Dave Cain: Welcome to unsuitable on Rea Radio, the award-winning financial services and business advisory podcast that challenges your old-school business practices and the traditional business suit culture. Our guests are industry professionals and experts, who will challenge you to think beyond the suit and tie, while offering you meaningful modern solutions to help enhance your company’s growth. I’m your host, Dave Cain.
Dave: We’re a few weeks away from the start of a whole new year, and you know what that means. It’s time to make our New Year’s resolutions, or dust off the 2018 that we never accomplished. From an economic standpoint, 2018 was an outstanding year, but as we look to 2019, we have an excellent opportunity to secure even greater financial wellness.
Dave: Angie Isakson, a senior manager on Rea’s Retirement Plan Administration team, is here to talk about some great savings strategies that can empower you to save even more for retirement. Welcome back to unsuitable, Angie.
Angie Isakson: Hello, Dave. How are you?
Dave: Good. How’s it going?
Angie: Great.
Dave: Good. Are you ready for the holiday season?
Angie: I am. But actually I’m going to Vegas next week, so I’m more ready for that.
Dave: Whoa. Okay.
Angie: Yes, yes.
Dave: Okay. So, we’re going to talk about stuff that’s going to happen in 2019.
Angie: Yes, we are.
Dave: We’re going to makes some New Year’s resolutions.
Angie: Great. Yeah.
Dave: Are we?
Angie: Yes, we are. Yeah. We have some new limits coming in place for 2019, so we’re going to resolve to save more.
Dave: Good. So, we’re going to cover a couple of things. One, the 2019 changes to the Hardship Withdrawal rules.
Angie: Correct.
Dave: We’re going to talk about one of my favorite things, the IRS Private Letter Ruling regarding student loan repayments.
Angie: Correct.
Dave: And general retirement savings strategies to remember in 2019.
Angie: Yeah, you’re correct. That’s what we’re going to talk about.
Dave: Okay, and we can cover anything else. Shopping tips, or whatever. We can do that.
Dave: So, let’s start out with the changes to the Hardship Withdrawal rules. First of all, if you could help me out. This is not an area I work in a whole lot. In fact, never. What are “hardship rules?”
Angie: Okay. Let’s start with what the current rules are right now, and what the new rules are going to be for 2019.
Angie: The IRS has made the decision to make some changes to the Hardship rules, because the ultimate goal for retirement plans is to save more for retirement. And the current Hardship rules are limiting that ability. So currently when you, in a plan, to apply for a Hardship, you have to first exhaust any loan availability you have within a plan. And they’re going to do away with that for 2019. So, starting in 2019, you don’t have to first start applying for a loan and then get a Hardship. You’re going to be able to right away apply for a Hardship in the retirement plan.
Dave: So that’s brand new in 2019?
Angie: Correct. Correct.
Dave: So, that is win one for the taxpayer, the common folks, right?
Angie: Yes, it is. That’s a good win for them. But more importantly, even, right now if you take a Hardship withdrawal within a retirement plan, they require that you’re not allowed to defer anything out of your paycheck for six months. So if I were to apply for a Hardship withdrawal because I had a bunch of medical bills or whatever and I couldn’t afford to pay them, and I was withdrawing, like, 10% out of my pay already to put away for a retirement, the IRS says, “Okay, you can take your Hardship withdrawal, but for six months you are not allowed to withdraw 10% out of your pay and put away for retirement. They’re doing away with that six month requirement. Now they’re not going to stop your 401K deferrals, even though when you apply for a Hardship withdrawal.
Dave: Yeah, we talked about Hardship and you’d mentioned medical reasons. What are some of the other hardship issues that qualify for Hardship withdrawal?
Angie: Okay. A very good question. That rule is not changing. They are keeping the same rules which, one is foreclosure on your home. If you’re going to be foreclosed on, your home. Or you’re going to be evicted, if you’re renting, you’re allowed to apply for a Hardship withdrawal for that.
Angie: If you are having, like, a major … Like a hurricane or a major disaster, or major repairs on your home need to be done, you can apply for a Hardship for that. You can, like I said, medical expenses. That’s another one. Funeral expenses is another one. They allow you to ask for a Hardship withdrawal if you have funeral expenses coming down the pipeline. And then if you’re getting a loan for the first time. I’m sorry. Getting a home loan for the first time.
