One of the Top Ten Great Urban Myths is that Albert Einstein failed math in school about which he replied:
I never failed in mathematics,” he replied. Before I was fifteen I had mastered differential and integral calculus.
The myth, however, still persists.
We have our own myths in the benefit world, or at least some employers do when it comes to who is and who isn’t an independent contractor. Here are just a few. Continue Reading
When we think about lying, cheating, and stealing in the workplace, we may think it’s always bad people doing bad things. But sometimes good people lose their moral compasses because of peer pressure.
That was the conclusion of the recent study, Underestimating Our Influence Over Others’ Unethical Behavior and Decisions conducted by Bohns, Roghanizad, and Xu at the University of Waterloo in Ontario, Canada.
The British Psychological Society reported on this study in their blog post, It’s Easier Than You Think To Get People To Commit Bad Deeds, published on their Research Digest blog.
The study, they say, suggests that many people will agree to perform a bad deed rather than say no to avoid social discomfort.
But here’s the thing. It’s also easier than you think to get people to do the right thing. They go on to point out the
"… truly startling finding from this work, the researchers said, is not how many people are willing to lie or vandalise, but rather "the lack of awareness people appear to have of this tendency when they are in a position to influence someone else’s ethical behaviour."
And maybe this lack of awareness can be addressed by education. The financial service industry often gets maligned, and sometimes deservedly so. However, the organizations that represent financial service providers do emphasize ethics, and in many cases, make it a continuing education requirement.
In my world, it’s the American Society of Pension Professionals and Actuaries (ASPPA). An interactive Ethics Workshop will be a major part of ASPPA’s five regional conferences in 2014 called ASPPA On Tour. The first one is on Thursday and Friday, January 23-24, 2014 in Los Angeles. If you’re in the benefit business and in the neighborhood. please stop by.
Image Source: Richard Niolon Ph.D.
It’s been almost 10 months since Roth 401(k) in-plan conversions were added as part of the American Taxpayer Relief Act of 2012.
After an initial flurry of media attention and a slew of industry publications, there hasn’t been much attention paid to this new tax planning technique. Could it be, perhaps, our attention has been focused on other matters such as Congressional wrangling on the budget and the debt ceiling?
Now after last’s week’s Congressional action, we can get back to other matters. At least until the next set of deadlines roll around. The recently signed bill authorized current spending through January 15, 2014 and extends the debt through February 7, 2014.
Let’s use this Quiet Period to review the status of Roth in-plan conversions and whether now is a good time for employers to add this provision to their 401(k) plans.
Under prior law, participants could not transfer amounts from traditional 401(k) accounts to Roth accounts in the same plan until they attained age 59 ½ or left their employer. The new law allows participants to make the transfer from a traditional 401(k) account to a Roth retirement plan account at any time.
Over the last several months, infrastructure has been put in place to handle Roth in-plan conversions for many 401(k) plans.
But there has not been a rush to make the change, and here’s why.
There are a number of unanswered questions about how the new in-plan Roth conversions will work, guidance for which has not yet provided by the Internal Revenue Service.
In the meantime, employers are being understandably cautious and deferring a decision until then.
Academics would call this cautiousness an application of the Law of Unintended Consequences. That is, outcomes that are not intended by a particular action, e.g., employees suffering adverse tax consequences.
In ERISA terms, we call it being prudent.
If you’re anywhere near a retirement plan, you have probably received a ton of emails from law firms and 401(k) providers on the recent Supreme Court decision involving same-sex marriages.
With the caveat that I’m not an attorney, here’s my Cliff Notes version on the June 26, 2013, United States Supreme Court ruling in U.S. v. Windsor.
The Court held that that Section 3 of the Defense of Marriage Act (“DOMA”) is unconstitutional under the Due Process Clause of the Fifth Amendment. Section 3 had barred recognition of same-sex marriages for purposes of any federal law or regulation subject to federal law. This includes the Internal Revenue Code (“Code”) and ERISA.
It has the immediate effect of granting same-sex couples who are married under state law the same federal rights, protections, and responsibilities as are afforded to married opposite-sex couples under the Code and ERISA.
The Internal Revenue Service (IRS) issued guidance on September 16, 2013 that same-sex couples legally married in a jurisdiction with laws authorizing same-sex marriage will be treated as married for federal tax purposes, regardless of whether the couple resides in a state where same-sex marriage is recognized. The so-called "state of celebration". Further guidance is needed from the IRS as to whether it applies retroactively.
The Department of Labor (DOL) in recent guidance also recognized a “state of celebration”. For DOL purposes, a spouse will include all legally married same-sex spouses, even if the couple resides in a state that does not recognize such marriages. We can expect the DOL to issue future guidance addressing specific provisions of ERISA and its regulations.
So what should employers do now?
The Windsor decision can impact retirement plans in the following areas in which a “spouse” could be involved:
Employers should consider reviewing their plan documents, internal procedures, and employee communication materials to determine if changes need to be made.And then wait for further IRS and DOL guidance.
