IRS Announces 2017 Plan Limitations

The IRS has now announced the qualified plan limitations for 2017. These limitations are determined based on annual increases in the cost of living index. Because there was a modest increase in the index, some of the plan limits have been changed for 2017.

Increasing in 2017:

• The maximum annual benefit payable from a defined benefit plan will increase from $210,000 to $215,000.
• The maximum amount that can be contributed by and for a participant to a defined contribution plan (i.e. profit sharing or 401(k) plan) will increase from $53,000 to $54,000 (this amount does not include catch-up contributions).
• The maximum amount of compensation taken into account for plan purposes will increase from $265,000 to $270,000.
• The definition of “key employee” will include an officer making more than $175,000, up from $170,000.

Staying the same in 2017:

• The 401(k) deferral limit will remain at $18,000.
• The catch-up contribution for participants who have attained age 50 will remain at $6,000.
• The compensation-based definition of highly compensated employee (HCE) will remain at $120,000. Thus, an employee who earns more than $120,000 in 2016 will be deemed an HCE in 2017.

In addition, the Social Security taxable wage base will increase from $118,500 to $127,200. Though not a qualified plan limitation per se, this will have an effect on the calculations in a plan that uses permitted disparity as the allocation methodology.

Please contact us if you have any questions about how this may affect your own qualified plan.

MID-YEAR AMENDMENTS TO SAFE HARBOR 401(k) PLANS – THE IRS BACKS OFF

For the past few years, there has been great concern in the benefits community about the IRS position on making mid-year amendments to 401(k) plans. Relying on ambiguously-worded language in the Regulations under Sections 401(k) and 401(m), the Service had ominously (but informally) indicated that any amendment to a plan that had elected safe harbor status for a plan year was suspect if it became effective during such plan year. The consequences of such a prohibited amendment were, at a minimum, the loss of the safe harbor election for the year (thus subjecting the plan to ADP and ACP testing), and the potential of plan disqualification (for violating the provisions of the safe harbor).

Over time, it became apparent that this position was not sustainable in the extreme, and the IRS began to carve out exceptions. Changes such as a mid-year replacement of a plan trustee and other inconsequential revisions to plan provisions (including Roth elections) were recognized as not violating the prohibition on mid-year amendments. Indeed, certain changes were mandated by law (relating to same sex spouses) and IRS procedures (the entire PPA restatement process itself could be claimed to violate the mandate against mid-year amendments). Still, there remained a high level of uncertainty about what could, and could not, be amended.

Finally, after years of silence despite repeated requests from ASPPA, among others, the IRS has now issued Notice 2016-16, in which it has significantly backed off its hard-line stance. There remain a few prohibited amendments, but these are neither surprising nor oppressive. For the most part, mid-year amendments are permitted, as long as they do not adversely affect the expectations of plan participants, and appropriate notice of such changes is provided (reasonable advance notice and an opportunity to make a new deferral election is required, but even most retroactive amendments are permitted with notice as soon as reasonably possible).

The following are among those provided as examples of permissible changes made mid-year:

• The increase of future safe harbor non-elective contributions from 3% to 4%.
• A retroactive increase in a safe harbor matching contribution for the plan year.
• The addition of an in-service withdrawal provision.
• A change in the plan’s default investment fund.
• A change to the plan entry date for future participants.

One can extrapolate that other common amendments, such as the addition of a loan program or revisions to distribution options, are no longer problematic.

Explicitly prohibited are the following mid-year changes:

• Increasing the years of service required for an employee to be vested in QACA contributions.
• Reducing or narrowing the group eligible to receive safe harbor contributions.
• Changing the type of safe harbor (i.e., switching from non-elective to matching or vice-versa).
• Changing or adding a formula used to determine matching contributions (or the definition of compensation used to determine such contributions), or to permit discretionary matching contributions. However, even such amendments are permitted if they occur at least three months prior to the end of the plan year, such changes are made retroactive for the year, and an updated safe harbor notice and election are provided to participants.

Clarity is always welcome, and a reasonable approach is doubly appreciated. It would appear that the IRS took the comments of practitioners seriously, perhaps recognizing that there was little legal support, and no practical objectives to be achieved, for its hard-line position.

