Posts

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 2020-1: The SECURE Act – 10 Things You Should Know

January, 2020

Purpose:

To provide you with an update on recent pension legislation, called “The SECURE Act”. (This stands for “Setting Every Community Up for Retirement Enhancement Act of 2019”).  It makes some important changes, probably the most in a decade. This is not intended to be a comprehensive review, just a quick summary. Let us know if we can provide more detail.

1. Age 70 ½ required distributions modified

The required beginning date has been changed from age 70 ½ to age 72. This reflects increasing longevity, (especially given that age 70 ½ started being used in the 1960’s).

(Effective Date: Payouts for those reaching age 70 ½ after 12/31/19.)

2. “Open” Multiple Employer Plans (“MEPS”) are now allowed

Before we dive into this issue, a little background will be helpful. Most of the plans that we deal with are considered to be “single employer” plans. Then, there are other plans called “multi-employer plans, which are collectively bargained Union plans (ex: Teamsters, Airline pilots, etc.) Neither of these plan types are affected by this change.

Beyond that, there are plans that serve as a “group plan” for more than one, unrelated employer. These are called “Multiple Employer Plans”, or MEPS.  Examples include the Association of car dealers (“NADART”), The American Bar Association Plan (“ABA”), etc.  MEPS allow employers to pool resources to achieve efficiencies of scale. Until now, the employers in these MEP plans had to have some type of “commonality”, perhaps because they are in the same industry, same geographic area, etc.

The SECURE Act removes this commonality requirement, so that any employers can join forces. This may be a very big deal, as large group “Open MEPS” will likely be created in the future. Down the road, we may even set one up for our clients. The main advantage is potential cost savings (ex: one tax return, one audit, one plan document, etc.) Potential disadvantages include loss of flexibility and control. Time will tell.

(Effective:  Plan years beginning 1/1/21, although this may be delayed.)

3. Tax Credits for Adopting Plans/Auto-Enroll

There have been small tax credits available for several years, for employers who adopt a new plan. These credits have been minimal, and often overlooked. Congress has a strong desire to have more employees “covered” by a retirement plan, so, accordingly, they have significantly increased this tax credit. (Note: “credit”, not “deduction”). But there is a string attached.

The basic tax credit has increased from $500, to up to $5,000, for the adoption of a new plan. This can be applied against 50% of the actual start-up cost. This will cover a lot of start-up costs! The actual amount is based upon how many “Non-Highly Compensated Employees” are covered, and is determined as $250 per such employee (maximum $5,000). The “string attached” is that the Employer can receive an additional tax credit of $500 for the first 3 years of the plan, but only if the plan provides for “automatic enrollment.”. This is where newly-eligible employees are automatically covered by the plan, unless they opt out. (Without this provision, they have to “opt in” to be covered.) Again, we can see here Congress’ enthusiasm for more coverage.

(Effective: Plans created after 1/1/20.)

4. Encouragement of “Lifetime Income”

Another goal of Congress is to ensure that people don’t run out of money during their retirement. There is concern that the 401(k) universe is all about lump sum payouts, rather than monthly retirement income. To encourage monthly income, Congress has made a couple of changes. First, the amount of estimated monthly income will need to be shown on 401(k) benefit statements. This information, using a format and assumptions to be determined by the DOL, may be helpful to an employee trying to plan for their retirement. Further, the new law reduces fiduciary responsibility for the Plan Sponsor in selecting an annuity-provider. This had been a barrier to lifetime income in the past.

(Effective: 12 months after the DOL issues interim regulations; don’t hold your breath.)

5. More Time to adopt a New Plan

Until now, a new plan had to be adopted (signed plan document) by December 31, assuming that the Plan year is a calendar year. This causes a year-end rush. In order to make it easier for a new plan to be adopted, this deadline has been extended to the Employer’s tax return due date, including extensions.

(Effective:  Plans established on or after 1/1/20.)

