Avoiding Common Errors Surrounding RMDs from Qualified Plans

RMD picture.jpgWhen it comes to their retirement accounts, many investors often fail to think about required minimum distributions (RMDs). An RMD is the minimum amount that participants in qualified plans—like 401(k)s and 403(b)s—must withdraw from their accounts annually once they reach age 70½. Failing to take an RMD can lead to unnecessary tax burdens and other financial issues, so it’s important to understand the rules—and the common errors people make.

Common error: I took an RMD from my 401(k). This will satisfy both the RMD for that account and the one I have to take for my IRA—or any other account for that matter.

What the rules say: RMDs can be aggregated for certain accounts. For instance, if you have multiple traditional IRAs, you can take an RMD from one account that equals the total amount of RMDs you would have to take from all accounts. So, if you have two traditional IRAs and each has an RMD of $1,000, you can withdraw $2,000 from one account to satisfy both RMDs. RMDs for SEP- and SIMPLE IRAs can be aggregated with traditional IRAs as well.

This same RMD aggregation rule can be applied to multiple 403(b) plans, too. You cannot, however, take an RMD from a 403(b) plan to satisfy an RMD from an IRA. And when it comes to 401(k)s and other non-IRA accounts, such as profit-sharing plans, you must take a separate RMD from each plan.

Common error: I just retired and have a substantial RMD due from my 401(k) plan and a small RMD due from my traditional IRA. I can just roll the 401(k) into the IRA and take the smaller RMD.

What the rules say: Although you can roll your 401(k) into a traditional IRA, the RMD amount is not eligible for rollover. If, for some reason, the financial institution makes a mistake and allows the RMD to be rolled with the other eligible assets, the RMD for the 401(k) will still be due, as will the RMD for the traditional IRA. The IRS does not give specific guidance on this, but some experts advise that, in order to truly satisfy the RMD from the 401(k) plan, the RMD amount must be put back into the 401(k) plan and then withdrawn.

Common error: I have a Roth 401(k) or 403(b), and just like my Roth IRA, I don’t need to take RMDs.

What the rules say: One of the more puzzling rules regarding RMDs is the fact that Roth 401(k) and Roth 403(b) plans both have RMDs. This is after-tax money, so the RMD does not increase your tax burden like a distribution from a traditional IRA would, but it can be a nuisance because, if you miss taking it, you will incur a 50% penalty. It may be smart to roll over these designated Roth accounts into a Roth IRA prior to the date you must start taking RMDs. Be aware, however, that if an RMD is due, that portion of the account balance is ineligible for rollover.

Common error: As long as I am still working, I can delay RMDs from my 401(k) or 403(b) past age 70½; I don’t have to start taking them until the year I in which I retire.

What the rules say: It is true that participants in 401(k) or 403(b) plans who are still working after age 70½ may delay their RMDs from those accounts until the year in which they retire. There is, however, one caveat: If you own 5% or more of the company by which you are employed, you lose the ability to delay RMDs. Even though you might still be working after age 70½, the IRS requires you to start taking RMDs by age 70½.

Please note: The exception for delaying RMDs only applies to qualified plans. Participants who also have traditional, SEP-, or SIMPLE IRAs are always required to start taking RMDs from those accounts by age 70½.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult a tax preparer, professional tax advisor, or a lawyer.

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IRS Benefit Plan Limits for 2018

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On October 19, 2017, the Internal Revenue Service released Notice 2017-64, announcing cost-of-living adjustments (COLAs) that affect contribution limits for retirement plans in 2018. The list below, although not exhaustive, highlights key changes that retirement plan sponsors should be aware of, as well as some limitations that remain unchanged from 2017:

  • The elective deferral limit is increasing from $18,000 to $18,500.
  • The aggregate contribution limit for defined contribution plans is increasing from $54,000 to $55,000.
  • The annual compensation limit used to calculate contributions is increasing from $270,000 to $275,000.
  • The limitation on the annual benefit under a defined benefit plan is increasing from $215,000 to $220,000.
  • The dollar limit used in the definition of “key employee” in a top-heavy retirement plan remains unchanged at $175,000.
  • The dollar limit used in the definition of “highly compensated employee” remains unchanged at $120,000.
  • The catch-up contribution limit for employees age 50 or older remains unchanged at $6,000.

