Retirement Plan Provisions in the New Tax Law

New tax laws often include provisions that relate to retirement plans. The new tax law passed in December 2017 is no different. Often, the changes are not favorable to retirement plans, because Congress has a nasty habit of cutting back the tax benefits of retirement plan benefits and contributions to make up for tax cuts in other areas. But fortunately, this time retirement plans seem to have escaped any significant changes. Hooray! The only changes in the new tax bill that directly impact retirement plans are as follows:

Repeal of Recharacterization of Roth Conversions

If you make a contribution to a conventional IRA, you can change your mind and have it transferred to a Roth IRA, or vice versa. This is called a Roth conversion.

Under previous rules, if you change your mind again and want to reverse the Roth conversion, you can do that any time up until the due date of your tax return. This is called "recharacterization" of the conversion.

The new tax law repeals the rule allowing you to recharacterize conversions. So once you transfer your IRA contribution from a regular IRA to a Roth, that's it – there is no undoing the conversion.

Extension of Time to Roll Over Loan Offsets When an employee receives a distribution from a plan on termination of employment or plan termination, any outstanding loans are "offset" against the full account balance, and the net amount is distributed. For example, suppose Riley has a balance in her 401(k) plan of $30,000, and has an unpaid balance on her loan of $10,000 in addition. Riley would be taxed on her full account balance of $40,000, which includes the value of her outstanding loan being "offset" against her account, but only $30,000 is distributed.

In order to avoid having to pay tax on the value of the loan offset, Riley could either (a) repay the loan to the plan before the distribution is made, then roll it over to an IRA or another retirement plan; or (b) if she rolls over the balance to an IRA or another retirement plan before she repays the loan, Riley could repay the loan to the IRA or new plan within 60 days of the loan offset.

The new tax law extends the 60-day period mentioned above. Riley now has until the due date of the filing of her income tax return (including extensions) for the year the offset occurred to repay the loan.

Distributions to participants in Federal disaster areas A participant whose principal residence was located in a Federally-declared disaster area during 2016, and who sustained an economic loss due to the disaster, is eligible for certain tax relief on distributions up to $100,000 from retirement plans.

Pass Through Income The new law includes a deduction for "pass-through income" for certain types of businesses. Under the new tax law, these businesses could be placed in a situation where the income tax benefits of making contributions are curtailed by having a larger tax on the benefits when they are distributed. This is clearly unfair, and we believe it was unintended because the tax bill was rushed through Congress without full discussion. It may be advisable to wait for clarification or changes to the rule before making any decisions on this issue.

Please let us know if you have questions regarding any of these new rules. We'll be glad to review them with you!

"Do you know where your participants are?"

Those of us who have been around since the late 1960s remember the iconic television public service announcement that was preceded an announcement of the time: "It's 10 p.m., do you know where your children are?" The implication was that if you didn't know where your children were, perhaps your parenting skills needed improvement and your children could be in danger. A new announcement from the DOL has us asking, "Do you know where your former employees are?" In particular, those who still have money left in your company's retirement plan. If you don't, there could be serious consequences.

The DOL has announced a country-wide initiative to send requests to retirement plan sponsors, asking for current contact information for selected participants. Sponsors who cannot give accurate information may subject their plan to an audit. Importantly, the DOL considers it a breach of fiduciary responsibility if the plan sponsor cannot contact participants who have balances in the plan, unless a diligent effort has been made to locate them.

What constitutes a "diligent effort?" There is no definitive list, but here are some actions that we believe will show a diligent effort.

1. Send a letter by certified mail, or a recognized delivery service like UPS, DHL, or Federal Express, to the employee's last known address, informing them about their retirement account and asking for them to make a decision as to its disposition. If the letter is returned because the address is incorrect, save the returned letter with a record of the date it was sent and returned.

2. Attempt to contact the participant by phone, email, or text. Save a copy of the attempt to contact (either a paper or electronic record is sufficient).