Dave: Home loan? Okay. Right.
Angie: A home loan for the first time.
Dave: First time home owner?
Angie: Yes. Then you can apply for a Hardship withdrawal to pay the down payment or whatever on that.
Dave: Okay. Okay. I’m not sure I’ve heard that one before, or I forgot about it. Are you seeing in … Let’s put this in practice. I know your department, you guys do hundreds, administer hundreds of plans in a year. Are you seeing a lot of Hardship withdrawals?
Angie: You know, I don’t know that it’s changed much. Yes, we definitely see a fair amount, but it’s proven pretty consistent over the … timeframe.
Dave: Good. That’s, I think, a good piece of information.
Angie: Right. Absolutely.
Dave: And can I write my plan document to prevent a Hardship, or is that something out of my control?
Angie: Great question, Dave. Yeah, you are not required to put in your plan documents ability to take a Hardship withdrawal. Clients, you know, can say that no Hardships are available. So, yes. That’s a good question. That’s an option.
Dave: And as you put a plan together, and I know you guys strategize on developing the plan. What’s your recommendation? Should it be in there? Should we allow it, or not?
Angie: Well, you know, that’s just really up to the clients, but-
Dave: I’m asking your advice. You know, get off the fence and tell me which way I should go.
Angie: My advice is … I would say, “probably.” You should probably allow a Hardship withdrawal within the plan.
Dave: Yeah. Agreed.
Angie: I mean, people can’t help major problems coming up in their lives. Now, for loans. My opinions on loans is, “no.” To not allow loans in retirement plans. That’s my opinion on those.
Dave: Not allow loans?
Angie: No. Go to the bank.
Dave: Go to the bank.
Angie: Go to the bank.
Dave: Okay. Well, wait, wait. Let’s stop there a second. So, this is something that you discourage?
Angie: I’m not a fan of them.
Dave: So, you want the money in there, compounding of interest tax-deferred, is what you want?
Angie: Right. And they just, as a third party administrator, they’re a bit of a hassle.
Dave: Yeah. Make it harder to do that, versus easy?
Angie: Correct.
Dave: Okay, because the whole idea of a retirement plan is save, save, and save.
Angie: Right. And people will take a loan for whatever. You know? And so I don’t … I’m for a Hardship withdrawal. I think those are necessary sometimes.
Dave: Okay. Agreed.
Angie: But a loan, you know … People think they have the ability, we make it easy, and they’ll just take it for whatever purpose they want. Buy a new car, you know. Whatever.
Dave: Okay. You know, recently, in this past year, we went through a huge tax change, tax changes throughout. Did these tax changes have any impact on retirement plans? Did anything reach over and touch retirement plans?
Angie: I mean, nothing overly. The new Hardship rules did come through the Budget Act, which was one of the 2018 rules. But other than that, there hasn’t been any major impact that’s solid, written in stone.
Dave: Okay. We’re going to talk about student loan repayments. When I saw this on our agenda to talk about today, about an IRS Private Letter Ruling regarding student loan repayments.
Angie: Correct.
Dave: What’s going on?
Angie: Yeah. Well, this is kind of exciting. Now, like you said, it’s a Private Letter Ruling, and what a Private Letter Ruling means is that it’s only applicable to the clients that filed the Private Letter Ruling. But it gives precedence. There’s precedence out there now under this Private Letter ruling where … So, let me just explain what the Private Letter Ruling said, first of all.
Angie: This client applied for a Private Letter Ruling stating that they had employees that were paying a minimum of 2% of their student loans back over a time period. They were paying a student loan back. And to reward these employees, the company, the client, wanted to provide some kind of matching contribution. Because since they were paying on these student loans, they didn’t have enough money to defer into a retirement plan.
Angie: But the client did not want to hold that employee back from being able to put money away for retirement, and they felt like, “We need to encourage this behavior of paying student loans back, encourage the ability to save for retirement.” So the Private Letter Ruling came out that said if you have an employee that is putting at least 2% away for retirement, then the client can give them a 5% matching contribution into a retirement plan if they show proof of this happening.
Angie: So like I said, it provides precedence. Because it’s only available to this client, but now the IRS has approved this, it’s in their kind of history now, and other clients may … They maybe come out a like new tax bill or something that says that this is something that they’re going to allow in all retirement plans.
