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Metro News #111

METRO NEWS – Report #111

Novermber 30, 2022

 

To our clients and friends:

This is another in a series of newsletters designed to keep you clearly informed of current events and trends in the area of retirement plans.

 

Is it too early to say?

That we hope that you have an enjoyable, healthy, warm, and happy Thanksgiving and Holiday Season. We enjoy working with our clients and friends 😊

 

(Oldie) Update on SECURE 2.0:

We had discussed this proposed legislation in Metro News # 109, this April. It would make a lot of interesting changes and be kind of fun. There are now separate versions that have passed the House and Senate, and the smart money is suggesting passage during the upcoming lame duck session/we’ll see. Note the emphasis on “Roth” after-tax employee deferrals; this is how Congress intends to pay for some of the liberalizations. Let me know if you’d like another copy of that Summary.

 

Metro Staffing Updates:

Since we last chatted, we have added two new Analysts to our staff:

Jake Pelloni and Jordan Simko have started with Metro this Summer, and we welcome them as 401(k) Analysts. Jake is a graduate of Penn State Behrend (math major!), and enjoys golf. Jordan graduated from Otterbein University in Ohio (major = actuarial science!), and is a baseball player and fan.

Also, we are proud to report that Samantha Garofola has achieved a professional credential thru ASPPA, and she is now a QKA = Qualified 401K Administrator. Please join me in congratulating Samantha. (yay)

 

Metro Cyber Security Update:

The DOL has issued guidelines that encourage firms like Metro to adopt a Cyber Policy. We have done so. Let me know if you’d like to review it. It is more than just a piece of paper. We are discussing it among ourselves at staff meetings, and we will continue to perform ongoing testing and monitoring. No one can guarantee 100% data security, but we are putting forth our best effort and will continue to do so.

Quick side note – I attended a presentation by an FBI agent recently in DC. He indicated that there have been over 31 million cyber breaches already reported to the national data base, and they all had one thing in common. The password was 123456. Don’t let this happen to you.

 

Important year-end Housekeeping Issues for you to Know:

You may be receiving communications next month regarding our two favorite year-end issues.

First, we issue 1099-R Tax Forms for some plans. Note that most of our 401k Plans are on an investment platform with a financial institution. Those platforms issue their own 1099 Forms. We issue them for certain Plans that are not on a platform. This is why we may ask you to confirm certain 2022 payouts, so that we can report accurately.

Also, it is essential that “RMD’s”, the mandatory payouts starting at age 72 (the old 70 ½ rule), be handled accurately. Be aware that not all investment platforms handle this task automatically. You should check if in doubt. It is very painful (for both the Plan and the participant) if you miss one of these payouts. We will be contacting Plans the first week of December if it applies to you. If in doubt, or if you have any questions, please let us know.

 

Pension Actuarial Corner:

We have been anticipating an increase in interest rates for (it seems) forever. Well it is finally happening, and this could be a big deal for certain Defined Benefit (“DB”) Plans.

Remember – there are two different types of DB plans – the old, traditional Plans which provide a formula and a monthly benefit, based upon years of service and final pay. These Plans have been largely supplanted over the past decade by the newer flavor of DB, called a “Cash Balance Plan”. In this plan, instead of a monthly benefit at retirement, the employee simply receives the amount in his Cash Balance account.

The impact of the increase in interest rates will be felt by traditional DB plans, in two different (and really important) ways. First, higher interest rates create lower liabilities. Many of these traditional DB plans were frozen long ago, with insufficient assets to actually terminate. With the higher interest rates and lower liabilities, these Plans could become fully funded and “terminatable”, to coin a new word.

The second issue for these DB Plans is that these higher interest rates will create sharply lower lump sum payouts for terminated or retired employees, starting 1/1/23. This is especially so for younger employees, since the higher interest rates have more years to compound. Note that lump sum payouts paid thru 12/31/22 are not affected.

Let us know if you would like to discuss the implications of this issue.

 

Higher Limits for 2023!