3. Do an internet search using Google, Bing, Yahoo, ask.com, or a similar search engine. There are also free "people search" sites like http://www.ussearch.com.

4. Search for the participant on Social Media such as Facebook, LinkedIn, Twitter, etc.

5. If you have a beneficiary form from the participant, try to contact the beneficiaries for information about the participant. If you remember the participant's spouse, children, parents, other relatives or friends, attempt to contact them for information.

6. Check with your payroll company to find out if they offer a service to locate former employees. If checks were being directly deposited, the payroll company may be able to contact the former employee through their bank.

7. Hire a commercial locator service such as http://www.employeelocator.com.

Even if you have followed these procedures, there is no guarantee that you'll locate the person. But keep the documentation so that you have proof you made a diligent effort to locate the participant and avoid a costly fiduciary breach.

Preferred Pension Planning Corporation to Participate in Charity Event

On Oct 7, Preferred Pension Planning Corporation (PPPC) will take part in the American Heart Association’s Central New Jersey Heart Walk. The event will take place at Arm & Hammer Park in Trenton, NJ. Participants will have the option between a one-mile or three-mile walk to raise funds for heart disease and stroke research.

Heart disease is the number one cause of death in the United States, and stroke is number five. While advancements in heart health have advanced dramatically over the past several decades, there is still more work to be done.

“It's been more than one year since we lost our beloved co-worker, Jay Driver, who passed away on his way to work on August 23, 2016,” said Lawrence J. Zeller, President of PPPC. “We're walking in his memory and we'll be calling our team ‘The Jay Walkers.’ Jay's wife, children, and friends will be joining us, and we welcome and encourage anyone to join us or support us by making a pledge of any amount.”

The American Heart Association, founded in 1924, is the nation’s largest and oldest volunteer organization dedicated to fighting heart disease and stroke. They fund innovative research, fight for stronger public health policies, and provide critical tools and information to save and improve lives.

If you're interested in donating to the cause, or if you would like to sign up to walk with us for the event, please contact Jill Murphy at jlmurphy@preferredpension.com, or call Jill at 908-575-7575, or visit http://bit.ly/heartwalknj to learn more.

The staff of Preferred Pension Planning Corporation has many years of experience in all facets of employee benefits. Our broad technical expertise gives us the basis to provide quick, accurate and practical solutions to your benefit plan questions and problems. For more information about our services, please visit http://www.preferredpension.com

Is Your Pension Money Protected From Creditors?

If you owe money to a credit card company, bank, or other creditor, can they attach your pension or 401(k) account? In other words, can they take what you owe them out of your pension account before you receive it?  In most cases, the answer is a definite "NO."  Pension plans covered by ERISA (the Federal pension law) must contain the "anti-assignment and alienation rule," which states that money in the plan is not available to creditors. Similarly, creditors of the employer sponsoring the plan cannot attach plan assets, which are held in a trust and are not part of the employer's assets.  

As usual, there are exceptions to the rule. For example, someone who commits fraud or a fiduciary breach that causes financial damage to the plan can have his or her account attached to repay the plan for the damage. Certain tax liens can be paid from plan assets. And pension assets can be considered part of the amounts to be split up during a divorce, using an agreement called a QDRO.

In a bankruptcy, pension assets are not considered as part of the "bankruptcy estate" to be split up among creditors. But the anti-assignment and alienation rule also means that you generally can't use your pension assets as collateral for a loan or other debt. And once the money is distributed from the plan, it is no longer protected.

Generally, retirement plans covered by ERISA afford broader protection than IRAs. State laws, rather than Federal laws, apply to the protection of the benefits in IRAs.

Overall, retirement plans can provide a very effective way to shield assets from creditors, as long as you're aware of the exceptions.

Math Tricks

If you ever have to multiply a number by 5 in your head, here's a shortcut: Multiply by 10, then divide by 2. For example, how much is 84 times 5? It's easy to multiply 84 times 10 and get 840, and then cut 840 in half and get 420.