Dave: Okay. Let me clear this up a second. That ruling has been signed off on, and it’s already in play? Or are we still waiting on the results?
Angie: No, that’s done.
Dave: Done.
Angie: The IRS has approved it for this particular client. They have the blessing to go ahead and put that 5% match into a retirement plan for those employees.
Dave: Okay. As difficult as it is out in the marketplace to find talent and keep benefits in play, this could be a very unique benefit used by employers to retain employees and recruit new employees.
Angie: Correct. Correct. Yes. It absolutely can be. But like I said, it’s not something that’s been passed that’s available across the board to anybody and everybody. This was just a Private Letter Ruling for that particular client. But we have hopes that here in the future soon, that the IRS will maybe put something in writing that’s available to everybody.
Dave: This was a Private Letter Ruling on behalf of a Rea client?
Angie: No.
Dave: Or just a general taxpayer, and we’re paying close attention to it?
Angie: Correct.
Dave: Okay.
Angie: Correct. It has a lot of conversation going around in the pension world right now everywhere. All the TPAs are … Third Party Administrators are talking about it. The … are talking about it. There’s a lot of hubbub about it right now, so we think that something may come in the near future. I don’t know when that may be. The near future with the IRS could be five years from now.
Dave: Okay. Well, yeah. Although, if we’re having a conversation in 2019 and I said, “Look, I’d like to put this in my plan document.” What’s my risk?
Angie: Well, you’re not able to put it in your plan document right now. You would have to go through a Private Letter Ruling yourself as a client, and go through the expense to be able to do that right now. So these are just conversations right now.
Dave: Okay. So, still sitting on the sidelines?
Angie: Correct. Correct.
Dave: So, if I came to you again and wanted to do a Private Letter Ruling, can Rea help me out? Can your team help me out with a Private Letter Ruling?
Angie: Oh, absolutely. We could go down that road and help with the Private Letter Ruling, and put something in place and file it with the IRS. Absolutely.
Dave: You could be a pioneer.
Angie: Maybe.
Dave: You can be a hero.
Angie: We could be.
Dave: Maybe a hero.
Angie: Yeah, absolutely.
Dave: Yeah. Now, are filing Private Letter Rulings kind of costly?
Angie: Yes, that’s the downside.
Dave: Yeah. Okay. Okay.
Angie: That’s the downside. They are a little bit costly.
Dave: So we’re kind of waiting on a … sitting on the sidelines waiting to see how this thing shakes out, and then it’s kind of a copycat thing. We’ll go from there?
Angie: Correct.
Dave: Okay.
Angie: Correct.
Dave: Good.
Angie: Yeah, yeah.
Dave: So, again. Let’s put the calendar on this thing. This is going to … or has happened. We’re going to see more activity on this in 2019, maybe even the back end of 2019?
Angie: You know, like I said. I hope. I can’t make any promises, though. We’ll see what the IRS … You know, we’ll see what the government comes down with in 2019. It’s just … In August of 2018 is when the Private Letter Ruling was approved, and we see something probably going to happen in the future. It’s just not sure when.
Dave: And, you know, I know your team makes it a habit on a continuing basis to meet with your clients, to go through these changes and tweak plans as needed. Again, as a … I’ll call it a “recruiting tool,” to retain talent. So, my hat is off to you guys for staying on top of that stuff.
Dave: You know, what else do I need to be aware of in 2019?
Angie: Well, just this past week is when all the 2019 plan limits came out, the new plan limits. So, currently we were able to defer like $18,500.00 into a retirement plan. Starting in 2019, that’s going to increase to $19,000.00.
Dave: 19K. Okay. What about, you know … You see a couple of members of our production crew, one for sure is way over 50. Can he do a little bit more?
Angie: Well, it’s currently $6000.00, and they’re keeping it the same. That’s $6000.00 again for 2019. So, yes. He can do more than the $19,000.00. He can get up to $25,000.00.
Dave: $25,000.00. 19 and 6.
Angie: Yeah, but they didn’t raise the catch-up limit for people over age 50.
Dave: Okay. That’s a catch-up?
Angie: Yeah.
Dave: Okay.
Angie: They didn’t raise that. They maintained it at $6000.00. But it is going up, so a little bit more than in 2018.
