IRS announces 2018 retirement plan limits

As 2017 nears its end, we already have the retirement plan limits set for 2008 by the Internal Revenue Service (IRS).

For 401(k) plans, the 2018 limit for salary deferrals contributions is $18,500, up $500 from 2017’s limit. Remember this limit is per participant, regardless of how many plans that a participant is enrolled in.

The annual additions maximum contribution (employer and employee combined) increases by $1,000 to $55,000.

Plan participants who contribute to the limit next year will be able to receive up to $36,500 from match and profit-sharing contributions ($55,000 minus $18,500).

The employee compensation limit for calculating contributions is $275,000, up $5,000, while the compensation limit of key employees in a top-heavy plan and of highly compensated employees in a top-heavy plan remains the same at $175,000 and $120,000, respectively.

For defined benefit plans, the limit for the maximum annual benefit rises from $215,000 to $220,000.

For SIMPLE and SEP plans, the maximum contribution limits are unchanged at $12,500 and $600, respectively; for ESOPs, the maximum account balance in the plan subject to a five-year distribution period will increase to $1105,000 from $1,080,000, while the dollar amount used to determine the lengthening of the five-year distribution period rises to $220,000 from $215,000.

Annual IRA contributions, as well as IRA catch-ups, are unchanged at $5,500 and $1,000, respectively.

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No Deferral Cap, But Let’s Not Celebrate

The Republicans in the House of Representatives unveiled their tax reform plan and there includes no substantial change to 401(k) plans. Everyone in the retirement plan industry and most individuals with common sense were outraged that there was even a suggestion that they would limit pre-tax deferrals to $2,400, thereby making the 401(k) plan a more Roth like plan.

When I heard of the $2,400 pre-tax limit, I knew it wasn’t going to happen. I’m no political genius, but I knew that there would be enough uproar that such a drastic cut in the tax-deferred limit would be shelved. It’s not genius, it’s just I’m a political realist and a Republican Congress needs every Republican vote they can get. And they wouldn’t get it with such a proposal.

Even the current proposal that limits state and local tax and mortgage deductions isn’t likely to pass. That is why I don’t think we are completely out of the woods yet. If the current bill fails, they will either shelve tax reform for now or they may revisit the issue of limiting deferrals t maybe a more negotiable amount like $10,000. I don’t know, but I wouldn’t be celebrating yet.

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Did Vantage Take Advantage?

Well over a week ago, I got the startling news that the FBI closed down the office of Vantage Benefits, a Dallas based third-party administrator. I didn’t make any comment on it until it was properly reported that their offices were closed because I know how rumor and innuendo can hurt a business.

I know of Vantage Benefits and I know Jeff Richie, so I still can’t believe the news. I understand why people may commit financial crimes, but I don’t understand why anyone would embezzle plan assets in a fiduciary capacity because it’s easily self-incriminating. From a self-incrimination standpoint, I think trying to rob a bank gives you better odds that stealing assets from a retirement plan you serve as a plan provider and/or fiduciary.

If the allegations are true, then it’s another black eye for the industry coming just a few years after the Matt Hutcheson debacle. I was involved in the Hutcheson debacle having succeeded him as a fiduciary for the only plan he didn’t steal from as the allegations start to pop up. Like that situation, this story can be a learning experience for plan sponsors and plan providers in properly vetting plan providers as well as putting procedures in place to make sure assets aren’t misused.

I’m looking forward to an investigation into this matter, no matter the outcome.

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Watch for any Potential Conflicts of Interest

It’s amazing sometimes how people are blind to conflicts of interest that are as clear as day. In my local hamlet, the Library Board hired a School District board member as their attorney even though there is a financial relationship between the Library and the School District. The attorney for the VolunteeFirefighterer District was hired as the Library’s director of community activities (the position is now paid) while the Library board is stuffed with his cronies that he either got elected or appointed. In addition, his wife was a Board member until the time he was hired. Some people are ethically challenged.

As a retirement plan provider, you need to understand where there is a conflict of interest if someone you know hires you. Whether it’s a family member, golf club, church, or bank where you serve as an advisory board member, you need to identify any potential conflicts of interest.

