U.S. tax reform – 401(k) plans saved from the chopping block?

For the last few weeks, U.S. tax reform deliberations put 401(k) retirement plans on a roller coaster ride. Rumors abounded, including, for example, whether legislators would impose new contribution caps, or eliminate pre-tax contributions altogether.  Legislators often have targeted the tax-advantaged status of retirement savings plans as a revenue raiser to pay for federal programs and competing tax breaks.  The House Republicans’ release of the Tax Cuts and Jobs Act (the “Act”) on November 2 appears to have stopped the roller coaster – at least temporarily.

The Ways and Means Committee is touting that the “bill retains the popular retirement savings options – such as 401(k)s and Individual Retirement Accounts – as Americans know them today.”  This is clearly the case.  However, claims that there are no changes to 401(k) or other retirement savings plans are not quite accurate.  While the current version of the Act does not lower 401(k) contribution limits or require the Rothification of 401(k) plans as had been rumored, it does contain some changes to retirement savings rules – many of which are pulled from the 2014 tax reform effort spearheaded by former Ways and Means’ Chairman Dave Camp.  Most of these provisions appear to have been included to accelerate the tax inclusion of retirement savings and, as a result, reduce the Act’s price tag. Continue Reading

U.S. Tax Reform – Death to Nonqualified Deferred Compensation?

The recently released Republican tax reform proposal (H.R. 1 – Tax Cuts and Jobs Act) has a provision that would effectively be a death knell for many common types of nonqualified deferred compensation plans.

Under the Bill, nonqualified deferred compensation will be subject to income tax when there is “no substantial risk of forfeiture”.  In plain English, this means nonqualified deferred compensation will be taxed when, or as, it becomes “vested”, instead of when it is paid.  (See Section 3801 of the Bill, which would enact new Internal Revenue Code Section 409B.)

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Threat to 401(k) plans?

With U.S. tax reform on the horizon, there are some reports that lawmakers are considering limiting annual pretax contribution limits to 401(k) plans to $2,400.  The current tax code allows most workers to contribute up to $18,000 on a pretax basis to 401(k) plans.  At this time, it is uncertain whether there will be any changes proposed.

On Monday, October 23rd, President Trump tweeted: “There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!”  Then, on Wednesday, October 25th, President Trump told reporters: “Maybe we’ll use it as negotiating but trust me … there are certain kinds of deals you don’t want to negotiate with”.

If there is a change to drastically reduce the amounts employees can contribute pretax to 401(k) plans, employers may look to other types of retirement plans in order to satisfy their employee retirement plan needs. For example, some employers may look to make contributions to a profit sharing plan instead of an employee bonus or salary increase. Also, employers may start looking to nonqualified deferred compensation retirement plans that allow employees to contribute above the pretax limits imposed by the Internal Revenue Code.  We will continue to monitor this and other tax reform developments.

Trustees – you are not exempt from the money laundering regulations. Do you know what actions you need to take?

Money LaunderingA lot has happened since 26 June 2017. We’ve had Wimbledon, summer holidays, a total solar eclipse, Leeds and Reading Festivals, the summer transfer window closed (football, not pensions), the start of the autumn term at school, the World Black Pudding Throwing Championships, Proms in the Park and we are now nearly into half term.  By contrast, little seems to have happened in terms of pension plans gearing up for the latest money laundering regulations which came into force on that date.

There is a lot to think about. Not least, that failure to comply carries criminal sanctions and could result in trustees being sentenced to 2 years in prison (worst case scenario).

Read on for our ten step compliance plan for trustees of UK occupational pension plans.

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Pensions myth-busting – overseas transfers

Business man and traveling luggage

Transferring UK pension benefits overseas was already difficult enough, but the new rules announced in the 2017 Budget have added a further layer of complexity. An Overseas Transfer Charge (OTC) applies to overseas transfers that are requested after 9 March 2017 and is generally payable unless the member can show that certain exemptions apply.

The new regime has increased the burden on scheme administrators who were already finding it difficult to process pension transfers, given the requirements to check that independent advice has been received and that the receiving arrangement is not a scam. HMRC has issued some guidance but many areas of uncertainty remain.

Read on to see the top 4 overseas transfer myths that we’ve encountered recently.

