September 2021

The Headliner

A periodic round-up of what’s happening in the Retirement Plan Industry

Upcoming Deadlines for calendar-year Plans

September
 

15th Required contribution to Money Purchase Pension and Target Benefit Pension.

15th Contribution deadline for deducting 2020 employer contributions for those sponsors who filed a tax extension for Partnership or S-Corporation returns for the March 15, 2021 deadline.

30th Deadline for certification of the Annual Funding Target Attainment Percentage (AFTAP) for Defined Benefit Plans for the 2021 Plan year.

October

15th Extended due date for the filing of Form 5500 and Form 8955.

15th Contribution deadline for deducting 2020 employer contributions for those sponsors who filed a taxextension for C-Corporation or Sole-Proprietor returns for the April 15, 2021 deadline.

15th Due date for filing 2021 PBGC Comprehensive Premium Filing.

Cash Balance Plan Spotlight – Hindsight is 20/20…

In many ways, last year was a year of “firsts”. For most, these “firsts” were largely unwelcome and difficult, kickstarted by the uncertainty of COVID-19. Not long after, the pandemic – and 2020 in general – affirmed its presence as one of disruption, both in our personal and work communities. Over a year later we know we are still navigating the “firsts” of 2020, albeit from a better place, with more knowledge and experience than before.

Revisiting the SECURE Act

For business owners, the busyness of the past 12-18 months has likely (and rightfully) overshadowed things that may have otherwise found a home on their list of priorities. Fortunately, the SECURE Act introduced another “first” in 2020: the permission to set-up a retirement Plan after the close of the calendar year. In short, businesses now have until their entity tax filing deadline plus extension to adopt a new Plan. (By comparison, the prior rule required the Plan be adopted in the calendar year.)

For the first time, owners can use concrete revenue data to consider their Plan options and desired contributions.

For those who decide that a Cash Balance Plan is a good fit, we often hear them express that they wished they’d known years ago that ‘this thing existed’. Perhaps now, if even just slightly, we can help redirect that sentiment. As Sophocles once wrote: “I have no desire to suffer twice, in reality and then in retrospect.”

BELOW: Case study of a 2020 year-end Plan established in 2021.


Defined Contribution Profit Sharing (only) + Defined Benefit Cash Balance Plan for the 2020 Plan Year…

  Age Compensation 401(k) Safe Harbor Profit Sharing Net Cash Balance Total Employer Allocations Total Allocations
Owner 62 $120,000 n/a n/a $6,000 $340,000 $346,000 $346,000
Non-Owners 45* $53,850* n/a n/a $38,075 $0 $38,075 $38,075
    Grand Totals: n/a n/a $44,075 $340,000 $384,075 $384,075
Certain provisions, like 401(k) deferrals and Safe Harbor, won’t be available in a Plan established after the close of the year.

 


…adding 401(k) and Safe Harbor immediately for the 2021 Plan Year (and beyond).

  Age Compensation 401(k) Safe Harbor Profit Sharing Net Cash Balance Total Employer Allocations Total Allocations
Owner 63 $120,000 $26,000 $0 $6,000 $340,000 $346,000 $372,000
Non-Owners 46* $53,850* $7,075 $4,845 $34,750 $0 $39,595 $84,130
    Grand Totals: $45,937 $4,845 $40,750 $340,000 $385,595 $418,670
*Reflects the average age and compensation of the eligible non‐owners. This actual case is summarized with totals and the full version is available upon request.

 


The Takeaway

  • conceptually the case study may look ordinary, but the figurative asterisk is the reality that the SECURE Act did not change other deadlines – the
  • neccesary steps require urgency and depend on many things, and w’re glad to share the extent of these considerations from our perspective
  • post year-end set-up does not eliminate the rules of ‘multiple qualified Plans’ – in other words, you cannot have had a SIMPLE or SEP in place
  • the 2020 ship may have sailed but 2021 is a new opportunity, and taking action sooner rather than later will never be unwelcome
  • be sure to check out the additional Cash Balance Plan article beginning on the next page

Looking to maximize savings? Cash Balance could be the answer!

You established a 401(k) Plan for your company and have been contributing consistently for years, and it has likely afforded your company significant tax savings and allowed you to attract and retain quality employees. While a 401(k) is a great savings vehicle, did you know there is a type of qualified retirement Plan that will allow you to contribute significantly more than the maximum allowed in a stand-alone 401(k) Profit Sharing Plan?

