April 3, 2018
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 – Conclusion:
I think that all of you know by now that Tax Reform did pass. Thanks to some last-minute lobbying by the President, the 401k limits were not reduced. (If not for his intervention, the limit would likely have been reduced from $ 18,500 to $ 2,400 per year on a pre-tax basis.) So our industry dodged a bullet there.
The other interesting wrinkle was the tax credit available to “pass-through” entities, like LLC’s and subchapter S corporations. Some people fear that lowering their tax rate would make a retirement plan tax deduction less valuable, by comparison. And, as a result, that some plan sponsors would decide to not implement a plan. But this is a pretty small tax difference. Have you seen people decide to not do a retirement plan for this reason? (I have not yet).
Hardship Rules Loosened:
The Budget Act included some changes to the hardship rules, which are nice improvements:
- The 6-month suspension is eliminated. Old Rule: If you took a hardship distribution, you were unable to continue to defer for a period of 6 months. Note how goofy this rule was to begin with. The law requires that a participant have insufficient financial resources to fulfill their financial need, so this 6-month suspension was supposed to be a token for that requirement.
- No longer a need to take all available plan loans before you could request a hardship distribution.
- All 401k plan funds can now be accessed for a hardship. Previously, some of the sources (like investment return, and certain kinds of Employer contribution) were not allowed to be touched. This will simplify the process, and how often do we get to say that?
- Payouts to cover a “casualty loss”, like a flood or fire, will be restricted to a “federally-declared disaster”, at least until 2026.
Most of these changes will take effect in 2019 (the casualty loss change applies in 2018). To take advantage of these improvements, however, the plan document will need to be amended. We assume that most of our clients will want to adopt this amendment. We’ll be in touch later this year. Please let us know if you have any questions in the meantime.
Speaking of Plan Documents:
The IRS has announced that all defined benefit and cash balance plan documents will need to be restated by 4/30/20. Further, all Tax -Sheltered Annuity (“403b”) plan documents will also need to be amended around the same time. We’ll be in touch if this applies to you.
And speaking of Defined Benefit Plans ….
These types of plans are very powerful and allow a highly-paid person to build up a payout of $ 2,832,610 at age 62, on a tax-deferred basis. Let us know if you’d like to learn more. While these types of plans are popular for such individuals and smaller firms, old corporate pension plans are not so popular or happy.
Almost all (big) corporate pension plans have been frozen or terminated. The only reason that they have been frozen, rather than terminated, is that the Plan Sponsor doesn’t have enough money to fully fund them, which is a requirement for termination. Congress didn’t help either, by (a) relaxing the minimum funding rules so that you can be in compliance with them, yet never arrive at a fully funded plan, and (b) quadrupling PBGC premiums. (We have plans paying over $ 500 K /yr. in premiums). While we don’t have a magic wand solution for these plans, we can assist the Plan Sponsor in understanding their options.
The IRS has raised their User Fees. A lot ☹
A very popular IRS program has been their self-correction program. In the (very) old days, if you did something wrong, they might audit you, and if they did, they might find it and punish you, perhaps badly. A couple of decades ago, they invented a “self-correction” program (“EPCRS”). The user fees had been very reasonable, and were based upon the number of plan members. (Note the “past tense” here.)
The IRS has announced a big increase in these user fees. For most of our plans, the new fee will be $ 3,000. Previously, most of these fees for small plans were less than $ 500. This will require some careful judgement on the part of Plan Sponsors, as to whether or not to file. Let us know if you’d like to chat or learn more about this annoying change.
Sorry to report a wrong figure in our prior MetroNews. The max compensation we can use for 2018 is $ 275,000. (I had reported it as $ 270,000 = oops = sorry).
Leann Malloy and Linda Fulton have passed an ASPPA examination and earned a Certificate on “Tax Exempt and Governmental Plan Administration”. (Example: 403(b) Plans). Courtney Porto has passed all the pieces of the Retirement Plan Fundamentals exam, an introductory course. Finally, Bryon DiGiorgio has earned his second credential, and we now should refer to him as a “QPA” = Qualified Pension administrator.
We also added a new employee to our West Virginia office, Bobbi Walsh. Bobbi is an Administrative Assistant for us in Ripley.
Are they really Missing?
When a Plan Sponsor wishes to terminate a 401(k) Plan, everyone (obviously) needs to be paid out. What do we do if a participant is non-locatable? This is a serious issue that could paralyze such a termination. Fortunately, the DOL has some (handy) rules for this:
- First, the Plan Sponsor needs to do enough work to declare them “non-locatable”. They must exhaust every possibility, including (all of) (a) certified mail, (b) checking related Employer records (ex: maybe they have a newer address in their health insurance records?), (c) ask their designated beneficiary in the 401k plan if they know where they are, and (d) using (free) internet search tools. If they do all of these things, then they can declare them “lost”, and move on, as indicated below.
- The Employer can roll their funds into an IRA. Although it is clear that this is the DOL’s preferred approach, it is a shame if their balance is small, as it will surely be eaten away by fees. Beyond that, they can set up a bank account in their name, or “escheat” the funds to the State, in their name.
Because we do a lot of work for the DOL in helping them to fix broken plans, we encounter this situation a lot. It is much worse (if not impossible) to follow these steps if we do not have a SS #. (Trust me.) That leaves us up a creek. Let me know if you’d like to discuss this further.
What’s up with you?
Let me know at the email address below. I’d like to know! Have a glorious Spring! (Let’s Go Bucs! – they need our help) 🙂
David M. Lipkin, MSPA, FSA, Editor
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.