Dave: Just out of curiosity, do all plans have to have that catch-up provision for the over-50? Or is that something I have to elect into?
Angie: All plans do not have to have that catch-up limit within their document. Just like the Hardship rule, it’s an election. But I would say 99% of plans, if not 100%, have it in them. There’s really no downside.
Dave: Yeah. There wouldn’t be a lot of reason… Yeah. What else have we got going on in 2019?
Angie: Well, I guess a lot of other limits have increased, too. To be considered a highly-compensated employee, that limit has increased to $125,000.00, up from $120,000.00 in 2018. Now, a highly-compensated employee is not just based on wages, though. It’s if you are a greater than 5% owner, you’re considered a highly-compensated employee no matter what your compensation is.
Dave: What does that really mean to me? Does that mean that I … When I hear “highly-compensated,” is that something that means I can put more funding into my particular plan?
Angie: What that means-
Dave: Or my account, I believe?
Angie: Not necessarily. Highly-compensated employees are defined within the IRS because of certain testing requirements that are required within a retirement plan. So, that definition kind of helps us determine what tests need to be done, and who is considered a highly-compensated employee for those tests. It doesn’t necessarily grant you the ability to put more money away, though. No.
Dave: You know, you mention these tests. Are those required on an annual basis?
Angie: Some of them are required. Some of them can be passed automatically if you become what the IRS calls a “Safe Harbor” plan. There’s several different kinds of Safe Harbor plans, but if your Safe Harbor plan … There are certain tests that automatically pass, and you don’t have to worry about them. But the limits that I’m talking about now, those limits have to be evaluated in every single year and make sure that they’re not exceeded.
Dave: Sure. Sure. You know, when you’re out talking to prospects and your clients, and especially prospects, somebody that you’re maybe not involved with. What kind of problems are you seeing in their plan documents? Are there anything that you’re seeing that’s saying, “Wow, that’s just stepping up there”?
Angie: You know, I don’t know. It’s kind of plan document related, but one of the biggest problems we see are definition of compensation.
Dave: Definition, okay.
Angie: Yeah. A lot of times clients will get in trouble with their procedures. Operational procedures are not following what their plan document is stating. So, I don’t know if that’s a document issue, necessarily. It’s more of an operational issue, and if you get kind of crazy within your document in terms of how you define compensation, it can affect how easy or not easy it is to operate the plan. So, that’s one of the big things that we do see.
Dave: Right. Right. Hey, have you got any tickets for any shows when you’re out in Vegas? Anything going?
Angie: Yeah. We do, actually.
Dave: What are you seeing?
Angie: We’re going to see a Cirque show, a Cirque du Soleil show, and we are actually going to see … It’s a new show that just came out in September. It’s a musical called, “A Mob Story.” It’s about the making of Vegas, you know, the mob, basically. The money from the mob is what started Vegas.
Dave: Oh, okay.
Angie: So, we’re kind of excited about that.
Dave: Wow. Okay. What’s your game of choice out there?
Angie: You know what? I’m not a big gambler. I’m just going out for the shows, the food, the sunshine. Not a big gambler.
Dave: That’s what everybody says that’s sitting at those slots every day. “I’m not a big gambler.” You’ll be at the nickel machines, I suspect.
Angie: Penny, if they have them.
Dave: Well, I’m sure they do. They have everything for everybody.
Dave: So, you know, let’s go into the plan designs for 2019, and kind of as you guys get your game plan ready. What’s on the horizon for us in ’19 as far as plan design?
Angie: You know, we are seeing a lot of cash balance plans being added over the last couple of years. I foresee, perhaps, a lot more of those coming into play-
Dave: Cash balance?
Angie: Mm-hmm (affirmative). In 2019, yeah.
Dave: Let’s break that down a minute. What does that mean to me? Does that mean that, “Hey, I had a good year. I may be able to put way more into the retirement plan and defer for my particular account?”
Angie: Not necessarily. Cash balance plans are a niche, kind of a niche market. They’re best for smaller companies, generally speaking. You can’t just add one and just put money away for, say, the owners, for the highly-compensated employees. You still need to put money away for the other employees.
Dave: Same kind of rules, discrimination stuff.
Angie: Same kind of rules, but there’s a greater disparity between how much you can put away to an owner versus a non-owner or a non highly-compensated within a cash balance plan.
