Posts

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.

 


Want to receive these newsletters in your inbox? Sign up below

Metro Newsletter #101

March 7, 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…).

This is the Quick, pre-Spring “Update” Issue of Metro News:

Nothing too deep here. We’re busy at this time of year, and we assume that you are, too. As a result, we are just touching base on a few timely issues. Should be a quick read 😊

End of Season update  – 1099 Forms and Age 70 ½ required payouts:

Our 1099 season is basically complete. We have sent out the Forms to the plan members, and we will upload them to the IRS shortly.

Age 70 ½ required payouts are due by 4/1/19, for some people. These would be those who:

  1. Turned age 70 ½ in 2018, and
  2. Chose to not take their 2018 required payout by 12/31/18, and instead deferred it until 4/1/19.

These people will be due a second minimum required payout by 12/31/19. Please let us know if you have any questions on these issues.

Metro Updates:

We have added a new employee to our Ripley, WV team. Her name is Ronelle Flint, and she began working for us as a Pension Analyst last month.

Who Are We?

We sometimes get stuck in our daily, or annual routines when we work with you and your Plans. I wanted to step back, and take a moment and (briefly) remind you who Metro Benefits, Inc. is, and what we do.

We provide administrative services for over a thousand 401k plans. Our roles are to make sure that they are (a) well-designed, i.e., that they carefully accomplish the Employer’s goals, and (b) compliant, i.e., they are meeting the various aspects of Tax Law and IRS/DOL regulations. Sometimes the compliance aspect can be very technical and confusing.

We also provide actuarial services to defined benefit/cash balance pension plans. We assist plan sponsors in evaluating and addressing various aspects of pension risk for these (fun) plans.

When we design a plan, we typically prepare the plan document. Over time, as the regulations and laws change, we need to keep the plan document current, by amending it. The IRS requires that plan documents be restated every 6 years or so. Some plans choose to hire their own ERISA attorneys to perform this document work, and that is totally fine with us. We do make an effort to keep all of the various team members in the loop.

One thing that we do not do, nor are we ever likely to do, is provide investment advice. We leave this vital function to those properly trained to do so. We often team up with investment advisors to deliver services to a Plan.

And now, we are able to provide these services in a different way, if you wish. This gets into the topic of “3(16) Plan Administrator”. Section 3(16) of ERISA defines a role, called “Plan Administrator”. This is a legally-important role of keeping the plan straight, handling paperwork, notices, etc. Note the broad overlap between this job description and what we normally do.

To capitalize on this commonality, we are now offering “3(16) Fiduciary Services”. This would, legally, take the burden of “Plan Administrator” off of the Employer’s shoulders.  Rather than Metro preparing the work for the Employer to then “execute” it, by signing off or performing an e-transaction as “Plan Administrator”, we can simply accomplish that task ourselves, on your behalf. Let your Managing Consultant know if you’d like to learn more about the costs and benefits of this new service option.

It is also the Season for  ….

401(k) testing corrections.

Recall that, in the old days, this annual test was a really big deal for every 401k plan. It measures the difference between the rates of salary deferral for “highly compensated” employees (“HCE’s”), compared to the rank and file. If the HCE’s defer proportionately more, then they must get a refund. It used to be very exciting and hassly. What changed?

First, Congress amended the Tax Code to provide for “prior year” testing. Under this option, available to most 401k plans, the HCE’s could, for example, base their 2019 limits on the actual deferral averages of the other employees for 2018. So it’s like knowing the answer to the test before it even starts. (That being said, we still have plans that fail the test even knowing this information.)  This prior year option is selected in the plan document.

The other (big) improvement that Congress made was the creation of the “Safe Harbor” 401k. Under this arrangement, the Employer makes a 3% of pay, fully vested contribution for all eligible plan members. (This can also be done via a generous match, instead.) A Safe Harbor plan gets a free ride on discrimination testing, hence its popularity. We have lots of these.

So, back to the beginning of this topic. Any 401k plans that are not Safe Harbor, must have their 2018 testing done by 3/15/19. If the tests are failed, then a refund must be made to the HCE’s by that date. Otherwise, the Company will need to pay an excise tax on the excess. (An “excess excise”?). Further, the IRS regards it as a very serious violation if the excess is not corrected within 12 months after the plan year; it could disqualify your plan, taking away the tax benefits.  

And, finally ….

A new baseball season is upon us. Go Pirates!  I don’t think it is a coincidence that the home opener this year is on April Fool’s day. But I am pretty sure that we can be hopeful for something?

Let me know what you are hoping for!

Best Wishes,

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 on it.

Metro Newsletter #100

December 14, 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 other stuff I find interesting…). Wow this is issue #100! It only took 31 years.

Happy Holidays:

We hope that you and your families enjoy a pleasant Holiday Season. We really enjoy working with you, and we are honored to have the privilege of providing services to your retirement plans.

Correction/Amplification from last time:

In Metro News #99, I had reported that the tax on a hardship distribution could now be spread evenly over 3 years. That was not true, as it applied only in very limited circumstances. I apologize for any confusion. 🙁

Nevertheless, there are still some big improvements for hardship payouts, starting in 2019. One of the biggest is that the mandatory 6-month suspension goes away. (Under the old rule, a plan member taking a hardship payout was not allowed to defer their pay into the 401(k) plan for 6 months.)

While a plan amendment is required to take advantage of the new rules, we understand that you may be able to implement the new rules as of 1/1/19, and to amend the plan “later,” retroactive to 1/1/19. This is still unclear, however, so check with your plan’s legal counsel on this.