Most business owners think they are undercompensated. The Internal Revenue Service does too for many business S Corporation owner employees. Their perspective is not exactly the same. The focal point is a sometimes hotly contested issue called “reasonable compensation”.
The IRS has come out the big winner. Here’s the story.
Since the publication of IRS Revenue Ruling 59-221 in 1959, shareholder-employees of an S corporation have enjoyed a significant tax advantage over Sole Proprietors, Partners in a partnership and Members of an LLC.
Perhaps “enjoy” is too general a term to describe it. Since that Ruling, taxpayers have had a long and sometimes contentious relationship with the IRS on this tax advantage.
That Revenue Ruling held that a shareholder-employee’s undistributed share of S corporation income is not treated as self-employment income. Thus, not subject to self-employment taxes.
As a result, business owners have elected S corporation status which still provides limited liability to shareholders, but earnings are taxed directly to the shareholders on their personal returns. (Note: shareholders in a professional corporation still have personal malpractice liability in a law suit).
The advantage of operating as an S corporation has become magnified as employment tax rates have climbed with increasing motivation for shareholder-employees to minimize their salary in favor of distributions.
In response, the IRS has made “reasonable compensation” a central focus on audits going after S corporation shareholders who do not pay themselves “reasonable compensation” to avoid paying employment taxes. If successful, the IRS can collect payroll taxes on officer compensation. The penalty for which can be steep: 100% of the taxes owed.
Taxpayers have not fared particularly well in litigation with the IRS. The burden of proof is on the taxpayer to prove their compensation is reasonable. Courts have based their decisions on the facts and circumstances of each case considering some of the following factors:
There are a number of steps S corporation shareholder-employees can take to make the case that their compensation is reasonable, a job for their CPA or attorney.
Our job is relatively simple. It’s to point out or remind the S corporation shareholder-employee that only the compensation appearing on the owner’s W-2 counts as compensation for purposes of determining a contribution to a qualified retirement plan. The larger the salary, the larger the potential retirement plan contribution.
The 2013 tax year is not over yet. Still time for shareholder-employees to give themselves a raise.
Tempus fugit is a Latin expression meaning "time flees", more commonly translated as "time flies’.
Today it’s frequently used as an inscription on clocks or artwork like the one pictured here.
But this being The Retirement Plan Blog, there is, of course, an ERISA connection. “Timing matters” is one theme that consistently runs throughout ERISA, and one of those matters is the October 1 deadline to set up a new Safe Harbor 401(k) plan.
Back in the day, calendar year taxpayers could wait until year end to set up a new plan. A plan document and an initial contribution to set up a trust account were the only requirements. The plan could be effective retroactive to January 1, and a tax deduction could be taken as long as the contribution was made before the tax return was due (including extension, e.g., September 15 of the following year).
This is not the case, however, for an employer wanting to set up a new Safe Harbor 401(k) plan. The Safe Harbor rules permit owners and other Highly Compensated Employees (HCEs) to maximize their contributions regardless of how much the Non-HCEs contribute.
Under 2013 tax rules, the maximum is $17,500 maximum plus an additional $5,500 for those over age 50, or a total of $23,000.
The Safe Harbor rules require that an employer make one of two types of contributions:
These Safe Harbor contributions can be allocated to owners and HCEs, as well.
In addition, an employer adopting a new 401(k) plan may qualify for the retirement plan tax credit as discussed in our FAQs.
Picture Credit: Tempus Fugit inscription on Clock over Time Ball Building on Briggate in Leeds West Yorkshire England, Photo by Mark Sunderland.
No, that’s not the Matrix pictured on the right. It’s simply a visual representation of a special report by The Economist a little over three years ago, Data, Data Everywhere,
In that report, The Economist reported that Wal-Mart handled more than one million customer transactions every hour, feeding databases estimated at more than 2.5 petabytes. That’s the equivalent of 167 times the books in America’s Library of Congress.
401(k) plans don’t have nearly the Wal-Mart-like amount of data, but it can still seem overwhelming. Consider the array of transactions that flow from a 401(k) plan – including contribution sources such as employee pre-tax and Roth after-tax contributions, employer contributions, and rollover contributions. Not to mention investment changes such as allocation changes, and account re-balancing,
The result? Mistakes happen. We all know the litany of what can go wrong, and in many cases, has gone wrong:
Fortunately, the Internal Revenue Service (IRS) and the Department of Labor (DOL) have established self-correction programs to fix plan mistakes. But the key to managing the 401(k) data deluge and avoiding mistakes is prevention.
In the view of the IRS, it’s about establishing and maintaining good internal controls, and has been holding a series of teleconferences on just that.
