Metro Newsletter #96

August 18, 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 …)

Merge vs. Terminate?

If you have two plans which you’d like to combine, it is sometimes unclear whether it is better to “merge” them into one plan, or “terminate” one of the plans to get rid of it. There are pros and cons of each approach. To keep this discussion simple, I’ll assume that one of the plans is an old “money purchase” plan (common until 2002), and the other is a profit sharing or 401(k) plan.

The main thing to be aware of is that if you terminate a plan, it triggers full vesting for all members. Some people don’t care, while others do not want to give away full vesting. Merging is the way to go if you want to avoid this. Another issue has to do with “joint and survivor” provisions (“J & S”), where spousal consent is required if you want to get a lump sum over $ 5,000. This applies to the money purchase plan, but not the 401(k). If you terminate the money purchase, then you must go thru this spousal consent process, even if the employee desires to roll their money into the 401(k). Without spousal consent, the plan must, instead, purchase an annuity. On the other hand, merging avoids spousal consent now, but someone must remember to track that money in the combined plan, and to do the spousal consent later.

Finally, when a plan terminates, it creates a “distributable event”, which gives active employees “permission” to receive a payout while still working. Some Employers would prefer that this not occur. Thus, merging the plans (instead of terminating) makes it so employees can not touch that money just yet.

Special rule on Pension Payouts:

When a defined benefit or cash balance plan terminates, everyone gets paid out their full benefit and goes on their merry way. However, what if a “Highly Compensated Employee” is now being paid out in a lump sum form, but the plan is not terminating? This might happen in a Partnership, a medical practice, or other situations where there are several owners.

The IRS has thought about this carefully, and they want to make sure that this payout doesn’t cause the remaining plan members to be left holding the bag, i.e., with an underfunded plan after that payout. There is a “110% rule”, which mandates that the plan after the payout must be at least 110% funded.

It can still be a shock to hear that you cannot get the lump sum that you were counting on. If the 110% rule is not met, then the payments can still commence as a monthly benefit, just not as a lump sum. But people do like their lump sums. It is helpful to plan for this before Mr. Big retires. The easy way out is to make an extra contribution, to boost funding above the 110% threshold. Let us know if you’d like to learn more about this potential trap.

Yahtzee Actuarial?

My wife and I play Yahtzee almost every day. Do you? We have a house rule that if you roll a Yahtzee, you have to go to the nearest window and yell that word outside very loud. (Awkward at airports.)  I am going to be tabulating our scoresheets (“actuarially”, of course) to determine how common some of the combinations are, and to see if I can figure out optimal strategies. Let me know if you want to participate in this project. 😊

Metro Updates:

Welcome to Maria Hartwick, our new receptionist. Maria enjoys running, and spending time with her children. Also, Sarah Mattis, recently started as an Administrative Assistant. Sarah enjoys dance, and loves her two cats. Finally, please join me in congratulating Bryon DiGiorgio on passing one of his ASPPA exams.

Another Trap for Pension Plans:

I have been warning about this for the past few years, and now the IRS has dropped the other shoe – a new mortality table will be required for payouts done in the 2018 plan year. It reflects the fact that people are living longer, so that lump sums will probably rise 5 – 7% with this new table. This is why you are seeing some big companies do a “lump sum window” right now, so they can pay these amounts out the door before the new rules kick in. (Cleverly, Marsh & McLennan, for whom I used to work, is offering this temporary lump sum to its terminated employees, and the amount offered does not reflect the full retirement benefits payable at age 62.)

Plan Document Updates:

Plan documents for 403(b) plans (“Tax Sheltered Annuities”) will need to be restated by 3/31/20. Also, it is likely that all defined benefit and cash balance plans will need to be restated around this same time, depending upon when the IRS releases the final approved language. 401(k) plan documents seem “safe” for now, i.e., a restatement is several years away.

Bow Wow Actuarial

It’s only a word, but in places like Boulder CO, you are not the owner of your dog – you are its guardian! City Council changed this in 2000, to reflect a different mindset. It doesn’t change anything legally, as you can still sell the dog, and the regs define “guardian” as “owner”. Other municipalities have since enacted similar legislation. Some people liked this change more than others, who are suggesting that this is the first step towards a policy of banning pets overall.

401(k) Plan vs. SIMPLE Plans:

I get a lot of calls from people asking to set up a 401(k) Plan, and we are (usually) happy to accommodate. But let’s take a moment to see if this is really a good idea. There are some other plans out there for small businesses, which don’t cost as much as a 401(k); in fact, they don’t cost anything!

These are known as SIMPLE plans. There are two types of SIMPLE’s, an IRA version and also a 401(k) version. They are similar, and, since the 401(k) version never really got off the ground, I’ll focus on the SIMPLE IRA. It’s like a “junior” 401(k) plan, because the contribution limits are lower. However, a SIMPLE plan is free, so you don’t need to pay Metro (or anyone else) a dime! That is because no plan document is required, and no annual tax filings (5500 Forms) are needed.

While the employee limits for a 401(k) plan (assuming you are age 50 or older) for 2017 are $ 24,000, the limits on a SIMPLE are only $ 15,500. Note, too, that an Employer contribution is also required for a SIMPLE plan. This can take the form of either an (a) Employer match, where they put in 3% and you put in 3%, or (b) a contribution for all employees, of 2% of pay. The 3% match can be reduced to 1% in certain cases. Beyond that, there is no wiggle room on these Employer contribution amounts, i.e., you can’t do less or more.

By comparison, it is typical to have an Employer contribution larger than this in a 401(k) Plan, although some 401(k) plans have no Employer contributions at all. This Employer contribution can often be (legally) tilted in favor of the owners, ex: they get 9% and others get 3% of pay.  While we like to sell billable hours to administer 401(k) plans, we like it even more when our clients can accomplish their objectives efficiently!

 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

[email protected]

(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.