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401(k) Update: Q1 2020

January 9, 2020

Administration

2019 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 2019 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 recordkeeper by their specific deadline (typically no later than January 31st, though some recordkeepers have stricter deadlines) 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 the 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.

Contribution Limits Reminder for 2020
As a reminder, the 401(k) contribution limits for 2020 have increased to $19,500 (up from $19,000 in 2019). The age 50+ catch up amount has also increased to $6,500, thereby allowing employees to contribute up to a total of $26,000. For your convenience, we have illustrated below the maximum per pay period deferral amounts based on two common payroll cycles.

2020 Target Contribution:

$19,500
(standard)

$26,000
(age 50+)

24 pay periods:

$812.50 

$1.083.33

26 pay periods

$750.00 

$1,000.00

 

401(k) News

Passage of the SECURE Act
The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act of 2019 has been passed and signed by the President.  The law is effective January 1, 2020. Below are some of the highlights that affect established 401(k) plans. Key provisions to be aware of are:  

Withdrawals:
  • Penalty-free withdrawals up to $5,000 are now allowed for expenses related to the birth or adoption of a child.
  • Penalty-free withdrawals are now allowed for those affected by a Federally (“FEMA”) declared disasters. In addition:
    • The maximum withdrawal amount raised to $100,000,
    • Disaster-related distributions may be rolled back into a qualified plan or IRA, and
    • The participant loan limit for those affected by disaster is increased to $100,000.
Safe Harbor:
  • Plans can now be amended mid-year to become a Safe Harbor plan, provided the employer commits to a minimum 3% non-elective contribution.
  • Annual notices are no longer required for non-elective contribution Safe Harbor plans.

Part-time Employees: the act extends coverage to long-term part-time employees. Any part-time employee who has worked 3 consecutive years of at least 500 hours per year is permitted to participate.

Older Participants:
  • The age at which required minimum distributions (“RMD”) must be made is now 72. This is effective with respect to individuals who attain age 70½ after December 31, 2019.
  • There is no longer a maximum age limit on contributions to Individual Retirement Accounts (“IRA”).

Automatic Enrollment: the cap on contributions is increased to 15%.

Stretch IRAs Restricted: Currently, after the death of a plan participant or IRA owner, a non-spouse beneficiary is permitted to stretch the required minimum distributions over the beneficiary’s life based on his or her life expectancy. Under the new law, all amounts held by the plan or IRA must be distributed within 10 years of the plan participant’s or IRA owner’s death. An exception to the 10-year distribution rule may be provided for an “eligible beneficiary.”

For more details on these provisions, please visit our SECURE Act blog post.

Market Update

All major asset markets rose in 2019 through a combination of solid, if unspectacular, US economic growth, a reversal of Fed policy from tightening to easing and the apparent trade truce between the US and China. Among equity markets, the US S&P 500 Index ended the year up 28.9%, while overseas the MSCI EAFE (Developed Markets) Index rose 18.43% and the MSCI Emerging Markets Index rose 16.27%. It was a similar picture in fixed income: the BarCap US Aggregate Bond Index rising 8.7%, while overseas the BarCap Global Aggregate ex-US Bond Index rose 4.6%. Economic fundamentals both in the US and overseas look little changed at the beginning of 2020, but the significant rise in both equity and fixed income markets seen in 2019 will likely be much more difficult to replicate in the year ahead. 

 US GDP growth in Q4 2019 is expected to come in at around 2.0% YOY, down from the peak of 3.2% YOY growth in Q2 2018. Annual US GDP growth at 2.0% may seem unspectacular compared with the average annual GDP growth rate of 2.7% since 1969 as well as the average 2.3% growth rate since the beginning of the current expansion in 2009. However, it is significant to note that the 2010’s is the only decade in US economic history not to have experienced a recession. With unemployment at 3.5% in December, inflation stable at between 1.5% to 2.0%, and none of the major cyclical sectors of the economy (auto sales, housing starts, business spending, inventories) over-extended, most analysts, including the Fed in its December 2019 projections, expect the US economy to be able to maintain this 2.0% rate of GDP growth in 2020. 

Overseas economies did not fare as well as the US in 2019, being much more directly affected by trade tensions and political uncertainty, most notably Brexit, which put a damper on European as well as Emerging Market economic growth. EU economic growth fell from 0.4% in Q1 to 0.2% in Q3 and looks to come in at or just below 1% for all of 2019, which is about 0.5% worse than 2018. Similarly, Chinese economic growth has been falling from 6.5% in 2018 to 6.0% YOY in Q3 2019. There was encouraging news in December on the trade front:  an agreement to ratify a replacement of NAFTA, a decisive result in the UK election opening the way for a smooth Brexit, and a phase one agreement on tariffs between the US and China. In addition, overseas central banks and governments have sought to stem the deterioration in growth by re-instituting easier monetary and fiscal policies in the second half of the year, leading to optimism that perhaps the worst is over in terms of the deterioration of overseas growth.       

The danger to the US economy is that the American consumer stops spending and business stops hiring. Consumer spending has more than offset the reduction in business non-residential investment spending and kept economic growth positive. Low unemployment, rising wage growth and the residual effects of recent tax cuts may be contributing to consumer confidence. However, research has shown that that business freezing hiring is a much stronger leading indicator of a possible recession than layoffs. What will be important to watch are the non-farm payroll numbers, currently running at between 120,000 to 150,000 per month. A significant decrease in non-farm payrolls may well be the trigger that eventually causes the US consumer to stop spending and the American economy to decline from current levels and even turn negative.       

Until that time, though, asset markets seem likely to see continued volatility and will struggle to match the impressive gains of 2019. The steep sell-off in US equities at the end of 2018 meant that there was quite easy ground to be made up in 2019. US equities are now fully valued and trading at 18.18x forward earnings, well above the 25-year average of 16.28x. The abrupt U-turn by the Fed from raising rates in 2018 to lowering rates three times in 2019 fueled the rally in US bond markets.  Most analysts now expect Fed policy to be on hold for 2020 as long as economic growth holds at these levels and inflation remains subdued. The focus for US asset markets in 2020 will likely be on quality of earnings for equities and quality of credit for fixed income. There well could be opportunities in overseas equity and fixed income markets if recent trends continue positively. In any case, the importance of a well-balanced portfolio that include some downside protection has never been more important than at the beginning of this new decade.

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