Too Late for a New 2015 Safe Harbor But You Can Still Establish a 401(k) Plan

While October 1^st may be the deadline to start a new Safe Harbor 401(k) plan for 2015, there is still plenty of time for a business owner to both establish a 401(k) plan and receive a meaningful contribution for 2015. In a Safe Harbor plan, owners and other Highly Compensated Employees (HCEs) may make 401(k) contributions of up to $18,000 plus an additional $6,000 for those over age 50 this year. In exchange for the ability to defer without the need for non-discrimination testing, the employer must commit to make one of two contributions:

• A non-elective contribution of 3% of compensation to all eligible participants.
• A matching contribution of 100% of the amount deferred up to 3% of compensation and 50% of the amount deferred on the next 2% of compensation.

Although this deadline has passed, employers may still establish a 401(k) plan for 2015 as long as there are sufficient payrolls remaining to allow all eligible employees to participate, if they wish. While some may argue that with only a few payrolls remaining this year, it is too late to establish a plan and receive a meaningful contribution for the year, with careful planning that is not the case. Applicable regulations allow a new plan to utilize a “first year rule” to perform the ADP and ACP non-discrimination testing. This allows a new plan that has no prior year testing data to assume that the Non-Highly Compensated Employees (NHCEs) are deferring at the rate of 3% of pay, which would enable the HCEs to defer (and receive an additional matching contribution of) up to 5% of compensation.   For the 2015 plan year, the compensation limit is $265,000, which would allow for deferrals and matching contributions of up to $13,250 each for anyone earning that much. Note that there must still be sufficient compensation payable before year end to defer the maximum amount.

An additional profit sharing contribution of $26,500 may also be made for a total contribution of $53,000 for 2015. Thus, a 401(k) program can maximize an owner’s contribution on a much more cost-effective basis than a profit sharing contribution alone, by the use of 401(k) deferrals and matching contributions to reduce the percentage of compensation the owner is required to contribute for the staff. However, if it does become too late in the year to implement a 401(k) program, please remember that an owner can still maximize his or her contribution at $53,000 for 2015 by implementing a profit sharing plan as late as December 31, and adding the 401(k) feature with or without the Safe Harbor for 2016.

If you are interested in implementing a new plan for 2015, please do not hesitate to contact any of the partners, sales director or case managers at The MandMarblestone Group for a free consultation.

– Stephanie Broncatello, CPC, QPA, QKA

The MandMarblestone Group is Turning 40!

The MandMarblestone Group, LLC traces its history back to October 30^th, 1975 when it was founded as Robert Mand, P.C. – a one-man firm based in Lafayette Hill, PA focusing on the newly implemented ERISA law. Almost 40 years later, The MandMarblestone Group, LLC is widely recognized as the region’s leading tax law and consulting firm with offices in Philadelphia and Boston, with more than 40 employees.

The MandMarblestone Group is known for providing qualified retirement plans to its clients, large and small, that enhance contributions for business owners, their family members and favored employees. The source of our success and growth has been our commitment to our clients and the collaboration we maintain with their financial professionals and accountants to collectively provide the best possible services and results for our mutual clientele.

As we approach our 40^th anniversary and celebrate MMG’s success, it is essential that we express our sincere, heartfelt appreciation to our loyal clients and to our accounting and financial partners. You’ve enabled us to thrive and expand, and your participation and services have been crucial in our day-to-day growth over the past 4 decades.

We are eagerly looking forward to 40 more years of collaboration and beyond!

IRS Announces 2016 Plan Limitations

The IRS has now announced the qualified plan limitations for 2016. These limitations are determined based on annual increases in the cost of living index. Because there was no increase in the index, plan limits will remain the same as in 2015.

Staying the same in 2016:

• The maximum annual benefit payable from a defined benefit plan remains at $210,000.
• The definition of “key employee” will include an officer making more than $170,000.
• The 401(k) deferral limit will remain at $18,000.
• The catch-up contribution for participants who have attained age 50 will remain at $6,000.
• The compensation-based definition of highly compensated employee (HCE) will remain at $120,000.  Thus, an employee who earns more than $120,000 in 2015 will be deemed an HCE in 2016.
• The maximum amount of compensation taken into account for plan purposes will remain at $265,000.
• The maximum amount that can be contributed by and for a participant to a defined contribution plan (i.e. profit sharing or 401(k) plan) remains at $53,000 (this amount does not include catch-up contributions).

In addition, the Social Security taxable wage base will remain at $118,500.  Though not a qualified plan limitation per se, this will have an effect on the calculations in a plan that uses permitted disparity as the allocation methodology.

Please contact us if you have any questions about how this may affect your own qualified plan.