The table below displays the 2017 and 2018 limits for a host of tax breaks:

401(k) Plan Limits for Plan Year 2018 Limit 2017 Limit
401(k) Elective Deferral Limit1 $18,500 $18,000
Catch-Up Contribution2 $6,000 $6,000
Defined Contribution Dollar Limit $55,000 $54,000
Compensation Limit3 $275,000 $270,000
Highly Compensated Employee Income Limit $120,000 $120,000
Key Employee Officer Limit $175,000 $175,000
Non-401(k) Limits
403(b) Elective Deferral Limit1 $18,500 $18,000
Defined Benefit Dollar Limit $220,000 $215,000
457 Employee Deferral Limit $18,500 $18,000

 

SEP and SIMPLE IRA Limits 2018 Limit 2017 Limit
SEP Minimum Compensation $600 $600
SEP Maximum Compensation $275,000 $270,000
SIMPLE Contribution Limit $12,500 $12,500
SIMPLE Catch-Up Contribution2 $3,000 $3,000
IRA and Roth Limits
IRA and Roth Contribution Limit $5,500 $5,500
Catch-Up Contribution2 $1,000 $1,000

1Employee deferrals to all 401(k) and 403(b) plans must be aggregated for purposes of this limit.
2Contributors must be age 50 or older during the calendar year.
3All compensation from a single employer (including all members of a controlled group) must be aggregated for purposes of this limit.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult a tax preparer, professional tax advisor, and/or a lawyer.

Mastering Your Company’s Match

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If I offered to give you $15 back if you gave me $10, would you do it? Of course, you would! That is pretty much the way a 401(k) company match works. If your company offers a matching contribution as part of its 401(k) and a participant contributes to that plan, then the company is giving that employee additional money just for participating. This makes a company match one of the most powerful tools in a participant’s retirement arsenal – if it is used correctly. Here are some ways that a company match can be so powerful.

Give Your Participants a Raise
The general rule of thumb for retirement savings is that on average an individual should save between 10% – 15%. That number can seem daunting to most people. However, add in a company match and that number becomes much more attainable. For instance, if the company match is 50% of the first 6% deferred, then a participant who contributes the full 6% is getting 3% from the company and is now at 9% – much closer to the 10% goal. Also keep in mind that the participant got to that 9% number with only 6% of their own money being contributed. That’s pretty powerful stuff!

Match Wisely
How the company chooses to design the match can have significant impacts on participant behavior. If the company front-loads a match, such as offering a 100% match on the first 3% deferred, it may be inadvertently dissuading participants from contributing more than 3% of their own money. Also, if too little match is offered, then the company may miss out on the incentive feature that a match can offer. Therefore, it is important to assess how much money your company can afford to allot to match money and then design your match to encourage your participants to defer as much as possible into the plan.

Give the Plan Some Relief
If your company is already offering a match and plans to continue doing so in the future and/or if the plan regularly fails annual compliance testing, then you may want to consider a Safe Harbor Match plan design. A traditional Safe Harbor Match is as follows: 100% of the first 3% deferred and 50% of the next 2% deferred. Therefore, if a participant contributes 5% of their own money, the company would match 4%. The other caveat with a Safe Harbor Match is that the money that the company contributes to the Safe Harbor Match is immediately 100% vested, which means it is the participants to take if she ever leaves the company. What makes a Safe Harbor Match so powerful is that by offering it, the plan is deemed to pass annual compliance testing, which means no more refunds to highly compensated employees if the plan would have otherwise failed testing. It also is an amazing benefit to your participants since a 5% deferral plus a 4% match gets them pretty close to that 10% goal.

A company match is a tremendous incentive that can help your employees meet their retirement goals. If you would like an analysis of your company’s current match structure or if you would like to discuss implementing a company match, please give me a call at 205-970-9088 or email me at jamie@grinkmeyerleonard.com.

Three Significant Ways Recordkeeping Arrangements May Vary

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Recordkeeping for an employer-sponsored qualified retirement plan is pretty much just as it sounds; an outside provider is hired to literally keep a record of participant accounts. This includes everything from accounting for how much money each participant has in her account, to the number of investment shares held, to the source of money deposited. On the surface, recordkeepers seem fairly similar, but get into the fine print and there are significant differences in contracts and services offered. Here is a list of some of those differences I have seen in my history of working with various recordkeepers.

