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Metro Newsletter #105

December 23, 2020

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.

Plan Document Updates:

As required by the IRS, we will soon be restating all 401(k) plan documents, as required by the IRS. These plan documents need to be redone (“restated”) every 6 years, to reflect current rules and regulations. The restatement deadline is 7/31/22. We recently sent out a short letter on this topic, and have already begun this process. This would be the perfect time to let us know if you’d like any changes made to your plan design.

In addition, you may recall that 2 recent pieces of legislation, called the SECURE Act and the CARES Act, have had a significant effect on qualified retirement plans. These Acts streamlined retirement plan operation, and made it easier for employees to access their retirement funds if needed due to the pandemic. Metro will also be updating your plan documents to reflect this required language. These amendments will be due by 12/31/22. It should be noted that we are still awaiting final guidance from the IRS for these amendments.

As a result, you may receive your plan document restatement first, with the SECURE and CARES Amendments to follow shortly thereafter, or you may receive them both at the same time. We will try to make this process as user-friendly as we can.

For those with defined benefit and cash balance pension plans – the amendments referred to above are still due, but the document restatement will be due in about 4-5 years, since these plans are on a different six-year cycle.

CARES provisions expiring

By the time you read this, the time period for allowing employees easier access to their funds, via an in-service distribution, shall have expired. Also, this Act provided for an optional “suspension of loan repayment” provision. That is also expiring, so those loan payments will now need to recommence. A lot of this activity will be driven by the fund “platforms”, who do the recordkeeping for 401k Plans. Please let your Metro Analyst or Managing Consultant know if you have any questions on this issue.

Is it too late to adopt a Plan for 2020?

Well, it’s funny you should ask. Until now, the answer would have been that YES, it is too late, unless the plan document is signed by 12/31/20. But no longer.

The SECURE Act provided more time to adopt a Plan. This was done to make it easier for Employers to adopt a new plan, hence increasing coverage of employees. (This goal for increased employee coverage is a guiding force behind many of Congress’ actions in creating retirement plan legislation.) The deadline for adoption of a new plan is now the tax return due date for the current fiscal year (i.e., you can adopt a plan retro to 2020 until the extended due date of your 2020 tax return, which is generally 3/15/21 or 4/15/21, plus possibly six months if extended.)

There are a couple of implications. If you wait too long, this extended adoption due date will not work for defined benefit plans. That is because the entire funding for a year is due by 9/15 of the following year. (Ex: 2020 funding requirement due 9/15/21.) If you adopt a DB plan near or after this date, retroactively to 2020, then you will encounter difficulty in meeting this funding deadline, which will likely incur an excise tax. (yucch).

There are also some logistical concerns about later adoption of a 401k Plan. Remember that part of the 401k funding is done via “salary deferral”, i.e., the employee contribution comes out of their paycheck. So, if you adopt a 401k Plan in 2021 (retro to 1/1/20), it will be impossible to fund this source retroactively. However, a lot of fun could still be had relative to Employer contributions for 2020 with the 401(k) salary reduction provisions starting prospectively in 2021. The good news is that the year-end stress of setting up new plans quickly can be alleviated.

Update on Required Minimum Distributions and 1099 Forms

This is your annual reminder that there are two year-end events that you should be aware of. First, some of those over age 70 ½ must receive their annual Required Minimum Distribution (RMD). This would normally be due by 12/31/2020, but because of the CARES Act, there is a waiver of RMD’s due in 2020, but only for 401k and profit sharing plans. It’s important to note that this waiver does not apply to defined benefit plans or cash balance plans. For defined benefit and cash balance plan first-timers, you can elect to delay your initial RMD until 4/1/2021. (If you do delay, you’ll have two payouts during 2021.) Also, note that there is an exception for those still working who are not 5% owners. These “late retirees” need not receive any RMD until they actually retire. Finally, recall that this age 70 ½ cutoff has been modified, and will now apply at age 72. This age 72 cutoff applies to those reaching age 70 ½ on or after 1/1/20 or later.

Further, 1099-R forms must be sent by 1/31/2021 to all plan members who received a 2020 payout. This form is due even if the employee elected a rollover, with no taxes due. If your plan is on a “platform” with a financial institution, then they normally prepare the 1099-R forms. Otherwise, we can help out.

Where are we in the annual cycle?

As we celebrate the Holiday Season, we are also preparing your 12/31/20 year-end data requests. Please check your (e-) mail box for this. We try to make it as easy as possible for our clients in this regard. We also like to try to obtain investment information directly from the fund companies, minimizing the Employer’s hassle. If you are aware of potential efficiency improvements in this regard, we’d be interested in hearing from you.

Poker Actuarial

Here is an important number, but only if you play poker. In a typical game of Texas Hold-em, (5 community cards face up and each player has 2 cards face down), just before the last card is dealt, each person would have seen 6 cards (4 face up and 2 face down.) Assuming we are playing with a full deck (my wife sometimes doubts this), 46 cards remain. So, any particular card has a 1/46 chance of coming out = 2.2%. You need to know this if you plan on winning at poker.

Example: You are drawing to a flush, and there are nine remaining cards that would help you win the pot. (Perhaps you have two diamonds, and there are 2 more on the board.) There is $ 50 in the pot. Someone bets $ 5. There is one card to go. Your chance of winning is 9 * 2.2% = 19.6%. (9 good cards for you, each with a 2.2% chance). But your “payoff” is 10 to 1 (bet $ 5 to win $ 50).

In this case, you should call the $ 5 bet, since your chances of winning are 4 to 1. (80.4% chance of losing, 19.6% chance of winning = about 4 to 1). Your payoff is 10 to 1, so this is (very) good! Note that if the bet had been $ 25 instead of $ 5, the payoff would have only been 2 to 1 (bet $ 25 to win $ 50), and your 4 to 1 odds look much less attractive. In this case, you should fold. Let me know if you’d like to chat about or play poker.

Quick Metro Update:

We are weathering the storm, hopefully just like you. (We almost made it thru as a pandemic-free issue of Metro news). Our offices in Pittsburgh and in Ripley, WV remain open, with about 20% of our staff regularly work at the office in a socially-distanced set-up. The other employees are working remotely from home, or some combination of remote/in office. We remain committed to delivering “gold level” client service, hopefully in a pretty seamless way.

A Couple of Pension Plan Updates

I like defined benefit plans a lot because (a) I am an actuary, and (b) they are fun. The maximum benefit limits for these plans have increased for 2021, from an annual benefit of $ 225 K per year, to a new limit of $ 230K. This is the highest limit one can fund for. In reality, most of our plans are designed to create a lump sum at retirement, rather than a monthly benefit. Nevertheless, the basic “promise” for all defined benefit and cash balance plans is a monthly benefit, and that is why the IRS defines the limit using this parameter. The maximum lump sum is simply the equivalent value of this maximum benefit. (Fancy people call this “actuarially equivalent”.)

Bottom line, the new limits will allow a lump sum of $ 2,946,527 at age 62, so that is something to consider if this type of plan fits your needs. This is a lot! A defined benefit/cash balance plan can be combined with a 401k, creating potential annual deductions approaching $ 250 – 300 K/year, if you are close enough to retirement. We’d be happy to prepare an illustration if this sounds interesting enough.

One other note, for those who already have such a plan. Interest rates used to determine lump sums continue to drop, so 1/1/21 lump sums will be about 8-9% higher than 12/31/20 lump sums. This last comment does not apply to cash balance plans – only traditional defined benefit plans. Some people prefer cash balance plans for just this reason – the lump sum doesn’t fluctuate with interest rates.

Best Wishes and Happy Holidays ! 😊

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 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 #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.