IRS Announces "Pretend Salary" Maximum for 2015

Each year around Halloween time, the IRS announces what I call the "Pretend Salary" maximum". For 2015 the amount is $265,000. Government regulators must be so jealous of those in private enterprises that have figured out how to make a pot full of money each year, that they have decided to pretend that nobody makes more than $265,000 per year. That way, the person who actually makes $530,000 will be treated as if they make half that amount for all retirement plan purposes.

"So what?", you may ask! (You did ask that, right?) Well, when you take their desired salary deferrals of $24,000 divided by their Pretend Salary maximum of $265,000, the Deferral Percentage is a fictitious 9.06% instead of the actual much lower salary deferral of 4.53% ($24,000 / $530,000). The name of that game is that you cannot do that much (the fictitious 9.06%) unless the Plan Sponsor is providing a Safe Harbor Plan or the rank-in-file employees are saving a ton, which isn't likely. Once again, the problem is the infamous ADP test (average actual deferral percentages of the Non-HCEs as compared with the average actual deferral percentages of the HCEs - normally, a 2% spread is all that is allowed). The Pretend Salary maximum also comes into play, if the business owner wants to max out for the year (2015) at the $59,000 overall limit.

Let's do a little Common Core Math word problem, shall we?

Suppose a business owner has a corporate salary of $700,000 and wants to get a Profit Sharing allocation of $35,000 added to his or her retirement plan account, then what percentage of Profit Sharing must be made by his or her company for the the staff? [Note that the salary deferral limit of $24,000 (over age 50) plus the $35,000 of Profit Sharing would get the business owner to the total limit of $59,000]. Your very bright 6th grader studying California Common Core Math would say to you "Well, that's easy! On a salary of $700,000, the $35,000 of Profit Sharing would represent a 5% of salary contribution for the owner. I got that using the "Ladder Method" instead of the "Standard Algorithm Method". So the Profit Sharing percentage for everyone would have to be 5% of their pay, right?

Not wanting to admit that you have no idea what the "Ladder Method" or the "Standard Algorithm Method" is that your 6th grader is referring to, even though you have an MBA, you meekly respond "Yes, Sweetie, that would seem to make sense normally, but you see, we cannot use the business owner's real salary. We have to use his or her Pretend Salary of $265,000, so we have to pretend the business owner is getting a 13.21% Profit Sharing allocation even though they are not. If we have a straight "Pro Rata Profit Sharing Allocation Method" called for in the plan document, then the business must contribute 13.21% for everyone!"

"No way, Dude!" your kid exclaims. "That's just crazy!" To which you respond, "Welcome to my world!"

Just so you know, with a Safe Harbor Cross Tested 401(k) Plan (wow, that is a mouthful!) for a successful small business, the contribution for the employees could be as low as approximately 4.40% (3% Safe Harbor plus 1.4% Profit Sharing) assuming the business owners are somewhat older than approximately 50% of the support staff.

For a nice handy, dandy chart of all of the 2015 retirement plan limitations including the Pretend Salary limit, go to this link: 401(k) Academy Materials and then click on the Retirement Plans Limitation Chart.

A Satirical Look at the New Retirement Plan Limits for 2015

Each October brings three wonderful things - (1) Oktoberfest which according to Wikipedia is "the world's largest fun fair held annually in Munich, Bavaria, Germany. (2) Halloween which also according to Wikipedia is "a yearly celebration observed in a number of countries on 31 October, the eve of the Western Christian feast of All Hallows' Day. And (3) usually sandwiched somewhere in between these two annual diversions from working world drudgery is what I call the "Annual Cost-of-Living Announcement Fest". This is the time of the year when the IRS announces the various retirement plan limits and then every online newsletter writer and every retirement plan blogger races to be among the first to publish the limits in various places to be seen by their target audiences. 