You have probably already read these summaries, so I’ll keep it short here:

  1. The maximum salary deferral is increasing from $ 20,500 (2022) to $ 22,500. (2023)
    1. Note that this does not include the catch up (below) for those people age 50 or older in 2023.
  2. The catch up has increased from $ 6,500 to $ 7,500.
    1. Therefore, the deferral limit for those age 50 or older is now $ 30,000.
    2. Quick comparison – this was $ 7,000 when the Tax Reform Act of 1986 was passed.
  3. The overall 401k limit, including both employee and employer contributions, has increased from $ 61,000 to $ 66,000.
    1. When you add in the catch up, we are now up to $ 73,500.
  4. The highest compensation that we can recognize has increased from $ 305 K to      $ 330 K.
  5. The comp limit for determining if you are considered “Highly Compensated” is now $ 150,000. (Ex: if you make this much in 2023 you will be an HCE for 2024).
  6. If the Employer makes a contribution of 4.394 % of pay, then the owner can “efficiently” max out, if certain conditions are met. (below)
    1. Assume that the owner is under age 50, so no catch up is involved.
    2. The goal is to get them the overall max of $ 66,000.
    3. Assume that they max out their own salary deferral at $ 22,500.
    4. Thus, they need another $ 43,500 of employer funds to reach their limit.
    5. Assuming maximum compensation of $ 330,000, they need 13.182% of pay.
    6. If the owner is a bit older than the other employees, we may be able to provide that 13.182% rate for them, in exchange for an employer contribution rate of 1/3 that amount for the other employees. (Note: This is subject to discrimination testing so you never know).
    7. 1/3 * 13.182% = 4.394% of pay.
    8. So there’s your answer. If you contribute 4.394% of pay for the employees, and the above assumptions are true, you may be able to max yourself out. This seems like a good deal; let us know if we can assist you with your plan design.
  7. Finally, the highest monthly benefit we can fund in a DB Plan is now $ 265,000.
    1. This can create a lump sum of over $ 3 MM at age 62, but you need to have the Plan 10 years to get this much.
    2. You can layer a DB on top of a 401k.
    3. Let us know if you want us to look at some examples for you.

 

That wraps it up for this edition. We’re here if you want to chat.

 

David M. Lipkin, FSA, MSPA, Editor

[email protected]

(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 upon it.

Metro Bulletin 2020-2: The CARES Act – Retirement Plan Relief from the COVID Virus

April, 2020

Purpose:

To provide you with an update on recent pension legislation, called “The CARES Act”. (This stands for “Coronavirus Aid, Relief, and Economic Security Act”).

You have an Important Option!

Some of the beneficial features of the CARES Act are optional. You need to make an election to use them. We will outline this for you clearly, in the “Distributions and Loans” section, just below.

1. Distributions and Loans

Congress wanted to make it easier for plan participants to be able to access their retirement funds during this emergency, so they have temporarily relaxed the payout and loan rules. But this relaxation applies only if the Plan Sponsor elects it. Due to the hectic nature of our world today, we are going to assume that you do wish to allow for these new provisions to take effect, unless you tell us otherwise by 4/20/20.

A. Allow for “In-Service” Distributions

Normally, an employee can only access their 401(k) funds if they have a “distributable event”, such as termination of employment, retirement, disability, or death. To allow easier access to these funds, you may now let an “affected employee” withdraw up to $100,000 from their account. Note, too, that these payouts can occur from Cash Balance and Defined Benefit plans, as well.

Who is an “affected employee”? This includes an employee (or a spouse/dependent) who is diagnosed with COVID-19. Also, if the employee endures financial hardship as a result of the virus, they, too, will qualify. This might include layoff, furlough, quarantine, reduced hours, or inability to work due to a (COVID-related) lack of available childcare. This sounds like a lot of people we all know. Rather than playing detective, the Act allows you to rely upon “self- certification” by the employee that they are affected in this way.

Congress was also gentle on the aspect of taxation. Normally, there is a 10% excise tax on premature payouts, but this is waived. Further, employees can (a) spread their income taxes out evenly over 3 years, and (b) have the option of repaying their distribution back to the plan or to their IRA, within that 3-year period. There is no need to withhold the 20% tax rate that normally applies to cash payouts.

B. More Generous Rules on Plan Loans

 Keeping with the theme, the CARES Act also makes it easier for plan participants to get a loan. The old limits were that an employee could receive up to 50% of their vested account balance, with a maximum limit of $ 50,000. The Act revises these limits to 100% of the vested account balance, with a limit of $100,000. Please note that this temporary provision applies only through 9/23/20.

Further, the Act offers relief for those who are now repaying their loans. Any loan payments due between now and the end of 2020 can be delayed, for up to one year. Interest will continue to accrue. When the payments commence again, we’ll need to re-amortize the loan. The normal maximum repayment period (5 years) can be extended by up to a year in this manner.

