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Posts Tagged ‘Charles Clark’

Lump-sum payouts and tax implications

February 24th, 2014 No comments

Clark-CharlieOver the past few years, there is evidence to confirm that several employers sponsoring defined benefit (DB) pension plans have been settling their plans’ pension obligation to former employees via a single lump-sum payout. It is commonly referred to as a lump-sum cleanup strategy. Some commenters have said that not only has demand for such a strategy not abated, it has accelerated.

This blog post will remain neutral on the prudence of implementing such a strategy, as each employer’s goal is unique. Recognizing that employers who implement such strategies spend enormous energy and resources to communicate the consequences and financial impact on those electing the lump-sum payout, it’s questionable whether recipients completely understand the individual tax implications it could personally have on them. (And to be clear, this blog post does not implicitly or explicitly render any type of tax advice.)

If a participant chooses to roll over the lump-sum distribution to a personal tax-deferred IRA or to a tax-qualified savings plan of a new employer, the issues below are irrelevant. However, if the lump-sum is received as current income:

• The individual could move into the next higher marginal tax bracket, both federal and state (where there is a state income tax).
• The individual could face a 10% excise tax if that person is younger than age 59½.
• The individual could incur an underwithholding penalty in comparison to their prior year’s tax liability.
• According to the U.S. Department of Health and Human Services (HHS), eligible individuals and families with incomes between 100% and 400% of the federal poverty level (FPL) may receive premium tax credits for purchasing health insurance in the healthcare exchange. The 2013 FPL for a single person is $11,490 and this individual’s healthcare premium payment is capped at $228 per year. A lump-sum of approximately $29,000 would raise that premium cap to $3,816. A lump-sum of approximately $34,000 would raise income above 400% of the FPL and the individual would have to pay the full premium of the healthcare policy selected on the healthcare exchange.

Takeaway: The economic impact of a lump-sum payout must be carefully evaluated by the recipient. It may not be as advantageous as it appears. Plan sponsors implementing this strategy may wish to consider the impacts of the ACA as they draft the communications to the prospective payees.

Touchdown for NFL, referees, and fans

September 27th, 2012 No comments

Perhaps unknown to most NFL fans was the actual technical issue between the owners and the regular referees that was the cause of the strike and, ultimately, the faux victory by Seattle over Green Bay.

It wasn’t pay and it wasn’t travel. It was that the refs wanted to continue with their defined benefit (DB) pension plan and not move to a defined contribution (DC) savings plan.

According to the Washington Post, here is the compromise they reached:

The two sides had been particularly at odds over pensions, which seemed to emerge as the major sticking point late in the negotiations. Referees wanted to retain their pension plan, which the league apparently considered too generous, particularly for part-time employees. The NFL wanted to switch the officials to 401(k) retirement plans. The compromise that was struck, according to an announcement by the league about the terms of the deal, would keep the pension plan in place for current officials for five years through the 2016 season, at which point it will be frozen. Newly hired officials will be given 401(k) retirement plans, as will all officials beginning in 2017.

The surrender of the DB plan in the so-called “eight-year compromise” appears to be mostly the result of a provision that the basic salary will rise from $149,000 last season to $173,000 in 2013 and $205,000 in 2019.

Confidence of eight years without another referee work stoppage is a touchdown for the fans—though it’s a few days too late for Packer fans.

Calculating Social Security benefits

July 3rd, 2012 No comments

If you have ever compared the estimate of your Social Security benefit generated by any financial forecast engine and the estimate that you can get at any time from the official website of the Social Security Administration (SSA), you’ve probably noticed that they are different. And in the cases of many individuals who are “young,” they are likely to be radically different. So is one calculation better than the other?

The unfortunate answer is that both answers are probably fine, but you need to have some understanding of how the calculations are created. Let’s take a brief look under the hood of both.

The SSA recently announced that it has ended the annual mailing of the statement to your home of your actual salary history, based on which you paid your FICA payroll taxes. Now you must log in to its secure website at www.ssa.gov and follow the specific instructions to retrieve it. Once you generate your official Social Security statement, you can find the calculations the SSA uses and compare them to your own assumptions.