Yep, the limits have been announced for 2015 and the Announcement Fest is in full swing - unfortunately it is just a bunch of boring numbers and no beer or chocolate included. So what do some of these numbers really mean and what relevance do they have to the real world. I won't bother to list all the limits here because by now you have saved 10 different charts of these. Oh, okay, if you really need another chart to print go here: http://401kacademy.com/materials/ and then click on the Retirement Plans Limitations Chart.

Back to what these limits mean... The first one I will discuss must depress the heck out of the great majority of 401(k) and 403(b) participants - they are now being told that they can save $18,000 in salary deferrals in 2015. Must be like an annual slap in the face to remind them how much the special, smart, successful top 1% of people in the old USA can save when they can barely afford to save anything at all. Then to add insult to injury, they are told if they are old enough (age 50 by 12/31/15) then they can save $24,000 ($18,000 plus $6,000 catch-up).

There is another group that must get frustrated as well when they see these annual salary deferrals limits and that is the group of so called Highly Compensated Employees (HCEs) who are not in a Safe Harbor Plan and so are not allowed to save the maximums either and in fact they keep getting money kicked back to them with some sort of innocuous explanation from HR about something called the "failed ADP test."

In a nutshell, some of the most pertinent limits are: Salary Deferrals $18,000; Catch-up Deferrals $6,000; Total Limit from All Contributions (deferral, match, Profit Sharing, forfeitures allocated, etc. $53,000 (add $6,000 Catch-up if over 50); amount of compensation that can be counted $265,000; amount of compensation in 2015 that will make you a Highly Compensated Employee in 2016 is $120,000 and the new Social Security Taxable Wage Base $118,500. Hey at 15.3% combined for employee and employer, that's over $18,000 being paid into Social Security in one year.

Again, see the link in my second paragraph above for all the limits in a nice, organized chart form. Heck, we even colored every other line for your viewing pleasure.

A Novel Idea for Motivating 401(k) Participants to Save for Retirement

Like Don Quixote and Sancho Panza railing against the Windmills in the Spanish novel, The Ingenious Gentleman Don Quixote of La Mancha, here I am as a lonely and deranged TPA railing against Government retirement plan regulations. Caveat:  if you are super busy, go on to your other work because I am just tilting at Windmills here and not expecting to teach you anything or give you any valuable ideas to implement, so I have broken the first rule of social media postings.  Perhaps you will find my idea entertaining or interesting if you do decide to read on.  

As a Third Party Administrator for 40 years, my life has been all about compliance, compliance and more compliance. Over the years, more and more required Notices have been forced upon the retirement plan administration industry (or more properly, upon Plan Sponsors).

We have the annual ADP test, designed, I guess, to force the Plan Sponsor to promote the 401(k) plan better with the rank-in-file employees. We have to make sure participants are given a Summary Annual Report (SAR). Please, someone (anyone!) explain to me what the SAR accomplishes in the real world! Then there is the Safe Harbor Notice, the EACA Notice, the QDIA Notice, the 404a5 Fee Disclosure Notices, etc., etc. If I was to do a complete listing, it would be too long and nobody would finish reading my blog posting.
Thinking about all of these Notices and all of the compliance work, it struck me that most everything is the Government's attempt to make employees aware of the retirement plan so that they will save for retirement. To implement and enforce all of this, the Plan Sponsors are expected to, company-by-company, develop effective communications and hold effective enrollment meetings to motivate people to engage in sufficient savings. Each financial institution doing record-keeping tries to create their own motivational enrollment books (that few participants actually read) and develop websites loaded with savings tools (that nobody uses). The Government hires many people to oversee everything (do audits, invent new notices, etc.) and that also does little or nothing to solve the dramatic savings shortfall. My years of observation tells me that all of the above efforts do not work very well! Savings rates are still abysmal.

How about a completely new, outside of the box, approach? Let's redirect some of the enforcement and audit dollars of the Government to developing a few really, really good movies or videos that can properly communicate about the wisdom of saving. Hire the best creators and movie makers from Hollywood to craft the message.  Get some A-list actors and actresses to volunteer their time "for the good of America." (yea, right!)

