Warren gets assailed by ARA for 401(k) tax

As far as an industry watchdog group, let’s just say that the American Retirement Association (ARA) does its job. Regardless of party affiliation, the ARA takes on politicians with proposals that are harmful to the retirement plan industry and plan participants.

As part of her Medicare for all proposal as part of her presidential campaign, Senator Elizabeth Warren has called for a financial transaction tax that could hurt the 401(k) balances of all participants, especially the middle income. Warren proposes a financial transaction tax that would impose a 10-basis point tax on the sale of bonds, stocks or derivatives, but there doesn’t appear to be an exemption for investments in 401(k) plans, IRAs or pension plans. A 10 basis point tax is huge when we consider the lowered costs these days of 401(k) plans, we have many plan providers who don’t make 10 basis point and we know several fund companies that don’t make that on their index funds.

An analysis by Vanguard has indicated that American workers will have to work 2½ years longer to make up for the lost retirement savings due to this new tax. I’m not going to delve into politics here, but I think it’s fundamentally wrong to tap the deferred retirement savings of millions of Americans to pay for any program, whether it’s needed or not.

Bravo to the ARA for saying what needed to be said.

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2020 Limits Announced

As I’m sure you heard, the Internal Revenue Service released their 2020 Cost of Limit Adjustment limits for qualified plans and individual retirement accounts.

The salary deferral limit for participants in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $19,000 to $19,500.

The catch-up contribution limit for participants aged 50 is increased from $6,000 to $6,500.

The limitation regarding SIMPLE retirement accounts for 2020 is increased to $13,500, up from $13,000 for 2019.

The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

Effective January 1, 2020, the limitation on the annual benefit under a defined benefit (DB) plan under § 415(b)(1)(A) is increased from $225,000 to $230,000.The limitation for defined contribution (DC) plans under § 415(c)(1)(A) is increased in 2020 from $56,000 to  $57,000. The annual compensation limit under §§ 401(a)(17), 404(l), 408(k)(3)(C), and408(k)(6)(D)(ii) is increased from $280,000 to $285,000. The dollar limitation under § 416(i)(1)(A)(i) concerning the definition of “key employee” in a top-heavy plan is increased from $180,000 to $185,000. The limitation used in the definition of “highly compensated employee” under§ 414(q)(1)(B) is increased from $125,000 to $130,000.

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Be clear

In communications with other plan providers, clients, and potential clients, you have to be clear. There isn’t much room for miscommunication. When dealing with clients, miscommunications can lead plan sponsors to some huge mistakes.

Everything you write or say must be clear, there can’t be room for misinterpretation because the stakes are pretty high. I’ve seen too many plan sponsors that were harmed because the third-party administrator wasn’t clear on the information needed for an end of year census.

If you tell people what you need and what they need to know in a clear language, a lot of mistakes will be avoided.

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Correct the late deferral issue correctly

Correcting your late deferrals by depositing them and making a contribution to make up for lost earnings in your 401(k) plan isn’t enough.

Why? Well, Form 5500 requires you to truthfully answer whether you have late deferrals. If you answer yes (well you have to under penalties of perjury), it will alert the Department of Labor (DOL) as to your issue. The DOL will check their files and see if you filed a Voluntary Fiduciary Compliance Program, application with them. If you didn’t, they will contact you and give the suggestion you should, which would also include Form 5330.

Many plan sponsors don’t do that because of the cost and wait to hear from the DOL. Speaking from experience, I’d rather nip problems in the bud and complete the issue ahead of time.

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Get those safe harbor notices out

If you have a safe harbor 401(k) plan or plan on adding that provision to your plan, keep in mind that you must hand out notices to plan participants before December 1.

It’s an excellent provision and the last thing you want to do is screw up the ability to have it by not handing out the notices. It’s a big requirement for allowing a safe harbor design.