Again, this relief applies to “affected” plan participants only, as described above, i.e., only those whose health or finances have been affected by the virus.

Finally, note that these new rules about payouts and loans are temporary provisions, that expire after 2020. Plan documents will need to be amended by 12/31/22, which will probably coincide with the next round of 401(k) plan document restatements. We expect that many of the investment platforms will be advising plan participants of these new rules shortly. However, we can assist you in this regard.

Remember, though, that these new rules only take effect if you want them to. We are going to assume, if we don’t hear back from you, that you do want to take advantage of these new loan and distribution rules.  If you do not now have a loan provision in your plan, however, we’ll ignore that aspect.

2. Waiver of Required Minimum Distributions for 2020 (“RMD’s”)

Due to the recent market drop, there is concern that 2020 required RMD’s (now at age 72, not  70 ½) will cause an undue burden. This is because the amount of the 2020 required payout is based upon plan participants’ 12/31/19 balances, pre-drop. Since plan assets today are so much lower, taking that same dollar amount (determined from the 12/31/19 balance) is now viewed as punitive, since it represents a much higher percentage of the account than what Congress intended. As a result, the CARES Act suspends required payouts for 2020.

If the RMD has already been paid out, it can be repaid back into the plan or rolled into an IRA. Taxes will continue to be deferred. The IRS is expected to relax the 60-day rollover rule for IRA’s, for this purpose.

Note, too, that this suspension applies to those who reached age 70 ½ (old rules) in 2019, and took their RMD’s from the plan between 1/1/20 and 4/1/20. Those payouts can be returned or rolled over. Those who took their 2019 RMD during 2019 are not offered any relief under this bill.  This provision does not apply to Cash Balance/Defined Benefit plans, because those plan participants’ RMD’s were not affected by the market drop in the same way.

3. Cash Balance/Defined Benefit Funding Relief

Congress is well aware that many plan sponsors can not now pay their required contributions into “pension plans”, such as these, so the CARES Act provides relief. Any required contribution due for the rest of 2020 can now be made by 1/1/21. This might include minimum funding requirements, normally due by 9/15/20, and quarterly contributions, as well. Interest will accrue on these delayed contributions.

CB/DB plans also have a mechanism that measures and certifies their funded percentage, called an “AFTAP”. If the funded percentage drops below a certain level, then restrictions on lump sums and benefit accrual apply. The Act includes some relief for these calculations, allowing that the 2019 certification can also be used for 2020. It’s unclear how helpful this provision will be.

4. Other/Non-CARES Act

While we’re at it, we also wanted to mention that the IRS has delayed the due date for restating 403(b) (normally due 3/31/20) and CB/DB (normally due 4/30/20) plan documents, by 90 days. We have already completed these documents for most of our clients.

We are also hoping for relief on the due date for 5500 Tax Forms, typically due 7/31/20. Our industry Association (“ASPPA”) has requested a “mass extension” for all plans, allowing for a 10/15/20 due date.

There is also some discussion of suspending required contributions into 401(k) plans, such as the 3% safe harbor contribution. We’ll let you know more about this when or if we hear more.

Finally, we thank you for being a Client or Friend of Metro Benefits. We enjoy working with you, and we want to help. Please contact (e-mail is the way to go, for now) your Analyst or Managing Consultant if we can provide further assistance. We will get through this together.

Metro Newsletter #102

June 28,  2019

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 other stuff I find interesting…).

Proposed Legislation – The “SECURE” Act:

Congress is now debating some big changes to the pension rules. While we never know, of course, if legislation will actually be passed, this one does appear to have bipartisan support. Even if it does not pass now, it is still useful to know what kinds of changes people are thinking about. Here is a brief summary:

  1. Make access to 401k plans easier – This is a theme with Congress, as they are concerned about the relatively low coverage rates among plan participants. (Background: They allow the retirement plan industry $140 Billion/year of tax savings, and they feel they are not getting the best bang for that buck. Billion with a “B”) Access would be easier by allowing for “group” types of 401k plans, where employers could sign up for a plan with lots of other Employers. This is called a “Multiple Employer” plan. Potential attractions might include lower fees and less fiduciary responsibility.

  2. Lifetime Income – this is another one of Congress’ long-term themes. They don’t want people to run out of retirement money. Apparently, too many people take a lump-sum and then waste it or use it up. The two relevant features of this bill would (a) force 401k plans to disclose, at least once a year, the amount of potential lifetime income that would be supported by the account balance, and (b) remove fiduciary liability for the Employer, regarding selection of an annuity provider.

