403(b) Crunch Time Series #2: Complying With The 403(b) Contribution Limits

By Jerry Kalish on Posted in 403(b) Crunch Time Series, 403(b) Plans

This is the second post in our 403(b) Crunch Time Series, the purpose of which is to help 403(b) plans get ready for the January 1, 2009 compliance deadline for the new Internal Revenue Service regulations. On Tuesday, Bob Toth , our guest blogger, wrote about Avoiding Problems with Custodial Accounts.

Now it’s my turn, and today’s post is about complying with the 403(b) contribution limits. So let’s start with some background. One of the concerns that the IRS had in their audits over the last several years was cases in which the contribution limits were exceeded and corrections not being done.

Those contribution limits are governed by Section 402(g) of the Internal Revenue Code and are adjusted annually. For 2009:

  • Elective deferrals are limited to the lesser of $16,500, or 100% of the participant’s includible compensation.
  • Designated Roth contributions count toward the $16,500 402(g) limit.
  • A catch-up contribution of $5,500 is available for participants age 50 and older.

In addition, there is a special life-time catch-up of $3,000 per year, not to exceed $15,000 for an employee of a qualified organization. If a plan participant is eligible for both types of catch-up contribution, then the special catch-up contribution limit is applied first to their accounts.

Sounds simple, doesn’t it, but it won’t be. The new regulations take the approach that the employer is generally responsible for compliance with the 402(g) limits and the correction of any excess that occur. This will be a big departure from the current 403(b) environment in which there is an individual relationship between the employee and the 403(b) investment provider.

Here’s two examples of potential problems for employers.

Monitoring Special Catch-Up Contributions. Pre-regulations, the employer could rely on the employee’s representations regarding his or her eligibility for and the amount of special catch-up contributions. It’s a complicated calculation based on the availability of extensive employee historical data. Many employers, I would think, would avoid this responsibility by not permitting the special catch-up.

Returning Excess Contributions. For those 403(b) plans in which there are individual contracts, the employer has no ability to direct the return of excess contributions. So what if the employee who must have contributions returns, simply doesn’t comply. That is, not notify the investment provider to return the excess funds. The answer, it would seem to me, would be for the employer to inform the provider who would then do the appropriate tax reporting to the IRS.

There are serious issues since the penalty for failure to comply with the contribution limits can be harsh – adverse tax consequences for both the employer and the employee.

The practical solution for those employers who decide not assume responsibility for this plan compliance is to do what 401(k) plan sponsors do – delegate the responsibility to a third party adviser or to the investment provider.

Coming Attractions: Bob will be back on Monday with with #3 in the 403(b) Crunch Time Series, Trouble in Terminating Tax Deferred Annuities.
 

BizBox by Slate, a blog for business owners

By Jerry Kalish on Posted in 401(k) Plans, Defined Benefit Pension Plans, Individual Retirement Accounts, Publications

I’m pleased to announce that I am now a regular contributing author for BizBox by Slate, a special promotion by OPEN from American Express.  I’m one of 5 contributors whose focus is helping business owners manage and grow their businesses. Come visit us.

403(b) Crunch Time Series #1: Avoiding Problems With 403(b) Custodial Accounts

By Jerry Kalish on Posted in 403(b) Crunch Time Series, 403(b) Plans

Yesterday, I introduced our forthcoming 403(b) Crunch Time Series. It will be geared towards helping 403(b) plans get ready for the January 1, 2009 compliance deadline for the new Internal Revenue Service regulations.

During this series, I’ll be joined by Bob Toth as a guest blogger. Bob, a Partner in the Baker & Daniels law firm, has over 25 years experience advising 403(b) plans and service providers.

And since it all starts with the new plan document requirement, here’s Bob with his guest post, Avoiding Problems With 403(b) Custodial Accounts.

The 403(b) Custodial Agreement. You know, that piece of paper you use in a 403(b) implementation that no one ever reads or understands, and is just signed because the Tax Code requires it? Heck, they’ve been used for years by the 403(b) vendors, so they’ve got to be pretty standard by now. How can they cause my 403(b) plan ANY problems at all?

Well, they generally still won’t cause you any problems in plans funded individual 403(b) custodial accounts. The problems are arising when folks are trying to set up 403(b) plans on a “401(k)-like” investment platform using a “group” or “master” custodial arrangement. Here, the “forms” are anything but settled.

There are two common errors:

Using a 401(k) Trust Document. The first common error occurs when you try to take a standard 401(k) trust document, change the word “trust” to “custodian,” place some gratuitous 403(b) language in the document, and think you are done.

