401(k) Newsletter - First Quarter 2018
by Vita, on January 9, 2018
2017 Year-End Census Information Due Now!
It’s that time again! Perhaps one of the most pressing compliance matters is the submission of census data to begin compliance testing. Sponsors of calendar-year 401(k) plans subject to the Average Deferral Percentage (“ADP”) or Average Contribution Percentage (“ACP”) Tests (i.e. all Non-Safe Harbor Plans) must submit their 2017 census data now to ensure timely results and processing of any potential refunds.
Be sure to submit your annual census data and compliance questionnaires to your record-keeper by their specific deadline (generally January 31st) to ensure delivery of testing results before March 15th. Any ADP refunds made after March 15th will be subject to a 10% employer excise tax. Please contact Vita Planning Group if you have questions regarding your record-keeper’s requirements.
For other important dates on the horizon, please check out our online Compliance Calendar.
The Tax Cuts and Jobs Act signed into law by President Trump on December 22, 2017 included two main provisions related to 401(k) plans: the maintenance of the tax deferred status of participant contributions and the extension of a 401(k) loan default to the date a participant is required to file their taxes.
There was a significant debate during the negotiation of the provisions of the tax bill whether to eliminate the tax-deferred status of participant salary contributions in order to help make up for revenue that would be lost as a result of individual and corporate tax cuts. The tax treatment of 401(k) salary contributions was not changed: contributions are still deducted from gross income and remain untaxed until funds are withdrawn during retirement.
Under current rules for 401(k) plans, if a participant’s account balance is reduced to repay a plan loan and the amount of that offset is considered an eligible rollover distribution, the offset amount can be rolled over into an eligible retirement plan - however, the rollover has to occur within 60 days. The tax act extends the 60-day deadline to the latest date on which the participant can file his or her tax return for the year of the loan default.
On another note, there are provisions in the tax law related to “pass through” income for sole proprietorships, LLCs, partnerships and S corporations that could make individual decisions regarding the efficacy of 401(k) contributions more difficult. These provisions are complex and quite subjective depending on individual circumstances, especially due to the phase-out limits for “professional services” (lawyers, doctors, consultants, etc.) for business owners, making over certain levels of income. We recommend those individuals for whom “pass through” income is applicable take professional tax advice before making any decision regarding their use of 401(k) or other qualified retirement savings plan.
2017 ended as it began: rising domestic and international equity prices with interest rates steady despite central bank tightening and rising commodity prices. The biggest factor affecting markets at the beginning of 2018 is the impact of the US tax reform bill signed into law in December 2017. Generally, both the enacted tax reform and the federal budget, currently being debated in the US Congress, are seen as supportive of economic growth and equity markets in the US. Overseas economies also continue to show improving economic growth and attractive valuations, which argues for continued strong equity markets in both developed and emerging markets. Longer term, supply side constraints in the US and rising interest rates globally may start to take some of the luster off current bull markets as we enter 2019.
In the short-term, the lowering of US corporate tax rates and the financial stimulus currently proposed in this year’s federal budget is expected to help US GDP growth. US GDP growth is forecast to rise from the 2.3% year-over-year (“YOY”) registered in Q3 2017 to 3.5% in the first half of 2018, with estimates for the full-year 2018 coming in at or around 3%. This is expected to translate into continued strong corporate earnings in 2018. Full-year 2017 S+P 500 earnings per share (“EPS”) are estimated at $1.25; full-year 2018 EPS is already estimated at $1.45. The weakening of the US dollar and the rise in energy prices that we are seeing as we begin 2018 are also supportive of improved S+P 500 corporate earnings.
Over the longer-term, it is likely that supply side factors, most notably the lack of US workers, will impinge on US economic growth. US unemployment stood at 4.1% in December 2017, a 0.6% decline during 2017. With the GDP expectations outlined above for 2018, it would not be surprising to see a similar rate of decline in unemployment, resulting in a possible 3.5% rate at the end of 2018. That would be the lowest rate of unemployment since the early 1950s. In addition, the lack of capital spending during this current economic expansion is resulting in falling productivity growth in the US. Both of these factors point to diminished US GDP growth, possibly as early as 2019.
Overseas economies are expected to continue their strong performance in 2018. The Global Purchasing Managers’ Index for Manufacturing shows the Euro Zone at 60.6% and Emerging Markets at 52%, the highest figures since February 2011 (a reading over 50 for either of these numbers indicates expansion and is typically viewed as a positive indicator by economists and investors). Eurozone GDP growth is approaching 3% YOY for 2017 and unemployment was down to 8.8% in November; aggregate emerging market GDP growth is approaching 5% with China leading the way at 6.8% YOY growth in Q3 2017. Improved economic figures and equity valuations at or below 25 year averages should result in continued buoyant equity markets in both developed and emerging countries.
2018 dawned with the S+P closing above 2,700 for the first time ever, following an 18.7% rise in 2017. Still, this result was dwarfed by emerging market equities returning 37.8% (MSCI EM) in 2017 and developed markets, 25.6% (MSCI EAFE). More perplexing was the record of fixed income markets. In both word and deed, the FED has sought to impress upon markets its intent to raise interest rates and decrease its assets. In fact, there were no interest rate cuts among any of the 10 top developed market central banks in 2017. Yet the 10-year US Treasury started 2017 at 2.45% and ended the year at 2.40% and spreads relative to high yield and corporate bonds narrowed and remained well below historical averages. Is this the year that longer term interest rates back up? If US tax reform results in the hoped-for repatriation of overseas corporate income and if foreign central bank tightening continues to lag the US, then it could still be some time before the US yield curve begins to steepen. In the meantime, 2018 looks likely to see a continuation of the now 9-year bull market in US equities, as well as strong overseas equity markets.