  3. Relax the age 70 ½ forced payout rule – the SECURE Act would delay it until age 72, while other pieces of legislation might either increase it further, to age 75, or else provide a “deminimis” amount (ex: $ 100K) to simply ignore the concept altogether. The political drawback is that this helps rich people.

  4. Allow aged workers to save more – by removing the age 70 ½ restriction on putting more $$ into an IRA.

  5. Encourage automatic enrollment – This is another of Congress’ favorite ideas to encourage participation. It has already been proven that auto-enrollment does increase plan participation. (Background – this means that a newly-hired employee is automatically covered by a 401k plan unless they opt out.) This proposed legislation would provide a $ 500 tax credit (for administrative expenses) if the Plan includes this provision. One can see that it’s only a matter of time until this feature becomes mandatory. (Another tax credit in the legislation would increase the set-up credit for starting a new plan to up to $ 5,000, depending upon the number of employees.)

  6. A new exemption from the early (age 59 ½) payout penalty – up to $ 5 K for the birth or adoption of a child.

  7. Elimination of “stretch IRA” provisions – so that a beneficiary of an inherited IRA might have to wrap it up over 10 years, instead of their whole lifetime. This would raise revenue.

  8. More time to adopt a Plan – Currently, you have to adopt the new plan by 12/31 of that tax year. The proposal would allow the Employer to adopt it until their tax return due date for that year.

  9. More flexibility on Safe Harbor – this popular 401k provision (“free ride on the 401k test”) would allow the Employer to add this provision until the end of the year, if they select a “non-elective” contribution of 4%. This means that everyone gets it, i.e., it’s not a “match”. This is also 1% more costly than the regular 3% safe harbor, available for more timely adopters.

  10. One more coverage booster – Since Day 1 of ERISA, the rule has been that we could exclude those employees who work < 1,000 hours a year. Again, this may have made sense in 1974, when more people worked full time. But this is another opportunity for Congress to improve coverage, and the proposal would provide coverage of part-timers who work 500 + hours for 3 years in a row. These employees, however, could be excluded from discrimination testing.

Will this bill actually pass? The House passed their version last month, 417-3. The Senate is bickering about it. There are unrelated (but connected) issues like a “kiddy tax fix”, that people want to throw into here. (The tax rate for a child whose parent died in combat was set too high in the recent Tax Reform Bill, so they’re trying to fix it.). There are also some “529 expansion” issues that are being debated (can it pay for home schooling?), so the teachers unions are weighing in. But the fact that it is being worked on so early in the two-year Congressional Term is a positive sign. In any case, whether it passes or not, one can see Congress’ intentions here.

What do you think about this? Let me know ([email protected])

What’s cooking here at Metro?

  • Diane Barton, our (beloved/esteemed) President, was in West Virginia last week, networking among our Accountant friends and business partners, at their 100th anniversary annual convention. (WVSCPA)
  • Leigh Lewis, another of Metro’s owners, is a co-chairperson of the ASPPA Women’s in Retirement Conference (for the third year), being held now in Chicago.
  • Several of the newer Metro employees have passed the preliminary ASPPA exams, including Izaak Fulmer-Moffat, Sam Hopps and Ronelle, Flint (in our WV office).

Reminder on Plan Documents:

For those of you who sponsor either Defined Benefit, Cash Balance, or 403(b) Plans, be aware that those documents will all need to be redone by next Spring. DB/CB documents are due 4/30/20, while 403(b) documents are due a month sooner. The reasons for doing this are (a) to keep the plan documents current with all regs and legislation, and (b) because the IRS says you have to do this every six years.  Please let us know if you have any questions on this process.

Hope for underfunded Defined Benefit Plans?

For decades, now, I have seen forecasts of higher interest rates. While you may agree with this or not, the people rooting the hardest for an increase in interest rates are the Sponsors of (traditional) defined benefit plans, almost all of which have been (i)  frozen and (ii) underfunded, some severely so. The concept is that if interest rates go up, the liabilities for those benefits would look smaller, hopefully to the degree that assets would become sufficient to pay out all benefits and the plan could be (finally) wrapped up.

Not so fast. The current 10-year Treasury rate (upon which required funding is measured) is now below 2%, having dropped over a full percent in the past 6 months. So those required contributions won’t be disappearing anytime soon.

What’s Up with You?

Let me know.  Have a great summer! 😊

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 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.

 


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