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A Game of (Pensions) Thrones – winter is coming…

Dragon

Well, the leaves are falling, there’s a bit of a chill in the air, and the shops are already trying to make us buy mince pies. That can only mean one thing…winter is coming. Whilst the hugely popular TV show “Game of Thrones” may be off UK TV screens again for a while, the drama continues within some of the major UK pensions institutions doing battle for supremacy. So who will prevail and what lies beyond the Wall?

  • The joining of three Houses: The government announced in the 2016 Autumn Statement a proposed merger of the Pensions Advisory Service, Pension Wise and the Money Advice Service to form a single public body offering advice on pensions, debt and personal finance generally. Following a recent consultation, it has now announced that the merger will be going ahead. There is certainly logic in having a single, convenient reference point for dealing with all financial questions. However, there is a risk that some of the good work in promoting Pension Wise following the introduction of the new DC pension freedoms may be undone, at least in the short term. Given the specialist nature of pensions advice (and advice in other areas for that matter, such as personal insolvency), concerns have also been expressed that the new service could become a “jack of all trades”. The new service will therefore need to ensure that its advisers are provided with adequate resources and training.

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“Another fine mess” – higher monetary penalties for professional trustees

Uncover The Facts

Are you considered to be a “professional trustee”? Well the answer to that question has just become a whole lot more important! The Pensions Regulator has recently published its “Professional trustee description policy”, which aims to provide clarity over who the Regulator would and would not consider to be a professional trustee. The Regulator’s definition can have significant consequences, as it expects higher standards of professional trustees and as a result higher monetary penalties will normally be applied where a professional trustee has failed in its duties. Professional trustees will need to have additional protection in place to reflect this increased risk, for example by way of insurance and indemnities.

Many trustees may therefore wonder “how do I know whether I am a “professional trustee” or not?”. The Regulator’s general description is fairly straightforward: “We consider a professional pension plan trustee to include any person, whether or not incorporated, who acts as a trustee of the plan, in the course of the business of being a trustee”.

However, after this the position becomes a little more complicated and the boundaries between a professional and a non-professional trustee become slightly blurred by the Regulator’s interpretation of “in the course of business of being a trustee”.

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How2 Do Pensions

How2 Do Pensions

To mark Pensions Awareness Day 2017, Squire Patton Boggs launches a series of free “How2 Do Pensions” guides! Each issue will provide a valuable speed brief on a key aspect of UK occupational pensions. The first two instalments summarise employer automatic enrolment duties and how to move to electronic member communications. Further instalments will follow each Tuesday. Watch out for the guides on our Insights page on the firm’s website or on Linkedin or Twitter.

Age ain’t nothing but a number

Pension Pounds

With a whirlwind of changes enforced in the last seven years the state pension age, which remained unchanged from the 1940s until 2010, is yet again in for a shake-up. On 18 July, David Gauke, Work and Pensions secretary announced plans to bring forward the increase in state pension age to 68 – this will come into force between 2037 and 2039. The government fiercely argues its proposals would reduce the expected rise in related spending by 0.4 per cent of GDP by 2039/40 and will make economic savings of £74 billion by 2046/2047 following the outcome of the Cridland report.

The changes fall against a pressurised backdrop of the continuous and rapidly rising life expectancy rate as well as an ageing population causing a surge in the number of people in receipt of a state pension.

What are the implications?

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A crisis of confidence or a question of short memories?

As the central bankers of the world gathered at Jackson Hole last weekend and considered how and when to taper quantitative easing programmes (“just how long do we have to hold these government bonds?” must have been one of their breakout sessions), a salutary reminder of the continuing reality of the financial crisis that began in 2007 came in the form of a very interesting Financial Times report highlighting a Which? survey about consumer trust in various financial products. The banking industry, for so long the unmentionable industry to confess to working in and the prime mover of the crisis, has recovered in consumer confidence in the Which? survey to the point where only 23% of consumers expressed confidence in long term savings, compared to 40% in high street banks. Even energy companies, renowned for being the bad boys of price controls, managed a 30% confidence score.

So what has happened in 10 years to cause this healing of the collective memory of the pain caused worldwide by the financial crisis? And why have pensions and savings fared so poorly?

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