Most of us are all familiar with Defined Contribution Plans (e.g., 401(k) and Profit Sharing Plans). You may also be familiar with traditional Defined Benefit Plans, or pensions, historically sponsored by large companies to provide monthly retirement benefits to their retirees. For business owners that are looking for large tax deductions, accelerated retirement savings, and additional flexibility, another type of defined benefit plan, a Cash Balance Plan, may be the perfect advanced strategy.

How does a Cash Balance Plan work?

In general, a Defined Benefit Plan provides a specific benefit at retirement to participants. A traditional Defined Benefit Plan defines an employee’s benefit as a series of monthly payments for life to begin at retirement, while a Cash Balance Plan states the benefit as a hypothetical account balance. Each year, this hypothetical account is credited with following: 

  •  A pay credit, such as a percentage of annual pay or a fixed dollar amount that is specified in the Plan document.
  • A guaranteed interest credit (either a fixed rate or a variable rate that is linked to an index, such as the one-year treasury bill rate). 

The accounts in a Cash Balance Plan are referred to as hypothetical because, unlike a Defined Contribution Plan, the plan assets are held in a pooled account managed by the employer, or an investment manager appointed by the employer. The hypothetical account balances are an attractive feature because these accounts tend to be easier for participants to understand, as the annual benefit statements reflect the value of their account, like 401(k) Profit Sharing Plan account statements. 

Unlike a 401(k) Profit Sharing Plan, a Defined Benefit Plan guarantees the benefit each participant will ultimately receive. The Plan’s actuary calculates the benefits earned each year based on the terms of the Plan document, which in turn determines the required employer contribution due to the Plan. 

When a participant becomes entitled to receive their benefit from a Cash Balance Plan, the benefits are defined in terms of an account balance and can be paid as an annuity based on that account balance, or in many cases, the participant also has the option (with spousal consent!) to take a lump sum benefit, which can be rolled over into an IRA or to another employer’s Plan. 

What if I already sponsor a 401(k) Profit Sharing Plan? 

In most cases, a Cash Balance Plan works best when paired with a 401(k) Profit Sharing Plan. To optimize a “combined Plan” design, certain provisions in your current Plan may need to be amended, especially if the Cash Balance Plan covers non-owner employees. Due to the large benefits typically earned by the owner and/or key employees, the Plans must pass certain nondiscrimination tests when combined. These tests are more easily passed when employer contributions are provided to the staff under the 401(k) Profit Sharing Plan as Safe Harbor non-elective and Profit Sharing contributions. And although company contributions in a stand-alone 401(k) Profit Sharing Plan may be discretionary, when coexisting with a Cash Balance Plan, these contributions become required since without them, they are unlikely to pass all required combined nondiscrimination tests.

Looking to maximize savings? Cash Balance could be the answer!

Is a Cash Balance Plan a good fit for everyone?
Suitability is based on several factors, and this Plan type may not be right for everyone. Major considerations should include first asking yourself whether you want to make contributions greater than the Defined Contribution Plan limit ($58,000 or $64,500 for participants over age 50 for 2021). If the answer is yes, then next would be to consider the demographics of your company and how they will impact/influence testing. Finally, ask yourself whether you anticipate consistent profits that will allow you to fund all required contributions for the foreseeable future.

This sounds too good to be true. What’s the catch?
If you’ve decided that setting up a Cash Balance Plan sounds like the perfect way to meet your retirement goals and further attract and retain quality employees, you may be right! As previously mentioned, there are many important factors to consider before jumping in. Here are a few additional key considerations:

  • A Cash Balance Plan can be designed with some flexibility, such as setting up pay credits using a percentage of annual pay, but the annual contribution calculated by the actuary is required. And when paired with a 401(k) Profit Sharing Plan, the employer contributions into that Plan become required as well to pass nondiscrimination testing.
  • Because the annual interest credit is guaranteed, the employer bears the investment risk for the Plan’s assets. If the rate of return on investments is less the expected, the required contribution may increase to make up for the shortfall.
  • Each qualified retirement plan must be established with the intent of permanency, and many service providers feel comfortable that maintaining the Plan for at least 3-5 years satisfies this requirement.
  • Because of its complexity, expect the Cash Balance Plan to be more costly to establish and maintain than a Defined Contribution Plan.

A Cash Balance Plan may be the perfect addition to your existing employee benefit
program if you are looking to increase your retirement savings and tax deductions, and it’s important to work with an experienced service provider to determine if this solution is right for you!

