CT SB No 971

Tomorrow I will be joining colleagues from around the state, as well as representatives of ASPPA, at the CT Commerce Committee hearing on SB No. 971, An Act Concerning Small Business Retirement Plans. Below is the text of the testimony I will be submitting:

February 24, 2009

Commerce Committee

Room 110

Capitol Building

Hartford, CT 06106

Re: Raised Bill No. 971 An Act Concerning Small Business Retirement Plans

Dear Members of the Connecticut Committee on Commerce:

My name is Sean Thomas and I am the president of Wells Thomas, LLC, a Third Party Administrative company in Branford, Connecticut. With a staff of ten retirement plan administrators and support personnel, our company provides retirement plan consulting, design and administrative services to approximately 375 small companies. I strongly oppose Raised Bill Number 971 – An Act Concerning Small Business Retirement Plans.

This Act would permit the State Comptroller to “establish a tax-qualified defined contribution retirement program to provide retirement investment plans, including, but not limited to, those created under Sections 401 of the Internal Revenue Code, of 1986…” with the goal of minimizing costs by “helping small employers and individuals purchase retirement savings plans…through economies of scale…”

While we agree that efforts should be made to entice small companies to establish qualified retirement plans for their employees, we do not agree with the method proposed in this bill. A similar bill was proposed in 2008 (SB No. 652), which had a funding amount of $500,000 in the first year. As SB No 971 is written, this amount would be recoverable from plan assets, which would result in an increase in the underlying investment cost. If the costs were to be equitable and “competitive” in the current market, this additional cost would have to be in the range of 25 basis points (or 0.25%) of the total assets. This would mean that, in order to recover 100% of the start-up costs, and remain at the 25 bps level, the total assets under the program would have to average $200,000,000 for the year. This would be quite the accomplishment, given the current economic environment.

Indeed, we are seeing our clients scale back the level of contributions to their existing plans because cash-flow has decreased dramatically in the past months for so many. In this economic environment, most small company plan sponsors will look at the plan contribution from a tax-savings point of view. An Employer Contribution to a plan will make sense if the ‘employee cost’ is less than the amount the owner(s) would pay in taxes if the same dollar amount were kept as profit. If the ‘employee cost’ is greater than the taxes would otherwise be, many plan sponsors are opting to retain the profits for themselves and simply pay the taxes.

In short, most small company owners opt to implement a plan and make ongoing contributions to the plan only if the owners are able to see a tax advantage in doing so. Often this can only be achieved through more complicated plan designs. Therefore, the key stumbling block we see in designing retirement plans for potential clients is not the administrative costs, nor the investment fees, but the restrictions in plan contributions.

In our profession, we strive to provide each client with an individually designed retirement plan that suits the need of that particular company. In an effort to accumulate sufficient retirement benefits for all level of employees, this often results in complex plan design and testing. In addition, we recognize the need for ongoing monitoring of all aspects of retirement plans as well as continuous education and service to both the employer and employees.

We understand that the reason SB No 971 is being introduced is the intent to reduce plan fees. However in the current marketplace, fund and asset management expenses under retirement plans have already been decreasing. Several providers have released new products with lower expense ratios in order to compete in the qualified plan market. Many funds offered are Institutional or Retirement Class shares, with front and back end loads waived. Recent focus on fee disclosure has helped drive down Investment Advisor Fees.

In addition, there are already a number of low- or no-cost plan design alternatives available to small companies, such as SIMPLE 401(k) Plans (which have very little administrative costs) and SIMPLE IRAs (which have no administrative costs). In addition, Safe Harbor Plans have been available for a number of years, which reduce administrative costs by eliminating certain plan testing requirements. These plans generally require the employer to make only a 3% of pay contribution to the employees and allow all employees to contribute higher amounts to the plan.

In operation, if SB No 971 were to pass, an RFP for the state sponsored plans would be issued each time the current contract expires. If a change in the provider occurs, this would result in forced changes in investments by plan participants, mandating notices and education to all those affected in order to meet Fiduciary Requirements. This would create an extremely large administrative burden, with associated costs going to plan participants or Connecticut taxpayers.