I am betting a team of professional screen writers, combined with professional directors and actors could come up with a handful of really effective short videos or movies that could actually educate and motivate the average participant to get off their butts and start saving. Create a movie showing a saver and a non-saver later in life - you know, at retirement. One struggling to make ends meet and one enjoying life based on decisions they made about saving years ago.  Instead of Plan Sponsors inventing their own education, just have them host meetings (on company time) to screen the movies or videos. Have record-keepers build prominent links to the movies on their websites. Pay NetFlix and Amazon to host the movies for free. Throw some advertising dollars into the promotion.

In other words, make really, really good effective, motivational movies or videos and then promote the heck out of them. Or is that just too simple of an idea?  Small plan sponsor will never fork over their hard earned dollars for the superb videos already available from some for-profit companies.

Yeh! You're right - that is crazy thinking - let's just force a few more inane notices upon everyone.  That will work! Right?

What Do You Mean "Give Salary Deferrals Back to Our Top People? Are You Crazy?

If you have a Safe Harbor 401(k) Plan or pretty much any 403(b) Plan, then you can skip this entire discussion. Wow, that is like being let out for recess early - always a great thing! However, if you have received a communication from your TPA or recordkeeper telling you that you must refund some of the salary deferrals of your top people, then you probably want to read on. Okay, you probably don't really want to read on having a million other things you need to do, but you should anyway.

Come with me on an adventure back in time....... It is the early 1980's and 401(k)'s have just been created.  Plan Design Consultants, Inc. has only been around for a few years at this time having been founded in 1975 by the man now affectionately referred to by our staff as "the old gray hair". Well, okay, maybe "affectionately" is not the applicable word for some of our staff. Anyway, back to our exciting story of mystery and intrigue.

Somewhere in the dark depths our our Nation's Capital, picture a couple of young recent graduates of Georgeton Law School slaving away deep into the night on drafting proposed legislation (yes, I know it is really spelled Georgetown Law School, but, hey, this is a fictional story). They are anxious to impress the Congressman that was crazy enough to hire them. Picture Kevin Spacey of the Netflix TV Series, House of Cards - a tough task master, as you know. They have been up for two days with the help of the best illegal stimulants money can buy and this point they approaching paranoia and hearing voices from somewhere in their head.  New legislative analyst #1 says to #2 - "We have just this one night to come up with some rules for 401(k) plans that will drive Plan Sponsors crazy for many, many years to come. These rules need to be incomprehensible, stupid, and most of all designed to make sure that the most successful people have a hard time retiring in style. Give me your best thoughts!"

Analyst #2 says "How about this, let's start by creating two classifications of people. The bottom classification will be able to save pretty much as they want without any restrictions. We can call them the "Non-Highly Compensated Employees".  Let's call the top classification of employees the Highly Compensated Employees and let's really stick it to them with the rules and let's not forget to stick it to their family members as well. You know.... their spouses, their kids, their parents and certainly anyone owning more than 5% of the company.

Analyst #1 says "Dude, you are on a roll - take another puff and keep going!" To which Analyst #2 says "Wouldn't it be really perverse to come up with some crazy mathematical rule, like the top group cannot do salary deferrals on the average that are more than two percentage points above the average of the bottom group. For example, if the bottom group averages 2% of pay, then the top group would be limited to an average of 4% of their pay. Consider how genius that would be because the bottom group cannot afford to do hardly anything and therefore the top group will really be hampered." The Congressman will be so impressed. With these kinds of rules we can make sure people have to pay current income taxes.

"Yes, yes, yes..... you are really onto something of maniacal genius level here! I knew there was a reason you graduated at the top of our class.  If those top people have done too much under your two percent rule, let's make them take the money back out and, check out this.... let's apply a 10% excise tax on the company if they can't get this money returned within 2 1/2 months of the end of the year. That will really drive them bonkers - we can upset the top people, we can upset the company and we can make them "want to shoot the messenger" who would be the TPA firm or the recordkeeping vendor doing these calculations."