This is almost right. But you need to make sure that the rules under 403(b)1(B)-(E) are also included in the document and, if the custodial account is also going to hold an annuity contract, have language which defers to that group contract (including the fact that the custodian won’t control the assets in the contract).

It is probably best for the custodial account NOT to hold annuity contracts; though its OK for the employer to hold that group annuity contract outside of the custodial agreement. By the way, collective trusts (often referred to in these 401(k) trusts) can’t serve as the “cash” holding account for the plan unless its “registered” as a “registered investment company.”

Using an Individual Custodial Document as a Group Document. The second common error is the “jury-rigged” use of the individual custodial account form with some modifications to try to make it serve as a group contract. This actually can cause you serious problems. Those custodial contracts DO have the necessary language that you wont find in the 401(k) trust. The problem is that they have too much language.

The individual custodial document was designed to serve the purpose of a plan document/service agreement, so they often have much language you would never otherwise find in a group trust document. There will often be language related to loans, hardships, distributions and the like, so that they almost look like a “quasi” plan document. And that is what causes the problem.

Plans using a group custodial document almost invariably also have a separate plan document-usually from a different vendor than who wrote that custodial document. So you have dramatically increased the probability of inconsistent terms, which can disqualify the document. You no more want your custodian having to monitor plan compliance than you would want your 401(k) trustee having that monitoring duty.

Thanks, Bob. Look for #2 in our 403(b) Crunch Time Series on Thursday when I’ll be talking about Complying With Contribution Limits For 403(b) Plans. 

It’s crunch time for 403(b) plans

By Jerry Kalish on Posted in 403(b) Crunch Time Series, 403(b) Plans

Much has been said and written about the new 403(b) regulations effective January 1, 2009, but most 403(b) plans haven’t even started to get ready for compliance. And so it’s crunch time for 403(b) plans.

Crunch time is nothing new for 401(k) plans who have been dealing with compliance deadlines since the passage of the Employee Retirement Income Security Act of 1974 (ERISA). But it’s a first time challenge for 403(b) plans. The IRS has constructed this challenge by providing comprehensive guidance for 403(b) plans for the first time in over 40 years. 403(b) plans will now have to deal with such issues as:

  • Requirement for a plan document
  • Rigorous application of the non-discrimination rules
  • Employer responsibility for complying with contribution limits
  • Timing of contributions. 
  • Transfers to other 403(b) contracts 
  • Employer responsibility for coordinating and tracking loans
  • Plan termination

So between now and year-end, I’m going to be posting a series of articles on how to get ready for the January 1, 2009 deadline. We’re calling them the 403(b) Crunch Time Series. I’ll be joined by Bob Toth as a guest blogger. Bob, a Partner in the Baker & Daniels law firm, has over 25 years experience advising 403(b) plans and service providers.

And since it all starts with a new plan document, Bob will kick off the series tomorrow with his guest post, Avoiding Problems with 403(b) Custodial Accounts.

New survey shows how employers are helping employees cope with higher commuter costs

By Jerry Kalish on Posted in Commuter Benefits

We’re big on commuter transit benefits here. Not only for cilents, but for our own employees who take public transportation. It’s good for employees, it’s good for employers, and it’s good for the environment.

It’s something I’ve blogged about before, What’s Old is New Again: Commuter Benefits Under Section 132 and The Next Generation of Tax Favored Commuter Benefits: Bicycle Commuting.

Under Section 132 of the Internal Revenue Code, employers can provide a program that allows employees to pay for commuter expenses, i.e., public transportation, parking, and now bicycle commuting on a tax-favored basis. Employers get a tax break since Social Security taxes are not imposed on the benefit – not available with 401(k) plans.

It’s a benefit that continues to grow in popularity because of the economy and global warming. TransitCenter, a company specializing in commuter benefit programs, just released their 2008 Commuter Impact Survey that provides a number of key insights and implications regarding the impact of commuting on employers, employees, and strategies used to address these impacts. Here are the implications they found as a result of their survey:

The Survey indicates that employers are profoundly concerned about the impact that high fuel and commuting costs are having on their employees. Importantly, most employers see a need to help find viable solutions to soften this impact. Yet, while employers see raising salaries as a means of providing relief, they also cite concerns that they may not have the resources to do so in today’s economic climate.

Survey findings also show that commuter benefit programs, including flextime, telecommuting and tax-free commuter benefits, continue to be a viable solution for employers to help employees cope with high commuting expenses. In particular offering a tax-free commuter benefits program is viewed as having three key impacts: a highly relevant and cost-effective enhancement to a company’s overall benefits package; an effective way to attract and retain employees; and an easy solution to help reduce a company’s carbon footprint.