Let’s assume that you have properly filed your 2011 personal income taxes. The SSA will use the compensation you reported in 2011 as the amount to be earned in each of the future years until you are able to commence Social Security benefits at your “Social Security Retirement Age,” which can be as high as age 67. In 2011, if you were age 47 and earned $45,000, the SSA calculation engine assumes you will earn $45,000 in 2012, 2013, 2014, and so on for as many years as it needs for the calculation.

For any common calculation engine you may be using, you are probably able to include an assumption for your wage growth. Call it 3% per year as an example—$45,000 thus becomes almost $60,500 after 10 years of 3% increases. So your calculation engine is likely going to produce a Social Security benefit estimate that is much higher when compared to the SSA calculation.

There are many other differences in the calculation to consider, including if your 2011 wages for payroll tax were much lower than before 2011. But careful inspection of the forecast assumption in your calculation engine will enable you to begin to understand why the estimates of your Social Security benefits can be so different.

Social Security: The sky is not falling

May 1st, 2012 No comments

The Social Security Trustees issued their annual report on April 23 and the messages are somewhat dour. However, the headlines that scream that payments will stop and drop to zero after 2033 are based on a fundamental misunderstanding about how the system will work.

Although the Social Security Trust Fund is projected to be “exhausted” after 2033, the payroll taxes collected on wages earned after that point will provide the source of revenue to pay retirement benefits. The system will then be a true pay-as-you-go system.

After 2033, projected continuing income to the trust funds equals about 75% of program cost, meaning that retirees will only receive 75¢ for every $1 under the current (complex) formula—but not zero. After 2085, continuing income equals about 73% of program cost, so retirees will only receive 73¢ for every $1 under the current (complex) formula.

Note that these forecasts do not anticipate any change in the current aforementioned complex formula. It does however reflect a set of economic, demographic, and actuarial assumptions that are “medium” in three sets of assumptions, commonly referred to as low, medium, and high.

And while we’re on the topic, the Social Security Administration today announced the availability of online statements. For more information, go here.

The most important retirement stories of 2011

January 19th, 2012 No comments

If you’re like a lot of people, you’re probably anxious to put 2011 in the rearview mirror. Yet the biggest stories of 2011 could play out for years to come. So let’s take a look in that rearview mirror and see if there’s anything we can learn from some of the key stories we tracked on Retirement Town Hall in 2011.

A record nobody wants to break
In the third quarter of 2011 the Milliman Pension Funding Index had its second-worst quarter in the history of the study (read the full story). Like a consecutive losses streak, nobody wants to break any records for worst quarter in the study.

How will underfunded pensions start to dig out in 2012? “With interest rates remaining at historic lows and low expectations for investment gains, plan sponsors will be facing record levels of contribution requirements in 2012 and 2013,” says John Ehrhardt.

Risky business
The Department of Labor (DoL) gathered experts to discuss the trend towards using investments with higher rewards but higher risks in pension plans (read the full story). Investing is all about risk and reward but pension plan managers face unique circumstances when investing people’s retirement money. That’s why many are exploring new approaches to managing this risk.

“The risk management techniques used by variable annuity providers saved insurance companies $40 billion during the financial crisis,” says Tamara Burden. “Pension plans can benefit from similar techniques, especially in this time of record-low interest rates.”

No more Social Security blanket
Changes are afoot at the Social Security Administration (SSA). In 2011 the SSA announced its plan to stop issuing paper checks (read the full story) and statements (read the full story). These moves are certainly eco-friendly, but they are really intended to help the SSA’s bottom line.

What effect will these changes have going forward? “As the world becomes more reliant on technology, electronic deliverables like these make more sense from both a practicality and cost standpoint,” says Tim Connor. “Get used to it, embrace it, and take part in it.”

Downgrades, they’re not just for hurricanes
The day some thought would never come came in 2011. The S&P’s downgrade of the United States was a dramatic event within the investing world that affected nearly everyone (read the full story). The downgrade led to immediate volatility, at the time.

What will be the lasting effects of the downgrade on those who manage retirement plans? “As humans we tend to forget, most of the initial effects of the downgrade have subsided, investors are still buying U.S. debt,” says Jeff Marzinsky. “However this should not lead investors to a false sense of security. The U.S. economy is improving, but still fragile, markets are volatile, and interest rates continue to remain low.  Investment policy and diversification are key areas to keep a close eye on, more than ever.”