"Beautiful, awesome, outrageous, most excellent - our legislative careers will skyrocket when Congress sees the superb work we have done on this. Give me another drag on that magic cigarette, will you? My only fear is that those legislative analysts who joined the staff of that honest, hardworking, intelligent Congressman from the Land of Dorothy and Toto will create some sort of a Safe Harbor exception to our testing.  They are such bleeding hearts that they will probably come up with some rule that says you can ignore our testing if you are willing to do a certain size match or Profit Sharing contribution.  If the employer will agree to do this, they might even specify that the top group can do whatever the salary deferral limit is for the year.  I heard they might let people put away $17,500 or even $23,000 if they are old geezers (over 50 by the last day of the year).

And with their work done for the night, the young grads headed of to Foggy Bottom to seek more wisdom in the realm of Budweiser (no wait, it would have to be some IPA Craft Beer that cost $2 a bottle more than domestic beer - can't be saving that money for retirement you know) - and in the morning they can go for a Caramel Creme Crunch Frappuccino with Expresso Infused Whipped Creme and Italian Roast Coffee Drizzle.   Hey, what's $6.75 for a coffee when you are not saving for the future anyway.

You Owe An Ex-Employee Retirement Plan Money and They Seem To Be Hiding from You

"Hey, Ex-employee, I would like to send you money!"  Really? Now how often do you find yourself as an Employer making that statement?  Not often, right?  But it does happen in connection with retirement plans.

Here's the drill - a person who was once a loyal, trustworthy, diligent, super hard working employee of yours (or not) either set aside money in your retirement plan as a salary deferral or you had the audacity to contribute money for them (perhaps a Match or Profit Sharing contribution).  This money was so incredibly important to them that as soon as they left your employment they forgot all about it.  Not only did they fail to give you back their plan distribution election forms, but ever since then they have failed to tell you where you can find them so you can send them their money.  KInd of incredible considering how often when they worked for you, they asked you to "Give me more money!"

Yes, they are totally connected to the rest of the world through FaceBook, Instagram, Twitter, Google+ (wait a minute, does anybody use Google+?), etc., etc., but to you they don't exist. Now the NSA knows exactly where they are, but they probably will not help you. Amazon not only knows where they are, but for enough money, they could have a drone outside their door in 20 minutes, tops! Perhaps the participant did not want to receive all those stimulating, informative, easy to understand government mandated on-going notices about their retirement account.

Well, no matter how hard they play "hide and seek" with you, you still have a Fiduciary responsibility to find them.  One of your 200+ Fiduciary responsibilities everyone keeps trying to scare you with so you will hire them to do something for you.

Anyway, the Department of Labor just released guidance saying how a terminated plan should try to find missing participants.  Now I ask you this - how many terminated plans are there out there as compared to how many on-going plans?  Hmmm... not much of a comparison - right?  But yet the DOL provides guidance to terminated plans while never thinking to even mention whether or not on-going plans should follow the same guidance in finding their missing participants. 

The techniques called for in the guidance involve (in no particular order):

• Certified mail
• Check records of related plans and employer(s)
• Contact designated beneficiaries to ask about participants
• Use free Internet search tools (Is the the same as saying "Google it"?)
• If account balances are significant  to justify plan expense, then a search service involving a reasonable fee can be use (and charged against the participant's account).

If after exhausting all of the above steps, a fiduciary still has not located the missing participant, they should consider distributing the plan account directly to an IRA rollover account which will continue the deferral of income, and avoid both the 20% mandatory withholding and the 10% early distribution tax. The technique some fiduciaries were apparently using of 100% withholding has been specifically ruled out as a reasonable method.  But if your plan is not terminated, then do not distribute without participant direction unless the account in under $5,000.