» Trivia Timeout «
A 2020 report cited that ____________ percent of Cash Balance plans are in place at companies with fewer than ____________ employees, and ____________ percent have less than ____________ employees.

 

Missing Participants: Ready or not, here I come!

Most Plan Sponsors can relate to the trials and tribulations of having missing participants in their retirement Plan. At times, it may feel like you are on the losing end of an intense game of hide-and-seek. Your opponents (the missing participants) may not have intended to pick the best hiding spot, but in many cases, they have surely succeeded! Now you are tasked with tracking them down – and upping your game to avoid this scenario in the future.

What are missing / lost participants exactly?
Former employees who left an account balance in a retirement Plan and did not keep their contact information up to date. Additionally, they may no longer actively manage their account.

Many factors have contributed to the increase in missing retirement Plan participants over the years. Two great examples are generational differences and workforce mobilization. Unlike the generations of our parents and grandparents, today’s employees will likely work with several firms over the course of their career, versus one. Further, the ability to work remotely has mobilized employees even more – some have chosen to relocate across the country while others find
themselves living in a new locale every few months. (Many of us can relate to this, especially over the past 18 months!) These factors alone can make it difficult to keep track of participants once they leave your firm, so it’s important to develop procedures that help ensure contact information is up to date, and to illustrate the proactive measures of your efforts. Below are a few ideas based on the Department of Labor’s (DOL) Best Practices. Whatever steps you implement, be sure and relay the importance of keeping contact details current to employees and participants, and the effect that not doing so could have on them!

1. Annual Review
Have participants verify contact information at least annually. (Include current employees and those who have terminated or retired!) Capture physical and e-mail addresses, phone numbers, and consider including a review of beneficiary election, too.
2. Mailings
When completing a mailing, provide a form where recipients can reply to update their contact information if needed.
3. Returned Mail
Initiate a search as soon as mail is returned as undeliverable, return to sender, wrong address, addressee unknown, or otherwise.
4. System Log‐In
If participants regularly log-in to a company system, set a reminder or pop-up directing users to verify their contact information. In addition to incorporating procedures for ensuring up-to-date contact information, document your procedures for locating participants once they go missing. Unfortunately, even with the best of processes in place, Plan Sponsors may still have participants who go missing! The DOL offers a list of search methods that should be used to locate missing participants, they include:

  • Send a notice using certified mail through USPS or a private delivery service with similar tracking features.
  • Check the records of the employer or any related Plans of the employer.
  • Send an inquiry to the designated beneficiary or emergency contact of the missing participant.
  • Use free electronic search tools or public record databases.

A Plan Sponsor has a fiduciary responsibility to follow the terms of the Plan document and ensure participants are paid out timely. An organized and defined process, along with documentation that the process is carried out, will prove worthwhile.

Additional info on the DOL’s Best Practices can be found on their website:
https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/retirement/missingparticipants-guidance/best-practices-for-pension-plans.

Safe Harbor: A Cure for Testing Headaches

A crucial requirement for Defined Contribution Plans is that they must not unfairly favor Highly Compensated Employees (HCEs) or key employees (such as owners) over Non‐Highly Compensated Employees (NHCEs) – and this includes 401(k) deferral contributions!

To satisfy this requirement, the IRS requires that a Plan pass certain nondiscrimination tests each year. These tests analyze the rate at which HCE and key employees benefit from the Plan in comparison to NHCEs. Failed tests can result in costly corrections, such as refunds to HCEs and key employees, or additional company contributions. Luckily for Plan Sponsors, there is a Plan design option that allows companies to avoid most of these nondiscrimination tests, called a Safe Harbor provision.

To be considered “Safe Harbor” and take advantage of the benefits afforded to Safe Harbor Plans, there are several requirements that must be satisfied. These requirements, and key characteristics of a Safe Harbor Plan, are as follows:

  • The Plan must include one of the below types of employer contributions and the chosen formula written in the Plan document.
  • With the exception of HCEs, the contribution must be provided to all eligible employees each Plan year.
  • The contribution must generally be fully (100%) vested immediately.
  • The contribution must be provided to all eligible employees without requiring the satisfaction of additional allocation conditions.
  • A Safe Harbor notice that informs eligible employees of certain Plan features, including the type of Safe Harbor contribution provided by the Plan, must be distributed before the start of each Plan year, and must occur at least 30 days but not more than 90 days prior. New participants must receive this notice at least by their date of eligibility (but not more than 90 days prior).