6. Easier to have a “Safe Harbor” 401(k) Plan

A “Safe Harbor 401(k) plan” is one where the employer makes a fully-vested contribution, in an amount set by law, and, in return, the Plan gets a free ride on 401(k) discrimination testing.  There are two types of Safe Harbor Plans. One is based on a “matching” employer contribution.

(Example: Employee contributes 5% of their own pay, the Employer matches another 4%.) The other type of Safe Harbor has a fancy name, called a “non-elective” contribution. The required rate is an employer contribution of 3% of pay. (They call it “non-elective” because the employer contribution goes into the plan no matter what; the employee need not “elect” to put in their own funds in order to get it.)

Keeping with Congress’ theme of improving retirement coverage, they wanted to make it easier to implement a safe harbor plan, so they made two changes, both affecting the non-elective (3%) option, and not the matching safe harbor.  First, the “Notice Requirement” has been removed. (Until now, the employer had to provide every eligible plan participant with an annual “Notice”, announcing that the plan would be considered as a safe harbor plan for the following year.)

Second, we’ll have more time to implement such a plan. Currently, a safe harbor plan must be adopted by September 30 of that year. This deadline is extended to November 30, again, assuming a calendar year plan. Further, an employer can implement such a plan even after November 30, but the 3% contribution, in this case, must be increased to 4% of pay.

(Effective: Plan Years Beginning 1/1/20.)  

7. Payouts available for Birth or Adoption of children

The SECURE Act allows a plan participant to take out up to $5,000, without penalty, when they have or adopt a child under age 18. The plan must allow this distribution to be repaid anytime.

(Effective: 1/1/20.)

8. Eligibility for Part-Time Employees

This is a big deal. Remember, ERISA (the Federal law governing retirement plans) was adopted in 1974, when most employees worked for just one (or a handful) of employers for their whole career. The “gig economy” was not foreseen. As a result, the rules for plan participation (and vesting) were created to allow a “1,000 hour” requirement to enter a plan.

Many plans still have a 12-month/1,000-hour entry requirement. This bars most part-time employees from joining such a plan. As an alternative to the 1,000-hour rule, all plans will need to allow an employee to enter sooner, if they work 500 hours in 3 consecutive years. Note, however, that employees who enter a plan because of these new rules need not receive any employer contribution. For example, in a 401(k) Plan, they could only defer their own pay, if desired. They would not be involved in compliance testing.

(Effective: Plan Years Beginning 1/1/21. However, part-time service before 2021 need not be tracked or recognized.)

9. Higher penalties for not filing your Tax Forms

The tax form for a 401(k) plan is called a “Form 5500”. We prepare a lot of these. The due date is typically July 31, although it can be easily extended to October 15. These dates probably look familiar.

(You might want to sit down before you read this next part.)

Until now, the penalty for late filing had been $25 per day, to a maximum of $15,000 per tax year. We have seen these penalties actually imposed. The new law increases the maximum penalty to $250 per day, not to exceed $150,000. (Note: this means $150,000 maximum penalty for every year late or missed.)  Be careful!

(Effective: Tax Forms due after 12/31/19.)

10. What haven’t we covered here?

As we said at the outset, this is not intended to be a comprehensive report, so we’ve left out some information and details. Here are some items that you may wish to review on your own. Of course, we are available to provide further information, or just to chat.

  1. IRA contributions can now be made after age 70.
  2. IRA mandatory payouts can now begin at age 72. (Same as new 401(k) rules, above.)
  3. “Stretch IRA’s” eliminated. If the beneficiary is not an eligible beneficiary, the inherited IRA must now be distributed within 10 years (not over the beneficiary’s life expectancy). Financial professionals view this change as potentially very significant. They eliminated the stretch IRA in order to pay for the other various goodies set forth above.
  4. No more loans from a 401(k) plan via credit card.

Next Steps for You:

Please let your Analyst or Managing Consultant at Metro know if you have any questions or concerns.

Best wishes for a happy and productive 2020!

 

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