SponsorNews - August, 2013
Maximum Compensation for Self-Employed
A frequent question involves self-employed individuals, such as partners or sole proprietors. The question is how much the individual needs to earn from his or her business to assure that the individual’s compensation for defined contribution plan purposes will be at least equal to the compensation limit. For a self-employed individual, compensation is equal to the individual’s earned income.
For a 2012 calendar plan year, a sole proprietor would need $310,988 of Schedule C income to assure that the individual has earned income of $250,000. (The same is true for the net earnings from self-employment for a partner.) In 2012, the 164(f) deduction (which mimics the employer’s share of payroll taxes) for this amount is $10,988. Subtracting this from the schedule C income leaves $300,000 of adjusted income. Subtract $50,000 of profit sharing contribution and you arrive at $250,000 of earned income.
For a 2013 calendar plan year, a sole proprietor would need $317,298 of Schedule C income to assure at least $255,000 of earned income. This is $6,310 more than last year. $5,000 of that comes because the compensation limit is higher. $1,000 of that comes because the 415 limit is higher. The remaining $310 results from differences in the 164(f) deduction.
Roth or Regular: Which 401(k) is Best?
By Scott Holsopple
March 12, 2013 RSS Feed Print
When you talk to your accountant this tax season, it’s also a great time to decide how you’ll contribute to your employer-sponsored retirement plan this year.
You might first have the option to choose between a traditional 401(k), and a Roth 401(k). Roth contributions are made on an after-tax basis, and traditional contributions are made on a pre-tax basis. (Your employer will deduct 401(k) contributions directly from your paycheck regardless of whether you opt for traditional or Roth.)
Traditional contributions reduce your taxable income for this tax year. Say you make $100,000 and contribute $15,000 in traditional form to your 401(k) plan. Your taxable income is immediately reduced to $85,000. Furthermore, the money you invest grows tax-deferred until you withdraw it at retirement. At retirement, you pay ordinary income tax on all traditional contributions and any gains.
Roth contributions won’t reduce your current taxable income. But there are no retirement-time taxes on Roth distributions. You pay taxes up front, and the rules today state gains aren't subject to taxation.
Deciding whether to Roth
People who are in their peak earning years just prior to retirement generally stand to benefit most from traditional contributions. In those high-earning years, traditional contributions could take you into a lower tax bracket and have a significant impact on your tax bill.
New workers in their early-to-mid twenties fall on the other end of the spectrum. Incomes are smaller, so contributions are smaller, and tax consequences are smaller as well. During those early earning years, there’s less need to jump down to a lower tax bracket, so it generally makes sense to make Roth contributions.
If you’re between 25 and 60, things are a lot grayer as tax and income situations vary widely. And tax laws could change drastically by the time you retire, so there isn't a perfect plan for deciding on Roth, traditional, or blended contributions.
You can, however, diversify to mitigate tax risks. In this case, I’m not talking about your asset class allocation—I mean tax diversification. You can blend so that you’re making Roth and traditional contributions. An even split may or may not work well for you. If you’re younger or area lower income-earner, you may tend toward Roth contributions; if you’re nearing retirement or are a higher income-earner, reducing your taxable income may be beneficial. But, ultimately, much of the decision hinges on whether you feel more comfortable paying taxes now or later and whether you’re willing to risk tax uncertainty during retirement years in exchange for a beneficial tax situation now.
Tax diversification is appropriate for nearly every retirement investor. The percentage split is the element that will vary based on your personal situation and comfort level. Either way, this is a good time to talk with someone that understands your tax burden.
Uncertain regulatory climate hasn’t put damper on TPA market
By Paula Aven Gladych
March 13, 2013
Despite an uncertain tax and regulatory environment, retirement plan sponsors are not shying away from the added expense of hiring third party administrators to help manage their 401(k) and 403(b) retirement plans. If anything, TPAs are more popular than ever because they help companies better navigate the murky, and sometimes choppy, regulatory waters.