One last week was conducted by Monika Templeman, Esq., Director of Employee Plan Examinations and Janice Gore, Employee Plans Exam Area Manager in our own Great Lakes Region. They stressed that good internal controls can:
They also announced that IRS has repackaged the 401(k) Questionnaire (as the QSAT (Questionnaire Self Audit Tool), scheduled to be released in 2013. The QSAT will help plan sponsors find, fix and avoid costly mistakes, and provides questions an IRS examiner would ask.
There is another benefit to having good internal controls. If you’re a Plan Sponsor, Plan Administrator, or anyone who exercises discretion or control over plan operations, you are considered a fiduciary. Good internal controls are essential to properly meeting your obligations… and avoiding personal liability.
How to go about it? That’s a topic for another day.
For many participants in a 401(k) or pension plan, filling out that beneficiary designation is a one and done activity.
Then, forgotten, but sometimes changing circumstances intervene to invoke the Law of Unintended Consequences. As in a recently decided case in which a U.S. Court of Appeals held that a pre-nuptial agreement does not waive spousal rights under ERISA.
As a non-lawyer, I’ll leave the analysis of MidAmerican Pension and Employee Benefits Plan Administrative Committee v. Cox, No. 12-3563 (8th Cir. July 12, 2013) to the ERISA lawyers.
But as someone who has been a TPA for many years, here is some background on qualified plan beneficiary designations and some practical considerations you might find helpful.
Special Rules for Qualified Plan Beneficiary Designations
Qualified retirement plans are generally subject to ERISA’s "spousal consent rule".
This means that for all defined benefit plans and some defined contribution plans, the death benefit for a married participant must be in the form of a spousal annuity unless spousal consent is obtained in another form, a lump sum if it’s available.
The spousal consent rule also applies to most defined contributions plans, such as 401(k) and profit sharing. The surviving spouse must be the sole and direct beneficiary of the participant unless he or she provides spousal consent subject to the following general rules:
And yes, the recent Supreme Court case regarding the Defense of Marriage Act (DOMA) has created much uncertainly in this area, but that’s a topic of another day.
Practical Considerations
Qualified plan beneficiary designations are not governed by a will. So here is brief checklist of practical matters to consider:
Finally, here’s the most important part: Plan participants should consult with an experienced attorney about completing designation forms as part of an overall estate plan.
In case you missed it, April was Financial Literacy Month.
So did I and I must admit that I wasn’t even aware that it existed until I saw a recent survey by LIMRA. The survey in the form of a quiz found that A Third of Americans Fail Financial Literacy Quiz.
No surprises there. I’m sure those of us who regularly communicate with employees have anecdotal evidence galore to that fact.
The Federal government is certainly aware of the problem. Title V of the Fair and Accurate Credit Transactions Act of 2003, known as the Financial Literacy and Education Improvement Act, created the Financial Literacy and Education Commission.
The Commission is comprised of more than 20 Federal agencies and bureaus charged it with coordinating federal efforts and developing a national strategy to promote financial literacy in America.
The Commission’s website, MyMoney.gov, provides information from these Federal agencies and Bureaus designed to help individuals make smart financial choices.
But those resources are available online. In our world, we have a “teachable moment” (the time at which learning a particular topic or idea becomes possible or easiest).
That is, of course, the workplace. For our firm, our workplace education efforts have been in a 401(k) environment. For other advisors it might be the same plus, perhaps, educational efforts for health insurance and voluntary benefits.
Maybe our sometimes lack of success is grounded in financial literacy, or a lack thereof.
Do we have to wait until next April?
Bob Seger and the Silver Bullet Band on their Rock and Roll Never Forgets Tour this Spring. Still The Same.
And still the same is the miscommunication that sometimes happens between the employee and the employer about the benefit program.
It could be, for example, the Summary Plan Description and plan document don’t gibe as discussed in my earlier blog post, Plan Administrator between rock and hard place when plan document and Summary Plan Description conflict.
Or it could be what was the employee was told and what the plan document says are different. Consider this, for example. Employee seeks verification that her surgery would be covered before undergoing treatment. Customer service representative confirms coverage. Claim denied after surgery. Employee files lawsuit.
Not a made up set of facts, but a real case which was the subject of a recent article, Seventh Circuit Makes Damages More Available for Employees Given Wrong Information About Benefits, written by McDermott Will & Emery attorneys, Prashant Kolluri and Nancy G. Ross.
I’m not an ERISA attorney so I’ll the leave the legal analysis and the application of this case to other situations including retirement plans to them.
But there’s a practical aspect to all of this. Simply, we can expect more of these conflict situations to arise as the aging workforce retires and take distributions; and as the Affordable Care Act changes the health insurance landscape.
My suggestion? Employers should consider having an experienced ERISA attorney review the plan documentation: plan document, Summary Plan Description; and any other employee communication or handbooks that discuss benefits. File that expense under Risk Management.
Old Time Rock and Roll Note: The song, Still The Same, written and recorded by Bob Seger in 1978, peaked at number 4 on the U.S. Billboard Hot 100. It was on his tenth studio album, Stranger In Town.