Angie: So, the thing is, it’s a defined benefit plan, so there’s a lot more restrictions in terms of, you need to get an actuary involved within it and you can’t just open it for one year. You have to have a little bit of longevity in that plan.
Dave: Isn’t that strange how things come back that used to be? A “Defined Benefit” now called “Cash Balance” plan.
Angie: Right, yeah.
Dave: Stuff comes back.
Angie: It’s a matured variety.
Dave: Mature plan. Do you think bell-bottoms will ever come back?
Angie: Probably.
Dave: You think so?
Angie: Oh, absolutely.
Dave: How about 8-tracks?
Angie: Uh, no.
Dave: I don’t think so.
Angie: No.
Dave: No. So, a Cash Balance plan, that’s maybe something we need to put in the planning documents as we talk to clients and-
Angie: I think we’ll be seeing a lot more of those, yes, coming through in 2019. Other than that, still a lot of Safe Harbor plans probably coming through. But other than that Hardship provision, we’re not seeing anything new, necessarily, in 2019 that we were going to need a kind of … plan document for.
Dave: Okay. As we wind down here, is there anything else that I need to be concerned … Is the IRS … sticking their nose in 5500s and plan documents? Are we seeing less or more?
Angie: You know what? They are still focusing a lot on ESOP plans. They’re still auditing that a lot. They’re still auditing people that have late deposits within the plan. So, those are the key things that we’re seeing with the DOL audits and the IRS audits still.
Dave: So, if poorly administered, the DOL is going to hit you hard, most likely?
Angie: Well, if you’re-
Dave: Because it’s the employer’s money, right? That’s what they’re saying.
Angie: Correct. Yeah, I mean, correct. There will be fees if you’re not following the document. That’s for sure. Or if you’re not doing what you say you’re supposed to be doing.
Dave: Okay. All right. I’ve got a retirement plan. What are my New Year’s resolutions for 2019? As a business owner, what should I be doing in 2019?
Angie: You should be saving as much as you can into that plan. Your limit is up to $56,000.00 now, for an individual in a retirement plan, so you should be trying to reach that level for you as an owner.
Dave: So, a lot of planning opportunities?
Angie: Sure.
Dave: And you guys will tear apart the documents and get some ideas out there?
Angie: Yeah. We sure will.
Dave: So, how do our listeners get a hold of you?
Angie: You can email me at angie.isakson@reacpa.com. Or you can reach me via phone.
Dave: Or we can go on the website-
Angie: You can go on the website-
Dave: … and check out your bio. Go that way. I’m just … Just call any Rea & Associates office. Angie is famous throughout the firm.
Angie: Absolutely.
Dave: Would you say?
Angie: I’m very famous.
Dave: Thanks again for joining us today, Angie. Great idea for us, so thank you very much. I hope more people will consider improving their financial wellness as a priority in the year ahead.
Dave: I’m also interested to learn more about the Private Letter Ruling regarding student loan payments. In fact, I plan to dig a little deeper into this topic in the next few weeks. I’m not sure who writes my script, but trust me. I’m not reading the Private Letter Ruling over the next couple of weeks. I’m partying with some friends, you know, over the holidays.
Angie: It’s Christmastime, yeah.
Dave: You’ve got it.
Angie: Yeah, I’m not sure who writes that, either.
Dave: I don’t know. Also, just a heads-up due to the upcoming holidays. unsuitable will be taking a two-week break. Don’t worry, though. We’ll be back the second week of January with even more unsuitable guests, with unsuitable content and unsuitable fun (at least for an accounting firm).
Dave: In the meantime, I hope you enjoy this special time with your family and friends, and if you ever need a break from the non-stop holiday music, know that you can always catch up on past episodes of unsuitable by downloading episodes from iTunes SoundCloud, IHeart Radio. Really, anywhere, everywhere podcasts are found.
Dave: Happy holidays from all of us at Rea & Associates. Enjoy the eggnog. Until next time, I’m Dave Cain encouraging you to loosen up your tie and think outside the box.
Disclaimer: The views expressed on unsuitable and Rea Radio are our own, and do not necessarily reflect the views of Rea & Associates. The podcast is for information and educational purposes only, and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation, so they can expertly guide you to the best solution for your specific circumstance.