Here is the actual Field Assistance Bulletin 2014-01 if you would like to read all the detailed, stimulating, exciting, thrill-binding wording or if you are really suffering from a severe case of insomnia and need something more sleep-inducing than pills.  

Electronic Disclosures - Can You Pretend It Is 2014 and Computers Exists?

We are often asked by our clients if they can distribute various required items electronically such as Summary Plan Descriptions, Summary of Material Modifications, Safe Harbor Notices, Qualified Default Investment Notice, 404a-5 Fee Disclosures, etc., etc., etc. Unless you are Rip Van Winkle and you started your nap in 1974 when ERISA was passed and you haven't awoken yet, then you are aware that the wonderful regulatory arms of our Federal Government have spent the last 40 years (Post-ERISA) creating the need for you to pass out one retirement plan notice after another after another, ad nauseam.  You know, those items you work so hard to pass out to everyone (because your TPA or recordkeeper browbeat you into doing so even though you might have some real work to do). Referring to those items that are actually looked at by 1/10th of 1% of your workforce (and they don't understand it because it is in required "government-speak").  "Ad Nauseam" above is the perfect adverb because the definition includes "doing something that has been done or repeated so often that it has become annoying or tiresome".  How about it, HR, are all the notices tiresome.

Can you distribute some of these notices electronically (via email) rather than having to print and distribute hard copy?  The answer is generally "yes."  Well, okay, we will admit it - after reading the clearly worded guidance on this topic a hundred or more times even when fresh in the morning and even with our third cup of coffee and even after having borrowed a couple of our grandkids ADHD meds to help us concentrate, we are not totally sure we understand the rules. Below is our best effort at what we think the rules might be.

Basically, disclosures under Title I of ERISA (the Employee Retirement Income Security Act of 1974) must be furnished using "measures reasonably calculated to ensure actual receipt of the material."  The Department of Labor issued a regulation defining a "safe harbor" for complying with electronic disclosure rules.  The safe harbor is limited to individuals who meet the requirements of one of the following classifications:

"Integral Part of Duties.  "Participants who have the ability to effectively access documents furnished in electronic form at any locations where the participant is reasonable expected to perform his or her duties as an employee and with respect to whom access to the employer's or plan sponsor's electronic information system in an integral part of those duties." That is government wording, not ours.  Our interpretation of that is that if an employee's job is such that they regularly use a company email system as part of their duties, then they can be given electronic disclosures via email.  Really, DOL?  Would it be so hard to just say "If your employee uses business email regularly, then you can send them the notices they won't read via email!"  You could also have employees who use a company electronic system such as an Intranet where you can be assured that they access the Intranet frequently in their duties who could given electronic notices.  Yea, right -  that expensive Intranet you maintain to communicate with employees that they have long since forgotten to log into and you have long since forgotten to update with anything fresh that would make they want to go there.  Oh, wait, that is our Intranet I am referring to, not yours.

"Affirmative Consent.  The safe harbor also applies to other participants (e.g., retirees, former employees and active employees who do not use a computer as an integral part of their duties), beneficiaries (e.g., surviving spouse, alternate payees), and other persons entitled to disclosures under Title I of ERISA who affirmatively consent to receiving disclosures through electronic media in a manner prescribed by the regulation."  Our interpretation of this government double-speak is that if you give this group of people an annual Notice (yes, yet again another notice) properly written to have to necessary language and if they provide you with a personal email address to use for the purpose of receiving future notices, then you can distribute required notices to them through email. You might want to make the Notice and Consent Form a part of your exit package or you could mail such a notice to their home address asking that the form be completed and returned.  Unless they return the form, you cannot send them notices via their personal email.  Maybe the best course of action is to get them paid out or rolled over if they are an ex-employee - but of course to do that, you have to issue another whole set of disclosures!

Here is a link to the actual Technical Release 2011-03 from the DOL with more detail on this subject - do us a favor, if you spend a few hours trying to digest the perverse language, please let us know if you reach any different conclusions.