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IRS proposes changes to life expectancy tables

People complain a lot about life these days, but one fun fact is that people are living longer than they did just 20 years ago. Thankfully, the Internal revenue Service (IRS) noticed too.

The IRS has proposed a new rule regarding the life expectancy and distribution period tables that are used to calculate required minimum distributions (RMDs) from qualified retirement plans, individual retirement accounts (IRAs) and annuities, and certain other tax-favored employer-provided retirement arrangements.

The life expectancy tables and applicable distribution period tables in the proposed regulations reflect longer life expectancies. In the new proposed rules, a 70-year old IRA owner who uses the Uniform Lifetime Table to calculate RMDs has to use a life expectancy of 27.4 years under the existing regulations. Using the proposed, new Uniform Lifetime Table, the IRA owner would now use a life expectancy of 29.1 years to calculate RMDs. That means smaller distributions over a longer period.

The life expectancy tables and Uniform Lifetime Table under these proposed regulations would apply for distribution calendar years beginning on or after January 1, 2021.

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Don’t Let Your 401(k) Plan Turn Into A Disaster Movie

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

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It’s so apparent, they still won’t see it

There are so many times in business where you may craft the greatest idea out there that will make people money that they’d accept, but they still won’t.

When I was at that semi-prestigious law firm, they had a rule that attorneys who originated a client would be entitled to 50% of the fee, regardless of the practice area. So if the real estate tax attorney got a client for their house tax appeal, he could get 509 cents on the dollar if that client would utilize any other attorney at the firm, regardless of the practice area. So I thought it was a no brainer that I could start a national ERISA practice with our existing clients. I was dead wrong.  For some reason, these partners who used to have their practice clung to their client lists for dear life.

Great ideas on paper to generate revenue for someone else is great on paper. The problem is when you’re dealing with human emotions, often it defies logic/common sense. You might be dealing with insecurities or other emotions that get people blinded to great opportunities.

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Make sure your custodian knows who the trustees are

If you’re a closely held business or not, changes do happen. Whether it’s leadership or who serves as your plan’s trustee, change will likely happen. The problem sometimes is when the plan document has been updated to reflect who the current trustees are, yet the plan custodian doesn’t. That could certainly be a problem if one of the trustees left on acrimonious terms and wants to go to business for themselves and take a distribution that they weren’t entitled to.

So if you make a change of trustees, also make sure that your third party administrator and plan custodian know as well, so the records and signings cards are updated. Otherwise, an unhappy trustee may think it’s a 401(k) version of Supermarket Sweep.

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That Estee Lauder 401(k) case is troubling

I worked at a third-party administration (TPA) where one of our administrators tried to steal money from a participant’s account and transfer it to his Individual Retirement Account (IRA),. The only reason he got caught because he messed up the numbers on his own IRA. So this Estee Lauder theft case reminds me of it.

Despite the lawsuit concerning this Plan and the investigation, keep in mind that these are only allegations.

The Department of Labor is investigating the theft of $99,000 from Naomi Berman, a participant in Estee Lauder’s 401(k) plan, according to the ERISA attorney representing her in a civil claim filed in U.S. District Court for the Northern District of California.

In 2016, Berman received the first of two letters from Estee Lauder, confirming distributions of $37,000 and $50,000 from her 401(k) account. The distributions were sent to accounts at SunTrust Bank and TD Bank. Berman did not have accounts at either institution. Berman left assets in the plan after terminating employment in 2006.

For 3 months, Berman made 23 calls to Estee Lauder’s recordkeeper, Alight. Alight reported to Berman that it would investigate the transactions. Upon completion of that investigation, Berman was told no money was recovered, and that she would not be made whole. There was no report on how the distributions were made and backup to the transactions was never received by Ms. Berman.

I have been through enough transactions where the plan provider (or employee) stole the money or it was a ruse created by a participant, trying to get paid out twice. What happened here is an unsolved mystery and it’s a troubling episode because it’s so public and the answer by the recordkeeper was insufficient for her lawyers

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