While a plan provider needs to understand the prohibited transactions rules under ERISA and the Internal Revenue Code, a plan provider should also identify the non-retirement plan rules on conflicts of interest. For example, if you are on a private school committee and you are hired as the school’s retirement plan advisor, you may not have an issue with the prohibited transaction rules, but you may have a problem with the school’s rules on conflicts.

Nepotism is as bad as cronyism, so getting hired as a retirement plan advisor because you’re related to a decision maker is also a potential problem. It might be Kosher with ERISA and the Internal Revenue Code, but it may not pass muster with the courts and/or the Department of Labor under review.

Just because something might be OK with retirement plan rules, it may not be good for the organization or person that did the hiring. Like I always say: the appearance of impropriety is reason enough to avoid a situation.

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Massachusetts proposes a MEP and why it’s a bad idea

After Vermont decided to proceed with sponsoring an open multiple employer plan (MEP), legislation proposed would make Massachusetts the second state to sponsor a 401(k) MEP.

Prior to May 2012, we had a decent market for open MEPs, open meaning that there was no commonality or nexus between the adopting employers like an association plan. I say decent because there were some high priced MEPs like the folks who got that adverse advisory opinion concerning theirs that has put the idea of Open MEPs on ice ever since because of the need of multiple 5500s for adopting employers because the DOL said without commonality, you have multiple plans (which require multiple 5500s).

I believe in the idea of an Open MEP and 5 ½ years later, we have absolutely no content from DOL on what would be an Open MEP that works as a single plan for 5500 purposes. I believe that the solution for Open MEPs should come from plan providers who know the basics of private retirement plans rather than politicians and civil servants who can’t spell 401(k) without spotting them the 4, the 0, the 1, and the k.

People are very wary of government, I don’t see many employers signing up for a plan sponsored by a state government.

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Advisors Advantage

My latest newsletter geared towards retirement plan professionals can be found here.

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The Bottom Line For Retirement Plan Providers

My latest article for JDSupra.com can be found here.

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Don’t ignore your clients and the fees they pay

I first started paying for my own vehicle when I got my first job as an ERISA attorney, It was a brand new1998 Toyota Camry. I was looking for car insurance and the best rate was through an insurance company that my father’s business partner used for the business.

I’ve used the same car insurance company since then, 6 different cars. They were great at paying claims, namely the two vehicles totaled during Hurricane Sandy. Over the past few years, I’ve seen my rates go up while my cars got older. I never got a call from the agent about the increase in rates or what I can do to lower them. So I shopped around and found insurance that will cost me $150 less a month. That’s good money.

The point here is that when you have clients, you just can’t sit around and ignore the fees that they’re paying. I’m not saying you should lower your fees, I’m saying that you should always have a discussion with clients about fees and when assets can lower the percentage of assets that pay fees. You just can’t stand pat and do nothing, further incentivizing plan sponsors to look elsewhere. Every relationship I’ve ever handed that ended, the blame always rests on a lack of communication. People and clients like to know that they are appreciated and that their continued loyalty isn’t taken for granted. The best way to show they are not being taken advantage of is by not ignoring the fees they pay.

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Trump and the 401(k) Flip Flop

After word leaked that proposal for tax reform may include a provision limiting pre-tax salary deferrals to $2,400, President trump said any proposal limiting deferrals wasn’t likely. Then about a day or so later, Trump said that discussion about limiting deferrals would be on the table.

Before anyone with an ax to grind against the President, the fact is he really has no idea what will be in a tax reform proposal until he sees it. There are going to be many discussions as to which tax deductions will be sacrificed to achieve lower tax rates, so I think the $2,400 proposal will be considered. Quite honestly, I think that low number is absurd and won’t sustain inclusion when at least 2 Senate Republicans will fight it. Maybe they lower the tax-deferred limit to $9,000 or maybe they will lower the 401(a)(17) recognized compensation limit like they did in 1986 and 1993, but I think $2,400 is an absurd amount when defined benefit plans have been phased out and Social Security becoming more and more like a Ponzi scheme for people my age and younger.

I wouldn’t take stock into what the Presidents says what will happen, I will only take stock of what the tax reform bill will look like and its chances to pass and become law. Until then, your guess is as good as mine.

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#1 Way A 401(k) Plan Sponsor Can Avoid Compliance Headaches: Hire The Right TPA

My latest article on JDSupra.com can be found here.

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