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:
- 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.
- 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.
- 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.
- Allow aged workers to save more – by removing the age 70 ½ restriction on putting more $$ into an IRA.
- 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.)
- A new exemption from the early (age 59 ½) payout penalty – up to $ 5 K for the birth or adoption of a child.
- 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.
- 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.
- 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.
- 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! 😊
David M. Lipkin, MSPA, FSA, 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.
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