Factors that may prompt more companies to offer commuter benefits — and more employees to use them — include tax credits and increases to the IRS cap on monthly pretax salary deductions for commuter benefits.

 Here is a link to the full survey.

Hat tip to Kris Dunn and his HR Capitalist blog.

Balance forward plans revisited

By Jerry Kalish on Posted in 401(k) Plans

Saturday’s post, Balance Forward 401(k) Plans: Someone’s Gotta Win, Someone’s Gotta Lose, generated several emails to me on the topic.  The comments involved frequency of the valuation and whether interim valuations could or should be done. Let me see if I can respond to all of them at one time.

First, some additional background. Balance forward recordkeeping was the traditional method of accounting when only contributions were made by the employer and deposited once a year. As 401(k) features were added to existing profit sharing plans and daily valuation technology available to even the smaller plans, employers increased the valuation frequency, e.g., quarterly or monthly, or simply changed to a daily valuation system.

So it seems to me that the real issue is: Should balance forward plans provide for interim valuations, and if so, how? And like all matters ERISA, there are both tax and fiduciary issues to consider. Here’s Sungard Relius discussing, Interim Valuations: The Right Thing to Do?, in more detail.

So no easy answer here. But definitely one of those matter to discuss with ERISA counsel.

Balance forward 401(k) plans: someone’s gotta win, someone’s gotta lose

By Jerry Kalish on Posted in 401(k) Plans

Balance forward 401(k) plans may seem like an arcane topic for a Saturday morning even if you’re a pension person. But if you’re a plan sponsor or a 401(k) plan participant, today’s investment climate is not a good time to be part of one. Let me explain why.

Balance forward is an industry term given to those defined contribution plans, e.g., 401(k) and profit sharing, in which participants’ accounts are valued monthly, quarterly or annually. And after all the accounting takes place, it can be 4-8 weeks after the valuation date before participants receive statements. Most defined contribution plans, however, value participants’ accounts daily right after the markets close.

And I hadn’t given much thought to them lately thinking they were an anachronism. But the topic came up a recent conference of pension people that I attended, and there’s more of them out there than I thought. My brief skimming of one of the Form 5500 databases indicated that there are at least 70,000 401(k) plan not counting the profit sharing plans that allow participants to self-direct their accounts.

So what’s the problem you might ask. My visual metaphor up top is the answer. Like chess, balance forward retirement plans are a zero-sum game. That’s what the economists and game theorists call a situation or interaction in which one participant’s gain results from another participant’s loss. And in the context of the recent huge swings in the stock market, balance forward plans are a bigger zero-sum game than ever before.

Here why? Assume a participant in a balance forward plan with a $50,000 account balance as of December 31. The participant receives a distribution for $50,000 on March 1. But between January 1 and the distribution date, the plan has lost 20%. Thus, the plan – which is to say – all the remaining participants eat the $10,000 loss.

But now let’s assume that same participant receives the same $50,000 distribution. But instead of the plan suffering a market loss, it increased by 20%. Now all the remaining participants in the plan share in the $10,000 gain.

Now that’s fair, isn’t it?

 

 

 

2009 Dollar Limits on Contributions and Benefits

By Jerry Kalish on Posted in 401(k) Plans, 403(b) Plans, Cash Balance Plans, Defined Benefit Pension Plans, Individual Retirement Accounts

Every year the Internal Revenue Service releases cost of living adjustments to applicable dollar limits for retirement plans. Here is a link to a chart (pdf) that summarizes the most frequently used limits.

The next generation of tax-favored commuter benefits: bicycle commuting

By Jerry Kalish on Posted in Commuter Benefits

Just this summer I wrote What’s old is new again: commuter benefits under Section 132. The post was about employers rediscovering (or discovering in some cases) that they could assist employees paying for commuter transit and parking expenses on a pre-tax basis – and the tax savings that employers themselves could realize. Interest sparked, of course, by higher gas prices.

Now here comes the next generation of tax-favored commuter benefits. Buried in the Emergency Economic Stabilization Act of 2008, a/k/a the "Bailout Bill", is a provision that allows employers to provide employees with a new tax-favored bicycle commuting reimbursement benefit.

Section 132(f) of the Internal Revenue Code was amended to allow employees starting January 1, 2009 to receive up to $20 per month tax-free for the reasonable expenses they incur during a calendar year for:

  • The purchase of a bicycle and for bicycle improvements
  • Repair and storage if the bicycle is regularly used for travel between the employee’s residence and place of employment

The bicycle commuter benefit is not available if the employee receives other Section 132 commuter benefits, i.e., transit or parking reimbursement.

Picture credit: Bike To Work, The Best Part of Your Day poster by daisy art studio of Seattle, Washington.

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