Compliance November 4, 2014

Enforcing Plan Limits for 403(b)s Not So Simple

There are unique rules for 403(b) plans that make enforcing contribution and benefit limits not so straightforward.
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The Internal Revenue Service (IRS) recently announced cost of living adjustments affecting dollar limitations for retirement plans, which included an increase in the elective deferral limit to $18,000 for 2015 and an increase in the age-50 catch up deferral participants are allowed to make to $6,000 for 2015. But for 403(b) plans, according to Susan Diehl, president of PenServ Plan Services, participants are also allowed a special catch up contribution in addition to the age-50 catch up: the 15-years-of-service catch up.

The 15-years-of-service (YOS) catch up is not subject to cost of living adjustments. It is limited to the lessor of:

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  • $3000;
  • $15,000 minus prior 15 YOS catch up contributions; or
  • ($5,000 X YOS) minus prior elective deferrals (excluding age-50 catch ups).

Catch up contributions made by participants are considered 15 YOS catch ups first, up to the limit, then categorized as age-50 catch ups, Diehl told attendees of the 2014 Association of Pension Professionals and Actuaries (ASPPA) Annual Conference.

Ed Salyers, a certified public accountant (CPA) with his own practice, and former senior tax specialist with the Tax Exempt and Governmental Entities Division of the IRS, told attendees that they should keep all records of participant contributions indefinitely to defend against the IRS because the agency only keeps employee W-2s for 10 years.

There are also different rules for 403(b) plans for Employee Retirement Income Security Act (ERISA) Section 415 limits on the amount of additions that may be made to participants’ retirement accounts. Specifically, for calculating 415 limits, the 403(b) is not aggregated with another defined contribution (DC) plan offered by the sponsoring employers. So, for example, if a hospital offers both a 401(k) and 403(b) plan for its employees, they must aggregate employee deferrals in the two plans for the individual employee deferral limit, but not for the 415 plan additions limit, Diehl said. Also, if a hospital offers a 401(a) plan to which 403(b) matching contributions are made, it does not have to aggregate the two plans for the 415 limit.

An exception is when the plan participant contributes to another DC plan offered by an employer it controls. For example, Diehl said, a doctor may contribute to a 403(b) plan offered by a hospital to which he is affiliated, but may also have a private practice for which he sponsors a retirement plan. In that case, the 403(b) additions must be aggregated with the DC plan the doctor sponsors, to calculate 415 limits. According to Diehl, if there is an excess to the 415 limit, it always has to be corrected in the 403(b) plan.

Another unique provision of 403(b)s Diehl pointed out is the ability to make contributions on behalf of employees that have separated from service for up to five years after separation. For example, schools sometimes use this provision to put accrued, unused vacation pay into the plan for separate participants rather than pay them. These contributions are considered employer non-elective contributions and may not exceed 415 limits.

Finally, Diehl pointed out that non-profit employers must think differently about what entities would make a controlled group for purposes of aggregating plans sponsored by different employers. There are no owners in non-profits, so they must look at the similarity of their boards of directors. Also, if one entity’s board has the authority to name 80% of another entity’s board, the two entities are part of a controlled group. Ronald J. Triche, associate general counsel and director of Government Affairs for ASPPA, moderator of the conference discussion, added that if two entities that share a budget, training or people may elect to be a controlled group.

Salyers noted that 457 plans also have unique provisions. For the individual deferral limit, employer contributions are also counted, so for 2015, the total of both employee and employer contributions cannot exceed $18,000. However, 457 plans provide for an additional catch up contribution of the lesser of twice the basic dollar limit or underutilized amounts. For 415 limits, 457 plan additions are only aggregated with additions to another 457 plan offered by the same employer. Salyers pointed out there is no formal IRS correction for excess contributions, so 457 plan sponsors “must get it right.”

Data & Research November 3, 2014

Blended Families Face Major Savings Challenges

Parents who are married or living together with children from a previous relationship face a challenging financial outlook, especially when it comes to retirement savings.
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According to the Allianz LoveFamilyMoney Study, blended families average only $158,600 in savings and investable assets, compared with $264,300 for traditional families (those married to someone of the opposite sex with at least one child younger than 21 living at home). Moreover, a majority (55%) of blended families say they “currently live paycheck to paycheck,” and nearly one-third (30%) cite one of their worst financial habits as “not saving any money,” versus 41% and 20%, respectively, for traditional families.

“The defining characteristic of blended families—which consist of parents who are married or living together with stepchildren and/or children from a previous relationship—is the financial baggage and commitments that they bring from their previous relationships,” explains Katie Libbe, Allianz Life vice president of consumer insights. “Blended families are survivors, but they could be burdened by the past. While children can form warm bonds with the new people in their lives, the financial scenario can be challenging.”

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Forty-three percent of blended families agree that, “My spouse/partner or I brought financial baggage to the relationship that’s difficult to overcome.” Additionally, 33% agree that “the lack of adequate financial support from my ex or my spouse’s ex is impacting my ability to save for retirement.” And while 60% of traditional families say they are on track to achieve their financial goals, only 46% of blended families share that sentiment, according to Allianz.

With the outward appearance of a well-integrated and united family front, blended households report to be very individualistic in their pursuit of financial needs and goals. Sixty-eight percent of those from blended families described their family structure and household dynamic as “focused on individual needs/goals.” This could result in blended families having multiple or competing goals, further complicating their family financial situation. On top of that, Allianz says 35% agree that “my spouse/significant other and I have different financial priorities that are difficult to navigate.”

“It’s possible that many in blended families are still picking up the pieces from a previously broken home,” Libbe notes. “This is a burden that they may feel they must tackle on their own—and likely leads to this more individualistic mindset when it comes to goals and needs. As they’re learning to navigate new financial relationships, they are likely trying to avoid repeating mistakes of the past.”

Even though only 32% of blended families say they have excellent or above-average knowledge when it comes to financial planning (contrasted with 44% of traditional families), Libbe suggests there is hope—specifically with the younger generations in the work force. Despite the challenges they face, the study reflects that blended families are doing more than both traditional families and other modern families to teach their children about money.

They’re also talking openly with their kids about their financial situation and working with them to create budgets, Allianz says. Building on that positive behavior, Libbe shares three additional tips to help create better financial harmony:

  • Develop strategies for saving and spending – Partners and spouses might come to the spending/saving discussion from very different perspectives, but they must work together to decide where they can and can’t compromise. Individuals can consider developing mock scenarios and asking their partner whether he or she would rather pay down debt or purchase a new vehicle, for example.
  • Determine roles and responsibilities – Household expenses are often a main source of friction in relationships. Determine in advance who will pay the bills and how they'll get paid. As long as you both agree that the division of responsibility is fair, it might work well to maintain separate accounts.
  • Establish mutual financial goals – Allianz urges blended families to develop a formal plan to help achieve complex financial goals. Reviewing wills and legacy planning strategies with an attorney is a good place to start. Feeling overwhelmed or can't agree? Consider consulting with a financial professional to discuss financial goals.

Libbe says the challenges faced by blended families are considerable, but not insurmountable. “And smart, pragmatic financial planning can go a long way toward making the blending of two households go more smoothly,” she adds.

The Allianz LoveFamilyMoney Study was conducted by The Futures Company via an online panel in January 2014 with more than 4,500 panel respondents ages 35 to 65 with a household income of at least $50,000.

More information about the firm and the new research is available online at http://www.allianzusa.com.

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