I believe one of the more immediate concerns is that of Fiduciary Liability. The fact that the State Comptroller will put out RFPs and make the decision on which investment provider will be offered, would, under the terms of ERISA, make the State Comptroller a Fiduciary to EACH of the individual small company plans that elect to take part in this. This matter should be looked into very carefully as it could potentially bring liability.Thanks to the Committee for your time today.

Sincerely,
Sean W. Thomas, QKA

President

Here We Go Again

Harrison Ford said it best in the original Star Wars (A New Hope), when looking at the mass of Stormtroopers in the hanger bay, "Didn't we just leave this party?"

That's how I'm feeling today when I received notice that CT is proposing, once again, "An Act Concerning Small Business Retirement Plans," just as it did in March of last year.

The bill, CT SB No 971, is virtually the same as last time; once again the intent is to establish a state run defined contribution retirement plan program for small companies in Connecticut. I'll be posting a copy of my latest letter to the CT Commerce Committee when I have completed it...but in the meantime, feel free to click on the title of this article to be taken to the site with the full language of the proposed bill.

And here's hoping we don't end up using that other classic Harrison Ford quote from Star Wars..."I've got a bad feeling about this..."

A Great Link To Check Out

Every once in a while an article or link I receive really grabs my attention. Recently I received an email from a colleague, Michael Pacowta, which linked his website: http://www.mikepacowta.com/.



But what I took notice of was his reference to a book he recently completed, "The 21 Biggest Mistakes Business Owners Make with Their Company Retirement Plans...and How to Avoif Them" (click on the title of this article to be directed to Mike's site.



About the book, Mike has this to say: "It contains important information primarily focused upon company retirement plans. Within it, I highlight my report on The 21 Biggest Mistakes Business Owners Make with Their Company Retirement Plans…and, How to Avoid Them. It presents 21 “eye opening” issues every business owner must be aware of, especially if they sponsor a company retirement plan or are contemplating doing so. The full report (in book form) has been sent to the Library of Congress in Washington, DC for copyrighting and will hopefully be available soon."



This is a very interesting piece...check it out.

ADP Refunds No Longer Cause You To Go Back In Time

It's finally here. No longer do you have to take Mr. Sherman by the hand and step into the Way-Back Machine when figuring out just WHEN to report those dreaded ADP refunds on your taxes. (The ADP test is the non-discrimination test on Employee Deferrals, which must be performed annually on all non-Safe Harbor 401(k) Plans.)



Starting with plan years that began on or after January 1, 2008, if refunds are required due to a failed ADP test, those refunds are now taxable in the year DISTRIBUTED. For example, if you receive an ADP Refund in February 2009, due to failed non-discrimination testing for the plan year-ended December 31, 2008, the refund will be taxable to you in 2009. You will receive a Form 1099 in January 2010 reflecting the refunded amount, which will then be reported on your personal tax return for the year.

In years past, ADP refunds made on/before March 15 (for calendar year plans), were reported on your PRIOR YEAR'S tax return. So refunds received in February 2008 were to be reported on your 2007 tax return...even though the 1099 would not be received until 2009!

And to make matters worse, if the refund were made timely (within 2 1/2 months of the close of the plan year) for off-calendar year plans, you would have to go back and amend your tax filing for the year in which the plan year STARTED! No WONDER people were always confused about the reporting requirements of the refunds.

But all is well with the universe now...so put away your time machine, and know that life just got simpler. Well, this piece of it at least.

2009 Required Minimum Distribution Waived

Due to the current economic environment, there is a temporary relief of the Required Minimum Distribution (RMD) from qualified retirement plans. Normally, if a participant subject to RMDs does not take the distribution in a given year, an excise tax of 50% is assessed against the amount that failed to be distributed. For 2009 ONLY, this excise tax has been waived, thereby making the 2009 RMD "optional".



If you are currently receiving RMDs annually, and wish to take the RMD in 2009, you may do so with no consequences. You do have the option to elect not to receive the RMD if you desire.