“It is an interesting time for them. A lot fear that fee transparency will equal pressure on fees, that once plan sponsors get this fee information from providers they may shop around and pick the cheapest plan provider out there,” said Ary Rosenbaum, managing attorney with The Rosenbaum Law Firm in New York. “I don’t think that will be the case. TPAs still offer great value as a service provider. Not all TPAs are equal. Some are better than others, but TPAs need to do better marketing for themselves to tell plan sponsors why they are better than their competitors, why their service is better.”
TPAs offer a tremendous value when it comes to administration, recordkeeping, discrimination and compliance tests and anything that is very technical, he said.
If the TPA a plan sponsor chooses is well versed in plan design, it can save the employer money.
“Plan sponsors don’t understand that across the board, pro rata contribution models may not be what is ideal,” Rosenbaum said. “When it comes to sophistication in plan design it could put more money in the employees’ pockets and less money in the pocket of the government.”
He added that plan sponsors also need to realize that hiring the cheapest provider may not be the best option for them.
Rosenbaum, who is an ERISA attorney, said that he believes the most important service provider a plan sponsor has is their TPA/recordkeeper. “A good one goes a long way to avoid plan compliance errors and maximize employer contributions and creates a lot less of a headache than if you go with someone who is not up to snuff,” he said.
“The worst thing a plan sponsor can do is shop based only on price. Shop for value, what you are getting for your money spent,”
Rosenbaum said. “Someone may be offering something cheap, but if their services are lackluster and negligent, you will pay more in compliance fees.”
TPA use isn’t just growing among the smallest companies, said Jeff Schreiber, vice president of TPA business development at The Principal. It also is working up market.
Recent data from the Plan Sponsor Council of America found that TPA use among 403(b) plans also is on the rise.
The 2011 403(b) Plan Survey showed an increase in the percentage of 403(b) plan sponsors who use TPAs, from 24.6 percent in 2010 to 28.7 percent in 2011. The survey also dispelled the myth that TPAs only work in the small plan market, with 56 percent of survey respondents with 1,000 or more participants saying they also use third party administrators.
The Principal, which sponsored that survey, has spent a good deal of time and money looking at what tools and information third party administrators need to do their jobs better. The company has developed a website dedicated to aiding these retirement plan practitioners through all aspects of retirement plan administration online.
“With the ever-changing regulatory and legislative environment, the responsibilities of being a plan sponsor and a fiduciary for the plan are increasing, not decreasing,” Schreiber said. If employers want to offer a plan to employees, they need to make sure it is designed the right way and meets all of the regulatory requirements.
He added that if he were a plan sponsor he would scrutinize the institution or recordkeeper behind the third party administrator to make sure they were experts on plan design and regulatory issues. “TPAs are very well positioned to do that,” he said.
The Principal’s TPA website now offers compliance information, marketing tools and advice on how to get into prospecting for new clients and helping existing ones.
“From The Principal’s standpoint, the role a TPA plays in the model going forward, we are trying to do what is best for advisors and plan sponsors. It is increasingly evident to us, the role of a TPA is important for us to support. We are a big believer in the value they play in the equation,” Schreiber said. “We will do everything we can to support it.”
Bob Benish, interim president and executive director of the Plan Sponsor Council of America, said he has talked to a number of plan sponsors about the issue of third party administrators and most agree they will continue to play a major role in the retirement industry.
“Under ERISA, they don’t assume everyone to be an expert, but they do expect you would use the expertise available to you in the marketplace to get the information you need to make a correct decision as a fiduciary,” he said.
The overwhelming majority of small and mid-size plan don’t have the expertise inside their company to do the job well, he said. “It behooves them to go to outside firms that know about fee disclosure and other plan-related information that can help them implement the best program possible for their employees,” Benish said.
He added he remains a big supporter of TPAs.