As exciting as watching paint dry
It’s more of a non-story than a story, but 2011 was something of a regulatory vacuum in which employers operating both defined contribution (DC) and defined benefit (DB) plans waited and waited and waited for regulatory guidance on key issues…and are still waiting.

“There are numerous examples where some regulatory guidance would be quite welcome for plan sponsors,” says Charles Clark. “There are holes in the DB funding rules, many questions still swirling around disclosure rules, and new uncertainty around cash balance plan regulations, just to name a few.”

A crystal ball for taxes

October 27th, 2011 No comments

Payroll taxes went down in 2011 from 6.2% to 4.2%, which is due to a one-time change in the law. Ideally, Americans would have used that extra cash to increase their retirement savings, but at this point, it’s hard to tell what they did. Although there is some speculation that the reduction could be renewed in 2012, payroll taxes could go back up to 6.2%. For Americans who were able to save, only time will tell if those who have gotten used to socking away more in their retirement savings will revert back to smaller contributions in 2012 (compared to 2011) because they can’t afford to do it or if it’s too painful.

 

Categories: Taxes Tags: ,

Risk, growth, and pension plans: Strike the right balance

September 8th, 2011 No comments

An August hearing at the Department of Labor (DOL) was held at which experts testified to the ERISA Advisory Council about the use of hedge funds and private equity investments for qualified pension plans. Isn’t it interesting that none of those experts said much, if anything at all, about why great care and prudence is needed to reduce volatility or protect as best as possible the value of the investments?

I am thinking, of course, about securing the benefits of the participants, who have earned these benefits and have a legal right to collect them if they meet all of the eligibility criteria.

Investment professionals overseeing pension assets today are not just managing money. They are also acting to prudently fund the earned pension obligations as the benefits come due and are distributed to plan participants. Otherwise, just managing the assets to maximize return while minimizing risk falls short of the design of these tax-preferred retirement programs.

Double dipping into your savings?

August 24th, 2011 No comments

The stock market’s volatility may be the precursor to a “double-dip” recession.  In the previous official recession, many employers sponsoring savings plans chose to eliminate all employer contributions. There is evidence to confirm that many (but not all) employers restored the matches or other contributions that did not rely on the employee’s contributions.

Some speculate that a suspension of employer contributions, voluntary or otherwise, could occur again because the economy is struggling with anemic growth.

How did you respond to recent volatility?

August 16th, 2011 No comments

When the financial markets closed on Aug 15th, the stock market had recouped all of its losses from the previous horrific week of volcanic volatility.  Three-year and five-year Dow Jones and S&P500 returns were either flat or negative.

The Investment Company Institute reported that over $50 billion moved into money market funds in the week ended August 10, but the cumulative change in the prior three weeks was a $130 billion outflow from money market funds.

The Wall Street Journal reported that the wealthy no longer have an appetite for the risk of equities and are “hunkering down with cash, gold, farmland and other safe-haven investments.”

Many financial advisors recommend staying the course with a diverse portfolio including, among other investment options, target date funds.

Retirement savings incentives and your taxes

May 26th, 2011 No comments

Charles ClarkIf you ever wondered how much income tax our federal government doesn’t collect by allowing employers to sponsor retirement programs and Americans to defer payment of taxes by contributing to IRAs, the numbers may shock you. In this current fiscal year, it’s $119 billion and that fact is buried in a footnote in a March 2011 report (Report GAO-11-333, page 1 footnote).

U.S. Federal Government FY 2011
Retirement Program Revenue Loss
401(k) plans $62,900,000,000
DB plans $42,200,000,000
IRAs $13,900,000,000
Total $119,000,000,000

It’s no wonder current members of Congress have been considering curtailing these tax-favored plans. In the same report, the GAO presents data that allegedly supports the claim that these tax-favored plans favor Americans with private sector jobs. They’ve titled it “Some Key Features Lead to an Uneven Distribution of Benefits.” What do you think?

Categories: Taxes Tags: ,