Anyone opting not to take an RMD in 2009 will be required to recommence the annual distributions in 2010.



A participant that was subject to the first RMD in 2008, and pushed the distribution out to April 2009 (permissible in the first year of the RMD only), this distribution is still required. The waiver applies only to those distribution applicable for 2009.

A Moment of Reflection

New Year's Eve...a time to reflect upon the past, and look forward to the new...

As I look back at the past 18 months, I am very proud of the direction Wells Thomas, LLC has taken, and I feel the journey ahead will bring out the best in us yet. I am ever thankful to my staff for all of their hard work and dedication to their clients. Not only is the experience of my staff impressive, but the comments I get from clients about the relationships they are building with our staff is a cornerstone of our service model, on which we will continue to build.

The past year has also seen some expansion on the services and activities we have become involved in. In March we began a series of quarterly meetings with local investment advisors, with the intent of providing simple, yet vital, information they can use in supporting their clients' retirement plan needs. I am happy to say that we have already lined up multiple sponsors for 2009, and will continue these quarterly meetings in the coming year.

In a similar vein, I began doing presentations for local broker/dealers and investment advisory firms in Connecticut. These question and answer meetings have topics ranging from "how to sell a retirement plan" to issues of plan design and administration, all with the purpose of providing knowledge and support to investment professionals interested in working with retirement plans. As a non-producing Third Party Administrator, the bulk of our referrals come from investment advisors, so we wish to actively support them in all of their needs for retirement plans.

Other highlights of the year include:

* Rolling out our new website (www.wellsthomas.com), which allows our clients to have greater and easier access to plan data
* Working to develop a relationship with New England Payroll Services, LLC, a payroll company in Hamden, which will streamline data transfers for mutual clients
* Testifying before the Connecticut Commerce Committee at the State Capitol regarding retirement plan matters
* Bringing on new members of our staff to strengthen our position as a local TPA
* Being named one of the select TPAs in Connecticut to offer the American Funds Plan Premier program
* Being selected as one of the few TPAs in the country to become a Strategic Administrator with Nationwide Trust Company

In closing, though there are a multitude of people I would like to thank for their ongoing support and work with Wells Thomas, LLC, I would like to take a moment to thank a special few:

My staff: Nancy, Frank, Margaret, Laurie, Lori, Terri, Tracy and Kris
My family for their support in this wonderful adventure
Those who have continued to support Wells Thomas, LLC with referrals, including: Bonnie, Mike, Glenn, Heidi, Lori, Kevin, Michelle and Roland, to name just a few
And finally, to all of my friends, old and new...

Thank you,
Sean

Congress Passes Economic Relief and Technical Corrections Bill

On December 11, 2008, the House and Senate passed The Worker, Retiree and Employer Recovery Act of 2008 (HR 7327), which will become law when signed by the President. [For a complete copy of the bill, click on the title of this post to be taken to the site.]

This bill includes short term provisions to help individuals and plan sponsors deal with the market downturn, as well as the PPA technical corrections package.

A few of the highlights of the bill are:

*Effective for plans beginning after December 31, 2009, rollovers by non-spouse beneficiaries are generally subject to the same rules as eligible rollovers. This means plans are required to provide a direct rollover option for non-spousal beneficiaries and must provide an IRC Sec 402(f) notice to the non-spousal beneficiaries.

*The requirement that gap period income be distributed on excess deferrals is eliminated. Thus, gap period income is no longer required on excess contributions, excess aggregate contributions, and excess deferrals distributed to satisfy IRS Sec 401(k)/(m) or 402(g).

* Effective for plan years beginning after 2008, defined benefit plans sponsored by small employers (100 or fewer employees) can provide a fixed 5.5% interest rate for determining maximum lump sum benefits under IRC Sec 415.

* The minimum required distributions otherwise due for 2009 under IRC Sec 401(a)(9) would be waived for qualified retirement plans, IRC Sec 403(a) and IRC Sec 403(b) plans, governmental IRC Sec 457(b) plans and IRA's.

As these are just a few highlights of the entire bill, we encourage you to call our office if you have any questions.