Taking credit for starting a retirement plan
By Jerry Kalish
March 25, 2013
With taxes on everyone’s mind now, here’s something to talk about with a prospective client who is thinking about starting a retirement plan. It’s the tax credit for starting a new retirement plan.
Here’s how it works in broad brush strokes in a Q&A format:What is it?
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) added a tax credit of up to 50% of the first $1,000 in retirement plan startup expenses for the first three years of a plan. Thus, the credit cannot exceed $500 during each of the first three years of the plan.Who is an eligible employer?
An employer is an eligible employer if, during the preceding year, there were 100 or fewer employees who received at least $5,000 of compensation.
Can the plan cover only Highly Compensated Employees?
No. The plan must cover at least one Non-Highly Compensated Employee.Does the plan have to be new?
Yes. The employer must not have established or maintained any employer plan during the three tax-year period immediately preceding the first tax year in which the new plan is effective.What types of plans are eligible for the Tax Credit?
Eligible plans include qualified plans such as 401(k) plans, profit sharing plans, traditional pension plans, cash balance pension plans, and employee stock ownership plans. In addition, SEP IRAs and SIMPLE IRAs could qualify.
What expenses are eligible?
Expenses include those incurred to establish the plan, administrative fees and costs incurred to educate employees about the plan.
Is a “double tax benefit” available?
No. Qualified costs are not deductible to the extent they are effectively offset by the Tax Credit.How does the employer claim the Tax Credit?
To claim the credit, an employer must file IRS Form 8881 - Credit for Small Employer Pension Plan Startup Costs.
Spring-cleaning your organization's retirement plan
With temperatures rising, days lengthening and buds blossoming, the thought of spring-cleaning comes to mind: a burdensome ritual passed down through the generations.
Like many, I too will take an otherwise good weekend and spend it diligently dusting, washing, scrubbing, organizing; you know the drill. Sometimes I'm tempted to cut corners, but I've learned taking shortcuts or working hastily will only lead to more work in the end.
As the plan trustee or plan administrator, now is a great time to “spring-clean” your plan too.
Here are a few tasks, which may “spruce up” your plan:
Confirm the appropriate compliance testing has been performed and the Form 5500 is being prepared. For calendar year plans, this testing is typically completed in January or February. A questionnaire is completed which provides data for the return. Ask your recordkeeper or TPA which tests apply to your plan and make sure any issues are resolved.
Cash out small balances. Even though an individual may no longer work at your organization, as a fiduciary your responsibility and liability continues until the participant has closed their plan account. Check your plan document to see what options are available for former employees with balances under $5,000.
Review the list of those needing to take a Required Minimum Distribution (RMD). If you have former employees in the plan age 70 ½ or older, they may need a RMD. Work with your Recordkeeper to determine who is on the list and how you can assist them with their distribution.
Update beneficiary forms. Take a few moments and have your participants confirm their beneficiary designations. Life happens and these updates often get overlooked.
Review your plan's Investment Policy Statement (IPS). As a fiduciary you want to ensure that you are managing your plan's investment offerings, and the frequency of their review, in accordance with your IPS. You may want to update your IPS if it is too restrictive, administratively burdensome or no longer consistent with your objectives.
Confirm receipt, distribution and review of all fee disclosure documents. In light of recent legislation, you and your participants should have received a myriad of fee disclosure documentation from your covered service providers (i.e. advisor, recordkeeper, TPA). If you did not, request them immediately. Make sure you are reviewing them and understand the services being provided and the overall plan costs. Remember, the costs must be reasonable for the services rendered.
Set dates to review education strategy, investments and plan costs. Once you understand the services you are paying for, map out a schedule for the year. If you don't have meetings set, put reminders on the calendar now.
In both cleaning our homes and our retirement plans, if we manage the little tasks along the way, the big “spring-clean” isn't as cumbersome. Hopefully this starter list will make your responsibilities a little easier year to year. Happy cleaning!