Safe Harbor Match
Under this option, the company makes a matching contribution only to those employees who choose to make salary deferral contributions for themselves. The two standard matching formulas from which to choose are as follows:

Safe Harbor Non‐Elective
Under this option, the company makes a fixed/set contribution equal to at least 3% of pay for all eligible employees, regardless of whether the employee choses to participate in the Plan.

Basic Safe Harbor Match
The company matches 100% ($1 for $1) of the first 3% of compensation an employee defers, plus 50% ($0.50 for $1) on the next 2% they defer.

Enhanced Safe Harbor Match
The company matches 100% ($1 for $1) of the first 4% of compensation an employee defers.

Please note that additional options, not covered here, are available for Plans that include certain automatic enrollment features.

Safe Harbor: A Cure for Testing Headaches

If all Safe Harbor requirements have been satisfied for a Plan year, the following nondiscrimination tests can be avoided:

Actual Deferral Percentage (ADP)

The ADP test compares the elective deferrals (including both pre-tax and Roth, but not catch-up) of the HCEs and NHCEs. A failed ADP test must be corrected by refunding HCE contributions and/or making additional company contributions to NHCEs. 

Actual Contribution Percentage (ACP)
The ACP test compares the matching and voluntary after-tax contributions of the HCEs and NHCEs. A failed ACP test must be corrected by refunding HCE contributions and/or making additional company contributions to NHCEs.

Top Heavy
Compares the total account balances of key and non-key employees. If the total key employee balance exceeds 60% of total Plan assets, an additional company contribution of at least 3% of pay may be required for all non-key employees.

ATTENTION

A Plan will lose its top heavy exemption if the company makes additional contributions (e.g., discretionary match or Profit Sharing) in addition to the Safe Harbor contribution!

How do you know if Safe Harbor in your Plan is a good fit?

As discussed above, the primary benefit of a Safe Harbor provision is the automatic passage of certain annual nondiscrimination tests. If your Plan typically fails these tests, resulting in refunds or reduced contributions by or to HCEs and key employees, then your company may benefit from a Safe Harbor feature. Predictable annual contributions also provide a great incentive for employees to save for retirement! If you do not currently offer an annual contribution like match or Profit Sharing to employees, then adding a Safe Harbor provision may significantly impact the company’s budget. Except for limited exceptions, a Safe Harbor provision cannot be removed during the Plan year and so it’s important that a company is able to fund these required contributions. As with all things qualified Plan-related, the key is working with an experienced service provider who can design a Plan to suit your company’s needs!

Emily C.

Client Service Manager

Education:

Kaplan University – Bachelors in Business Management

Hometown:

Donahue, Iowa

Best food ever?

Tacos, chips & salsa, carnitas…really anything Mexican!

What inspires you?

My boys, Scottie and Jackson. They are smart, creative, funny, and kind and I want to make them proud. 

First concert?

Miami Sound Machine at our county fair

Jim H.

Principal, CFO

Education:

University of Akron

Hometown:

Cleveland, OH

Hobbies?

Golf

Favorite part of your job?

Satisfactorily resolving client issues

Coffee or tea?

Coffee

Liza B.

Senior Client Service Manager

Education:

Bachelor of Science, Physical Education

Hometown:

Santa Fe Springs, CA

Best food ever?

Tonkatsu ramen

First concert?

Rolling Stones

Biggest fear?

Sinkholes

Zak K.

Principal, Consulting Actuary

Education:

BA in Mathematics, Minor in Business Admin and Philosophy/Religion

Hometown:

Port Clinton, Ohio

Best part of your day?

First cup of coffee in the morning!

First concert?

Starship

Favorite part of your job?

Teaching

Sandra D.

Senior Client Service Manager

Education:

Virginia Western Community College

Hometown:

Roanoke, VA 

Where do you donate?

I work in the food pantry at my church

What’s on your nightstand?

Alarm clock

Coffee or tea?

Both 

Sandy G.

Sr. Client Service Manager

Education:

Institute of Arts and Sciences, Fine Arts, Hesser College

Hometown:

Swansboro NC

Where do you donate?

In memory of my daughter, I have Random Acts of Kindness cards. There are 250 in the box. My goal every year is to empty the box. So in short I donate everywhere there is a need or just to do something kind to anyone. 

