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.
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.
- 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)
- 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.
- 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:
- The owner earns at or above that maximum salary, and
- 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.
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:
- 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.)
- 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.
- 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.
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”:
- 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.”
- 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!
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.