It’s Also the Season for 1099’s and Age 70 ½ required payouts:

In November and/or December you may be receiving (or have already received) information from us regarding two very important year-end issues: (a) age 70 ½ Required Minimum Distributions (RMD’s) and (b) IRS 1099-R tax forms reporting 2018 distributions. Please watch your email (or mail) for communication from us and, if requested, respond by the stated deadline.

Age 70.5 RMDs must be processed by December 31, 2018. Note that an extension is available if this is the first year the participant is required to take this distribution, but it will require two such payouts during 2019.

If your Plan is on a “investment platform”, then they will likely prepare and mail the 2018 Form 1099-Rs to each participant who took a distribution in 2018. Plans whose investments are in other accounts, such as brokerage accounts, need to be aware of the possible need for Form 1099-Rs.

If we believe your Plan may need 2018 RMDs and/or 2018 Form 1099-Rs, we will provide you with additional information in the next few weeks. Please let us know if you have any questions.

2019 Limits:

  1. The 401(k) annual deferral limit is increasing from $18,500 to $19,000. (While we’re at it, let me remind you that this limit is always on a calendar year basis, regardless of the Plan Year. So the handful of 401(k) plans that are not operating on a calendar year basis have some extra work to do to monitor this; consider switching to a calendar year.) The 401(k) “catch up limit” for those turning age 50 or older during 2019 remains at $6,000. Thus, the overall limit for these people is now at an even $25,000. ( = 19,000 + 6,000)
  2. The Overall defined contribution limit (including deferrals, catch up, and Employer match + profit sharing) increased from $61,000 to $62,000. If you are under age 50, then the catch up does not apply, and your annual limit is $56,000.
  3. The highest annual benefit payable from a pension plan at age 62 has increased from $220K to $225K. This is a lot! This allows for a large tax deduction, for those of you approaching retirement. Please let us know if you’d like an illustration.

As part of this, it is good to know the “magic number,” i.e., what percent of pay must the Employer contribute for non-owners (in a 401k)  in order to max themselves out? It’s about 4.405% of pay. If the owner defers the maximum allowable 401(k) amount, they can supplement this with a profit-sharing contribution. By contributing 4.405% of pay to employees, they can often triple this rate for themselves (13.214% of pay). If you apply this rate to the highest amount of compensation we can use (now $280K/year), it results in a profit-sharing contribution of $37,000. Combined with the salary deferral, this allows the owner to reach the overall maximum limit ($62,000, including the catch up) in the most efficient way.

Note that this only works if:

  1. The owner earns at or above that maximum salary, and
  2. The ages are “right,” i.e., the owner is (generally) older than the average employee. (We can test for this)

Please let us know if you’d like us to run an illustration for you on this basis. It will be fun.

Metro Updates:

Please join me in congratulating Alex Romano, who recently passed (yet) another professional exam, and will soon be a “Qualified Pension Administrator” (“QPA”).

Also, we have added several new members to our happy team. Three Administrative Assistants: Heather Fierst and Mackenzie Torchia here in Pittsburgh, and Allee Miller in our West Virginia office. Joe Gliozzi came aboard as our new Controller.

Important news for Pension Plans:

Traditional pension plans allow for a lump sum payout as an alternative to the monthly payment. These lump sums depend upon the interest rate used to calculate them. As interest rates go up, lump sums go down. That is what is happening now.

The IRS-mandated interest rates are increasing as of 1/1/19. One example that we recently saw would have the retiree’s lump sum go down from $825K to $765K, based upon a delay of one day, from 12/31/18 to 1/1/19.  The impact will vary by age.

Plan Sponsors should be careful in handling this delicate situation. Please let us or your plan counsel know if you have any questions in this regard.

A Couple of Odd “Matching” Items:

401(k) and 403(b) Plans are often designed with a matching contribution, to provide the employees with an incentive to save their own money. Here are some observations on matching arrangements:

  1. Don’t make them too generous. Some plans match 3% if the employee contributes 3% of their own funds. While it may be a good idea in certain circumstances, this provides an incentive at too high of a cost. A better use of those employer dollars may be a 50% match on the first 6% of pay that the employee defers. This would provide the employee with an incentive to defer more. (However, changing the match from the 100% of the first 3% to 50% of the first 6% may, itself, create some challenges.)
  2. While you may offer different matching formulas to different groups of employees, those formulas require some extra testing, to ensure that each formula covers a broad cross-section of employees. For example, you can’t provide a richer formula for the owners.
  3. Finally, when people compare a 403(b) plan to a 401(k) plan, one of the basic differences is that the 403(b) gives you a free ride on testing. However, this automatic pass on testing applies only to the salary deferrals, and not to the match, which must still be tested.

Slots actuarial:

I don’t play slots. Do you? Something like 10–15% of everything you put in goes right to the casino. This can’t be a good idea. Nevertheless, if you do enjoy playing slots, here are some tips, courtesy of a brochure I picked up at MGM Resorts, called “How slot machines really work”:

  1. Q:  “I’ve been playing for a long time. I must be due for a win soon, right?”
    A: “No. With slots, persistence doesn’t pay off. Slots are never due for a win.”
  2. Q: “The machine I just left paid out a jackpot. If I had stayed, would I have won?”
    A: “Probably not. A slot machine uses a random number generator, which continuously cycles through numbers. If you had continued to play, it’s highly unlikely you would have had the same result as the player who followed you.”

I’ll leave the rest for you to figure out. In general, I’ve found that the less work that you are willing to do at the casino (as in life), the more you pay for that privilege. Slots is the easiest game to play–no thinking needed. So you pay a premium for that. I continue to believe that the house edge for each game should be prominently displayed at the casino.

What do you think?

P.S. Have a good New Year!

 

Best Wishes,

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 on it.