Any hobbies?

So many… Art projects, Photography, Nature walks, Fishing, swimming, traveling….

Coffee or tea?

Coffee, Coffee and more Coffee

Stephen R.

Senior Actuarial Consultant

Education:

Bachelor’s Degree in Actuarial Science

Hometown:

Plain City, OH (Columbus, OH)

What are you really good at?

Piano – I began lessons at 3 years old after my older sister heard me play “You are not alone” by Michael Jackson while she was watching the music video on MTV

Best part of the day?

Breakfast, Lunch and Dinner (and the snacks in between)

Hobbies?

Sports and fitness – I coach group fitness a couple days a week. I can’t think of a better way to prepare for a long, prosperous retirement!

Tom B.

Actuarial Consultant

Education:

Master’s Degree; MDiv

Hometown:

Tampa Bay

Favorite thing to do in Charlotte?

Spending time with my family at a park or on a nature trail hike

What inspires you?

Interacting with others who are always seeking to grow, improve, and take on challenges

First concert?

Beach Boys

Shelley D.

Client Service Manager

Education:

CPCC

Hometown:

Mount Holly 

Best part of your day?

Dinner time with my family.

Best food ever?

Anything Pasta

First concert?

New Kids On The Block

Aaron H.

IT Manager

Education:

North Carolina State University, BS Mathematics and Computer Science

Hometown:

Charlotte, NC

Best Food?

Tacos

Most-used productivity hack:

Put everything onto a list with a date and time.

Coffee or tea?

Coffee all the way.

Jasmin W.

Internal Sales Consultant

Education:

Bachelor of Arts in Communication

Hometown:

Military brat, the US is my hometown!

Best food ever?

Anything Jamaican!!! 

What are you really good at?

Motivating others to see their potential & surpass it! 

Favorite part of your job?

Learning something new every single day!

 

Tracey G.

Compliance Analyst

Education:

Stark State College

Hometown:

Minerva, Ohio

Best part of the day?

5 o’clock. Lol

First concert?

Tom Petty

Coffee or tea?

Coffee, of course.

Morgan C.

Compliance Analyst

Education:

Bachelor of Science in Finance

Hometown:

Spanish Fort, AL

First concert?

Incubus

Coffee or tea?

Coffee

Best part of the day?

Being with my husband and little girl

Renee A.

Compliance Analyst

Education:

B.S. in Accounting, B.S. in Psychology

Hometown:

Mobile, Al

Hobbies?

Reading

First concert?

Rascal Flatts

Coffee or tea?

Coffee

Julie M.

Senior Actuarial Consultant

Education:

Undergraduate Degree in Business Administration from John Carroll University / Graduate MBA Degree from Cleveland State University

Hometown:

Solon, Ohio

Best food ever?

For me, nothing compares to the comfort food feeling of the Eastern European cuisine – spatchcocked roast chicken with boiled small yellow potatoes that are glazed with butter, garlic and dill sauce. The side dish is a salad consisting of fresh tomatoes / cucumbers / sweet onions with dill and sour cream. One does not go without the other so it’s all one dish.

Favorite books?

Alexander Dumas’ The Count of Monte Cristo

What inspires you?

It’s not original but I’ve always been inspired by acts of kindness, selflessness and perseverance. It’s very easy to be focused on your own life, problems, wants and needs. It’s much harder to put other people ahead of yourself and also not get discouraged when your journey is not as smooth as you’ve anticipated. 

Kristi D.

Director of Actuarial Services

Education:

Bachelors in Applied Mathematics and Bachelors in Applied Statistics, Actuarial Science

Hometown:

Akron, Ohio

Where do you donate?

We are frequently making drop offs to the Salvation Army and give to the Cleveland APL 

Best part of your day?

At the end of the workday every day, rain or shine, my husband and I take a walk with our English Bulldog Frank (and now our precious Naomi too!) and chat about our day.  It’s the favorite part of my day.

Best food ever?

Anything Thai

Coffee or tea?

Coffee in the morning, herbal tea after 3pm

Nick N.

Principal, CEO

Education:

BA, Interdisciplinary Studies

Hometown:

Akron, Ohio

Where do you donate?

Charity Water

What’s your most-used productivity hack?

Listening to podcasts and audiobooks at 1.5x to 2x speed.  Only problem is now normal speed seems so slow!

Best food ever?

Chipotle burritos.  Prove me wrong.