  1. Termination Clauses – When things are good, they’re good, but should your company need to terminate your relationship with your recordkeeper, there is a good chance that some fee will apply to end the relationship. Fees may vary. Also, recordkeepers have different arrangements when it comes to the services they will complete once they have been handed their pink slip. I recently came across a situation where the recordkeeper refused to complete the annual testing or Form 5500 if the plan transferred assets prior to the calendar year end.
  2. Available Investments – The universe of investment options is slowly but surely become more available thanks in part to the Department of Labor’s Fiduciary Rule, but there remains some noteworthy discrepancies in the accessibility of investments across various recordkeepers. In some cases, recordkeepers offer sub-advised or sub-managed investments which includes the investment arm of the recordkeeper offering additional oversight on traditional investments, usually for an additional fee. There are also differences in the share classes offered. Share class matters because it often dictates the overall cost of investing in an investment option along with the amount that various parties, such as the financial adviser and recordkeeper, receive in compensation from the investment. (See my blog Share Class Warfare for additional information).
  3. Third-Party Administration Services – Often recordkeepers will also offer third-party administration (TPA) services in what the industry calls a “bundled” service arrangement. In many cases, this arrangement makes sense because much of the data that a recordkeeper collects is also used by a TPA and therefore, having them work together is a win-win for the client and the provider. However, TPA services are another area with vastly different capabilities, costs, and proficiencies. Before you enter into a bundled agreement it is important to assess what the compliance and administrative needs of your plan are and whether or not the bundled TPA can meet those needs.

Although all recordkeepers may seem the same on the surface, there are several differences that can be found in the details and operation. If you would like assistance reviewing your recordkeeping arrangement, please contact me at 205-970-9088 or email jamie@grinkmeyerleonard.com.

One Item to Immediately Address With Your Participants

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Often when we are engrossed in the day-to-day operation of 401(k) plan management, we can overlook the reason why we are all doing this – for the benefit of our people. We also focus on the here and now; making sure that employee deferrals are contributed on time, that investments are top notch, and that participants are retirement ready. The one item that often get overlooked is what will happen when your hard-working people pass way. The simplest way to answer that question is to make certain all of your participants have an accurate beneficiary form on file with you, the plan sponsor, and if possible, the plan’s recordkeeper. Here are 5 items that can help you and your participants get back on track with their beneficiary forms.

1. Don’t leave a beneficiary form blank, and don’t name your estate as beneficiary.
Failing to name an individual, or individuals, as your beneficiary could deprive your heirs or loved ones of inheriting your retirement assets. Another downside of not naming a beneficiary – your retirement assets would need to go through the lengthy probate process and could be subject to creditors.

2. Make a beneficiary designation for each retirement account that you own.
People often make the mistake of assuming that the beneficiary they name on one account will dictate who the beneficiary is on their other retirement accounts, but that is not the case. You need to have a valid beneficiary on file for each account.

3. Remember that beneficiary designations take precedence over wills.
Retirement assets are distributed according to the named beneficiary, regardless of any other agreements, such as wills.

4. Keep your beneficiary designations current.
Many people fail to update their beneficiary designations after major life events, such as a marriage, divorce, or new addition to the family.

5. Consider consulting a professional.
You may wish to seek the guidance of an experienced attorney, CPA, or financial advisor to help you make the best choices for you and your heirs.

Don’t let your hard work or that of your participants go to waste by having their retirement account balances go to the wrong person or worse, the state. If you need assistance with making sure that your beneficiary forms are on file and in good order, please give me a call at 205-970-9088 or email me at jamie@grinkmeyerleonard.com.

 

 

Best Practices for Retirement Plan Management

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As I mentioned in last week’s blog, running a 401(k) plan is a lot of work that is marked by several complex tasks and timelines. Therefore, this week I thought it would be helpful to highlight some of best practices for 401(k) plan management.

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If you have any questions about how to implement these practices in your business, please give me a call at 205-970-9088 or email me at jamie@grinkmeyerleonard.com.

