December 23, 2020
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.
Plan Document Updates:
As required by the IRS, we will soon be restating all 401(k) plan documents, as required by the IRS. These plan documents need to be redone (“restated”) every 6 years, to reflect current rules and regulations. The restatement deadline is 7/31/22. We recently sent out a short letter on this topic, and have already begun this process. This would be the perfect time to let us know if you’d like any changes made to your plan design.
In addition, you may recall that 2 recent pieces of legislation, called the SECURE Act and the CARES Act, have had a significant effect on qualified retirement plans. These Acts streamlined retirement plan operation, and made it easier for employees to access their retirement funds if needed due to the pandemic. Metro will also be updating your plan documents to reflect this required language. These amendments will be due by 12/31/22. It should be noted that we are still awaiting final guidance from the IRS for these amendments.
As a result, you may receive your plan document restatement first, with the SECURE and CARES Amendments to follow shortly thereafter, or you may receive them both at the same time. We will try to make this process as user-friendly as we can.
For those with defined benefit and cash balance pension plans – the amendments referred to above are still due, but the document restatement will be due in about 4-5 years, since these plans are on a different six-year cycle.
CARES provisions expiring
By the time you read this, the time period for allowing employees easier access to their funds, via an in-service distribution, shall have expired. Also, this Act provided for an optional “suspension of loan repayment” provision. That is also expiring, so those loan payments will now need to recommence. A lot of this activity will be driven by the fund “platforms”, who do the recordkeeping for 401k Plans. Please let your Metro Analyst or Managing Consultant know if you have any questions on this issue.
Is it too late to adopt a Plan for 2020?
Well, it’s funny you should ask. Until now, the answer would have been that YES, it is too late, unless the plan document is signed by 12/31/20. But no longer.
The SECURE Act provided more time to adopt a Plan. This was done to make it easier for Employers to adopt a new plan, hence increasing coverage of employees. (This goal for increased employee coverage is a guiding force behind many of Congress’ actions in creating retirement plan legislation.) The deadline for adoption of a new plan is now the tax return due date for the current fiscal year (i.e., you can adopt a plan retro to 2020 until the extended due date of your 2020 tax return, which is generally 3/15/21 or 4/15/21, plus possibly six months if extended.)
There are a couple of implications. If you wait too long, this extended adoption due date will not work for defined benefit plans. That is because the entire funding for a year is due by 9/15 of the following year. (Ex: 2020 funding requirement due 9/15/21.) If you adopt a DB plan near or after this date, retroactively to 2020, then you will encounter difficulty in meeting this funding deadline, which will likely incur an excise tax. (yucch).
There are also some logistical concerns about later adoption of a 401k Plan. Remember that part of the 401k funding is done via “salary deferral”, i.e., the employee contribution comes out of their paycheck. So, if you adopt a 401k Plan in 2021 (retro to 1/1/20), it will be impossible to fund this source retroactively. However, a lot of fun could still be had relative to Employer contributions for 2020 with the 401(k) salary reduction provisions starting prospectively in 2021. The good news is that the year-end stress of setting up new plans quickly can be alleviated.
Update on Required Minimum Distributions and 1099 Forms
This is your annual reminder that there are two year-end events that you should be aware of. First, some of those over age 70 ½ must receive their annual Required Minimum Distribution (RMD). This would normally be due by 12/31/2020, but because of the CARES Act, there is a waiver of RMD’s due in 2020, but only for 401k and profit sharing plans. It’s important to note that this waiver does not apply to defined benefit plans or cash balance plans. For defined benefit and cash balance plan first-timers, you can elect to delay your initial RMD until 4/1/2021. (If you do delay, you’ll have two payouts during 2021.) Also, note that there is an exception for those still working who are not 5% owners. These “late retirees” need not receive any RMD until they actually retire. Finally, recall that this age 70 ½ cutoff has been modified, and will now apply at age 72. This age 72 cutoff applies to those reaching age 70 ½ on or after 1/1/20 or later.
Further, 1099-R forms must be sent by 1/31/2021 to all plan members who received a 2020 payout. This form is due even if the employee elected a rollover, with no taxes due. If your plan is on a “platform” with a financial institution, then they normally prepare the 1099-R forms. Otherwise, we can help out.
Where are we in the annual cycle?
As we celebrate the Holiday Season, we are also preparing your 12/31/20 year-end data requests. Please check your (e-) mail box for this. We try to make it as easy as possible for our clients in this regard. We also like to try to obtain investment information directly from the fund companies, minimizing the Employer’s hassle. If you are aware of potential efficiency improvements in this regard, we’d be interested in hearing from you.
Here is an important number, but only if you play poker. In a typical game of Texas Hold-em, (5 community cards face up and each player has 2 cards face down), just before the last card is dealt, each person would have seen 6 cards (4 face up and 2 face down.) Assuming we are playing with a full deck (my wife sometimes doubts this), 46 cards remain. So, any particular card has a 1/46 chance of coming out = 2.2%. You need to know this if you plan on winning at poker.
Example: You are drawing to a flush, and there are nine remaining cards that would help you win the pot. (Perhaps you have two diamonds, and there are 2 more on the board.) There is $ 50 in the pot. Someone bets $ 5. There is one card to go. Your chance of winning is 9 * 2.2% = 19.6%. (9 good cards for you, each with a 2.2% chance). But your “payoff” is 10 to 1 (bet $ 5 to win $ 50).
In this case, you should call the $ 5 bet, since your chances of winning are 4 to 1. (80.4% chance of losing, 19.6% chance of winning = about 4 to 1). Your payoff is 10 to 1, so this is (very) good! Note that if the bet had been $ 25 instead of $ 5, the payoff would have only been 2 to 1 (bet $ 25 to win $ 50), and your 4 to 1 odds look much less attractive. In this case, you should fold. Let me know if you’d like to chat about or play poker.
Quick Metro Update:
We are weathering the storm, hopefully just like you. (We almost made it thru as a pandemic-free issue of Metro news). Our offices in Pittsburgh and in Ripley, WV remain open, with about 20% of our staff regularly work at the office in a socially-distanced set-up. The other employees are working remotely from home, or some combination of remote/in office. We remain committed to delivering “gold level” client service, hopefully in a pretty seamless way.
A Couple of Pension Plan Updates
I like defined benefit plans a lot because (a) I am an actuary, and (b) they are fun. The maximum benefit limits for these plans have increased for 2021, from an annual benefit of $ 225 K per year, to a new limit of $ 230K. This is the highest limit one can fund for. In reality, most of our plans are designed to create a lump sum at retirement, rather than a monthly benefit. Nevertheless, the basic “promise” for all defined benefit and cash balance plans is a monthly benefit, and that is why the IRS defines the limit using this parameter. The maximum lump sum is simply the equivalent value of this maximum benefit. (Fancy people call this “actuarially equivalent”.)
Bottom line, the new limits will allow a lump sum of $ 2,946,527 at age 62, so that is something to consider if this type of plan fits your needs. This is a lot! A defined benefit/cash balance plan can be combined with a 401k, creating potential annual deductions approaching $ 250 – 300 K/year, if you are close enough to retirement. We’d be happy to prepare an illustration if this sounds interesting enough.
One other note, for those who already have such a plan. Interest rates used to determine lump sums continue to drop, so 1/1/21 lump sums will be about 8-9% higher than 12/31/20 lump sums. This last comment does not apply to cash balance plans – only traditional defined benefit plans. Some people prefer cash balance plans for just this reason – the lump sum doesn’t fluctuate with interest rates.
Best Wishes and Happy Holidays ! 😊
David M. Lipkin, FSA, MSPA 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.