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:
- The maximum salary deferral is increasing from $ 20,500 (2022) to $ 22,500. (2023)
- Note that this does not include the catch up (below) for those people age 50 or older in 2023.
- The catch up has increased from $ 6,500 to $ 7,500.
- Therefore, the deferral limit for those age 50 or older is now $ 30,000.
- Quick comparison – this was $ 7,000 when the Tax Reform Act of 1986 was passed.
- The overall 401k limit, including both employee and employer contributions, has increased from $ 61,000 to $ 66,000.
- When you add in the catch up, we are now up to $ 73,500.
- The highest compensation that we can recognize has increased from $ 305 K to $ 330 K.
- 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).
- If the Employer makes a contribution of 4.394 % of pay, then the owner can “efficiently” max out, if certain conditions are met. (below)
- Assume that the owner is under age 50, so no catch up is involved.
- The goal is to get them the overall max of $ 66,000.
- Assume that they max out their own salary deferral at $ 22,500.
- Thus, they need another $ 43,500 of employer funds to reach their limit.
- Assuming maximum compensation of $ 330,000, they need 13.182% of pay.
- 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).
- 1/3 * 13.182% = 4.394% of pay.
- 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.
- Finally, the highest monthly benefit we can fund in a DB Plan is now $ 265,000.
- 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.
- You can layer a DB on top of a 401k.
- 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
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.