Three Major Reasons Your 401(k) Plan Matters

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Hours of work goes into managing and administering your company’s 401(k) and at times it may seem like a mountain of work for a molehill of appreciation. However, as someone who spends every day working on 401(k) plans, I am here to tell you that they matter – a lot! They matter to your company, your people, and you.

1. The 401(k) plan offers your employees a powerful savings vehicle
The 401(k) has many qualities that make it an attractive option for savers. High deduction limits (in 2017 employees under the age of 50 can contribute $18,000, those over 50 may contribute an additional $6,000) allow employees to save a significant amount into their 401(k) through simple payroll deductions; Roth options allow employees the ability to choose whether to be taxed now or taxed later; and features like automatic enrollment and automatic deferral increase allow employees to begin and increase their deferral amounts without proactive action.

2. 401(k)s can be a more financially prudent choice than a traditional investment account
Despite the confusion surrounding 401(k) fees, there are times when a 401(k) can be a better financial choice than an Individual Retirement Account. Due to the size of 401(k) plans, they may have access to shares of investments that may not be available to individual investors. This can lead to lower investment expenses. Additionally, 401(k) plans may offer access to a financial adviser who can provide financial education to you and your employees for no additional cost.

3. 401(k)s can lead to happier, more loyal employees
In the 2017 Workplace Benefits Report published by Bank of America, they found that 31% of employees selected a 401(k) plan as their top employment benefit, second only to health benefits. This same survey found that employee’s number one financial goal was saving for retirement. Furthermore, a study conducted by Lockton Retirement Services and detailed in the report “Finding the Links Between Retirement, Stress, and Health” found that 52% of respondents reported that having a retirement savings plan helps ease financial concerns “a great deal” and an additional 43% said it helps “a little.” Additionally, those employees with access to a retirement plan in which the employer contributed to the plan reported higher levels of job satisfaction and lower incidents of physical ailments. Therefore, if your company offers a 401(k) plan that can help employees save for retirement and reduce stress, it seems highly likely that those same employees will be happier and more loyal to your company.

Your employees look to your company to help them to save for retirement. If you do not think that your current plan is achieving that goal, please call me at 205-970-9088 or email me at jamie@grinkmeyerleonard.com and I will get to work for you today on developing a plan that works for your company and its employees.

 

4 Tips to Make Your Plan Conversion Go More Smoothly

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For retirement plans that are eyeing a year-end conversion or any transition in the near future, here are four tips to help make the conversion process go as smoothly as possible.

1. Make Sure Everyone is on Board

In my experience, many times the person that has the final say in deciding whether to hire or fire a service provider is not usually the same person in the company that works directly with the provider. Therefore, before making the decision to pull the plug on a provider you need to ensure that all members of your team are on board. Ask your team questions like, “What does ABC provider do that makes your life easier?” or “What is something that you wish ABC provider did better?” Once the decision has been made to make a change, make certain everyone is involved from day one.

2. Ask for Specifics

We all know that often times what we are sold and what we get don’t exactly match up. For this reason, it is important to ask your sales representative to give you specifics on what your plan conversion will look like and better yet, ask them to involve your service representative from the very beginning of the process. Get the details on payroll upload file feeds, distribution processing and timing, blackout periods, and service standards.

3. Tie Up the Loose Ends at Your Current Provider

The old saying “garbage in, garbage out” applies here. More than likely, you chose to convert your plan to a new provider because something at the old provider was broken; so, don’t bring that broken process or bad data to your new provider. Items that can be an issue in a conversion are outstanding loans, participant vesting information, automatic enrollment start dates, and more.

4. Control the Message to Your Participants

You may be excited to get a fresh start at a new provider, but keep in mind that change is hard, especially on your participants. They will have to learn a website and memorize a new call center number and they probably had absolutely no say in whether or not to make the change. The blackout period can also cause uneasiness among participants since there will be a time that they will not be able to access or even see their account balances. Therefore, make sure to get ahead of any unrest by controlling the messages they receive from you and the new provider.

There is so much that goes in to a successful plan conversion. If you would like to discuss these tips and many more, please contact me at jamie@grinkmeyerleonard.com or 205-970-9088.

