there is a 50% excise tax on the missed payout. By filing this form with an explanation, you can request that the IRS waive this penalty. The other advantage is that it starts the clock on the IRS statute of limitations.
Wow that’s a lot of $$
With the new 2017 IRS limits in place, you may now accumulate up to $ 2,684,000 at age 62 in a defined benefit plan, assuming that you have at least 10 years of plan participation and also have compensation in excess of $ 215,000 per year. Let us know if you would like our help in working on this type of plan for you or your client.
Metro Updates:
Welcome to Rachel Warnock, our new receptionist. (Our prior receptionist, Courtney Porto, has been promoted to Assistant to Diane Barton, Metro’s President). Welcome to Jeffrey Geiger, recently hired as an Analyst to work on 401k Plans. Finally, please join me in welcoming Sharon Duran, an Administrative Assistant in our accounting department.
We’ve also had some exam successes, as more of our Analysts pursue professional credentials. Emma Joyce has passed her first (major) ASPPA exam, called D-1. This will move her closer to the QKA designation. Shelia McLaughlin passed a different type of test, relating to 403(b) (“TSA”) Plans, so now we have an expert on staff for that specialty. Finally, Jessica Klauss and Jeffrey Geiger both passed introductory exams that will provide them with a background in retirement plan administration.
We appreciate the hard work that these employees have done to achieve these exam successes. It makes our company stronger.
Important New Regulations Proposed:
The IRS has released new regs governing the services of actuaries. Among the important provisions:
- Henceforth, actuaries will be known as “leaders of the universe”.
- Dark chocolate will be made available to them for free.
- As of 1/1/18, clever jokes about (geeky) actuaries will be encouraged even more.
- We will continue to be thought of as really cool people (?)
- (Please see the date of this Newsletter for additional guidance)
Balancing Defined Benefit tax deductions:
One of the reasons that people like defined benefit plans is that they can take a (very) big tax deduction. Often, they are paired with a 401k plan, as a “combo plan”. The tax code has some provisions about the maximum combined deductions for these paired plans. The important dividing line is whether the defined benefit plan is covered by the PBGC insurance program or not. If so, then you can take a full 401k deduction, plus a full defined benefit deduction. (PBGC coverage is avoided for one-person plans and for plans of “professional employers” with fewer than 25 employees).
If the defined benefit plan is not covered by the PBGC, then the combined deductions are limited and tricky. If one limits the 401k deduction to 6% of payroll, then you can take the full available defined benefit deduction. But if you go a penny over that 6% limit on the 401k side, then your defined benefit deduction is limited to 31% of payroll, less the 401k deduction. So be careful in coordinating these combined deductions!
What’s up with You?
Let me know at the email address below. I’d like to know ! 🙂
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.