Five Tips a Retirement Plan Adviser Wants You to Know

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Recently, my partner Caleb Bagwell and I had the opportunity to speak to a group of Human Resource professionals about how to leverage strategic partnerships. In preparing for the presentation, I was surprised about the lack of information on how to best work with professionals you hire to perform a function for your business; i.e. best practices for working with a CPA or top tips for getting the most out of your relationship with a benefit’s adviser. So, in the spirit of not bringing up an issue without a providing a solution, here are five things that I want you to know when working with a retirement plan advisor.

1. Ask Questions – I love the ins and outs of plan design, compliance testing, and investment analytics and strive to make the details of these complicated topics as relatable and understandable as possible, but that can be difficult. Therefore, I encourage the plan sponsors that I work with and you to ask questions when you don’t understand a topic. The 401(k) plan is designed to be a benefit for you and your employees and it is imperative that you understand how it works and works for you.

2. Don’t Accept the Status Quo – I cannot tell you the number of times I’ve heard, “We’ve always done it that way.” While the old way may have worked and may still be working, there have been significant advances in plan design and participant value-adds that your plan may want to take advantage of. Your retirement plan advisor should want the best results for your plan and “the old way” should not be an excuse not explore alternative plan designs, analyze your current investment menu, or demand better a better participant experience.

3. Read the Darn Document – When I first heard this mantra, there was a stronger adjective used, but you get the idea. Why this is so important is that the plan document is the instruction manual for the plan and following it is critically important to the operation of the plan.  While it seems intuitive that the plan providers would be following the document, that is not always the case. Furthermore, the consequences for not correctly following it can be anything from fines to total plan disqualification.

4. Be Engaged – You know your people better than anyone else, so be engaged and let your plan adviser know what works and what doesn’t. For example, several plan providers have introduced state-of-the-art website technology, but if your employees are not computer savvy and/or prefer live interaction or attentive call center representatives, speak up and let your advisor know what is most effective for you and your team.

5. Take Your Plan Off the Back Burner – The stock market as a whole has been on an upward trend for the last several years and most everyone has benefited in their investment accounts. While I am certainly not complaining about this, it has led to 401(k) plans being placed lower on the priority list because everything appears to be going well. However, just because no one is complaining, does not necessarily mean nothing is wrong. Your plan may be in need of a fee review, investment review, or retirement readiness assessment and none of those things are going to happen if no one is paying attention to the plan.

If you would like additional insight on how to best work with a qualified retirement plan adviser, please contact me at jamie@grinkmeyerleonard.com or by phone, 205-970-9088.

10 Attributes of a Retirement Plan Advisor

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There are a number of advisors to choose from when it comes to providing advice for your company’s retirement plan. There are advisors that manage personal money, provide other benefit services, are best friends with the owner, specialize in qualified retirement plans, or if you are lucky some combination of those attributes. Our firm specializes in qualified retirement plans and is partnered with the Retirement Plan Advisory Group (RPAG) to offer investment analytics, plan design reviews, and enhance participant outcomes. RPAG also assists us with offering services that satisfy ERISA’s strict standards. Here are some guidelines from RPAG that can help you select a retirement plan advisor.

Attributes of a Good Advisor Why You Should Hire One
Independence Ability to help evaluate funds and providers objectively and without conflict of interest
Familiarity with ERISA Ability to keep the committee updated on litigation, legislation and regulations impacting plans and fiduciaries
Prudent Expert ERISA section 404(a) requires fiduciaries to act with the skill, knowledge and expertise of a prudent expert
Expertise with Plan Design Ability to help plans maintain qualified status while continuing to meet the goals and objectives of our organization
Knowledge of the Provider Marketplace Ability to ensure that our plan is being administered in the most efficient manner and for a reasonable price
Qualified Plan Investment Expertise Ability to evaluate, select and monitor fund performance
Documentation Skills Ability to demonstrate procedural prudence in a well-documented manner
Communication Skills Ability to educate employees regarding plan highlights and how to create an appropriate investment strategy
Acceptance of Role as a Co-Fiduciary Willingness to acknowledge in writing that they’re a co-fiduciary to our plan with respect to the investment advice being delivered
Full and Open Disclosure Fully and openly discloses all sources of fees being received on a direct and/or indirect basis

If you would like to learn more about how we fulfill these qualifications, please contact me at 205-970-9088 or jamie@grinkmeyerleonard.com.