| ...from the HR Perspective |
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| Human Resource Update |
October 2017 |
Unintended Consequences
Or, Government Doesn't Seem to Look Downstream
I believe most laws are made to better the welfare of the nation (pause for laughter). If they were not, they would never be proposed, discussed, argued, compromised (yes - even today) and passed. So, why do many produce results that are unexpected and untoward? It seems to be what some call tunnel vision, a rush to get something done due to pressure from groups that (hopefully) have good intentions, or bowing to the wishes of those who will re-elect them. We can spend a lot of time on that last one - should a politician's sole duty be to do what he/she perceives are the wishes of his/her constituents, or should part of that duty be to inform and possibly educate them?
From a pure business viewpoint, we have seen a number of recent laws that have had unintended consequences, and more that are in the breech ready to be fired at us. Some examples are Obamacare which resulted in many employees having their work week cut to 28-29 hours, minimum wage laws which have caused some to lose their jobs entirely, overtime rules that caused some companies to revise schedules, jobs and hours resulting in a loss of hours and in some cases actual jobs.
The problem is that while the intended consequences, to make companies give more or pay more, were successful in some measure, the unintended consequences have truly hurt those whom the laws were to have benefited. Government did not look downstream to see what might happen. One of the things Congress is contemplating at this moment is to limit the deduction for 401(k) contributions to $2,400 or so. Anything over that amount would be considered a Roth contribution (the contribution is not deductible now, but the contribution and any earnings are not taxed when paid out). While this sounds like it might be fine, the unintended consequence is a possible reduction in the amount of contributions over $2,400, as to contribute the same amount, the employee would have less take-home pay (after income taxes have been taken-out). Other proposals such as the lowering of pass-through income tax rates, could cause some companies to disband their retirement plans as they no longer have a tax incentive to maintain a plan. The unintended consequence is the loss of a retirement planning vehicle for the rank and file employee.
So, what can you do about this? If you become aware of a proposal that in any way could hurt your organization, speak up, write, or email your representatives. Or better yet, do all three. You can find your representatives' contact information here:
If we can provide any information or answer any questions you may have regarding proposed legislation, please call.
Sincerely,
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If you find value in this newsletter please let us know. Feel free to call me with a comment and/or ask a question at any time (908-689-4200) or send me an email (myates@mfyco.com). We offer this timely information as another benefit of your relationship with our company. If you feel a friend or colleague would benefit from receiving our newsletter, please feel free to forward a copy.
You can view all of our newsletters by clicking the 'newsletter archives' link at our company website www.mfyco.com.
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When You Should Use the Fluctuating Workweek Method
for a Regular Rate of Pay
As we all know, overtime can be contentious. Recently, the 5th Circuit Court of Appeals recently noted that "Calculation of the correct 'regular rate' is the linchpin of the FLSA overtime requirement, adding that it is "an often tricky calculation that the Supreme Court has called perplexing."
There are two methods of calculating a nonexempt employee's pay if paid a salary. The two methods are:
- Fixed Workweek Method - the regular rate is computed by dividing the salary by the number of hours the salary is intended to compensate for, or
- Fluctuating Workweek Method - there is no fixed number of expected work hours. Rather, the employee is compensated for all hours worked as a whole, though the hours vary from week to week. Therefore, the fluctuating workweek method calls for a weekly computation of dividing the salary by the number of hours worked in a particular week to determine the regular rate of pay, which would then be used to determine the overtime rate of pay.
When using the Fluctuating Workweek Method be sure that you are classifying your employees correctly and that they truly have a "flexible work week". Working a set 38-hours one week and a set 48-hour work week the next is not necessary "flexible" since it is "fixed."
According to Hills v. Entergy Operations Inc.
, 5th Cir., No. 16-30924 (Aug. 4, 2017).
The employer was using the Fluctuating method and the 5th Circuit reversed the district court's summary judgement stating that the fixed workweek method should have been used since the schedule was a fixed schedule that merely alternated from week to week which did not amount to a fluctuating workweek.
Click here for more information on this case.
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Invitation to MFYCO Facebook
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Participant Loans from Qualified Retirement Plans - Possible Effects of Various Contingencies
(Note: The following is intended to be a general discussion and not an attempt to provide legal advice.)
In this article, we will discuss how the effects of the following life events should be considered when preparing a qualified plan's written participant loan policy:
- Payment Default
- Termination of the Participant from employment
- Death
- Retirement
- Divorce
- Leave of Absence
- Military Leave
- Natural Disaster
- Termination of the Retirement Plan
Payment Default
Generally, the loan must be repaid within five years under a schedule of level payments made at least quarterly. This schedule may be extended if the purpose of the loan is to purchase a primary residence.
If the participant fails to make any of the payments, the loan goes into default. At this point, if the participant is unable to repay the remaining loan, then this remaining unpaid balance is considered to be a "deemed distribution," which is reported to the IRS using Form 1099-R. This is a taxable event. Since the original loan was made using untaxed funds from the retirement plan trust, the participant must pay income tax on the outstanding loan balance. In addition, if the participant is age 59 1/2 or less, there is an additional "early distribution tax" of 10%.
In addition, despite the defaulted loan being a deemed distribution to the participant, it does not go away. The remaining loan balance is still counted as an asset of the plan and continues to accrue interest. The participant is obliged to keep paying on the loan even after a deemed distribution, until the loan is repaid or a distribution-triggering event occurs which would allow the plan administrator to offset the loan with the distribution balance. However, the payments made after the deemed distribution are counted as participant's tax basis under the plan.
Termination of the Participant from the Company
Companies that sponsor qualified retirement plans have some degree of latitude in how those plans are constructed. This also applies to the company's policy concerning participant loans. Some companies may disallow loans completely from their plans, especially from their defined benefit pension plans. The reason for this is because traditional defined benefit (DB) pension plans have much more complicated benefit and payout structures than defined contribution (DC) plans. These benefits provide the security that allows the participant loan to take place, so the more complicated it is for the security to be paid, then the more complex and expansive the loan policy has to be.
Most companies with DC plans, or hybrid plans such as Cash Balance Pension Plans, allow loans from these plans. The loan policy regarding terminating participants would normally require that the loan be repaid immediately upon termination, utilizing a portion of the vested benefit distribution. Since the initial loan amount could not exceed 50% of the participant's benefit that would be payable upon termination of employment, there should be sufficient funds to repay the loan.
For companies that allow participant loans from their DB plans, their policy regarding loans will depend upon the DB plan provisions. For example, a DB plan that normally pays a vested terminated participant a lump-sum equal to the value of their accrued benefit, the repayment would be similar to DC plans above. On the other hand, if the DB plan has no lump-sum payouts (other than de minimis), then special provisions will be necessary in the loan policy to ensure the loan will be repaid.
Death
A participant's death does not diminish the outstanding loan balance. For a DC plan, a portion of the death proceeds would be utilized to repay the loan. For DB plans, death benefits can be extremely complex, again requiring detailed and complicated wording in the company's loan policy describing how the loan must be repaid.
Tax treatment for the repayment is the same as for the "deemed distribution" above, except that the early distribution tax does not apply.
The portion of death benefit equal to the amount of the loan cannot be rolled over into another retirement plan.
Retirement
A participant who is retiring at Early or Normal retirement age and still has an outstanding loan balance is likely to be treated similar to the terminating participant above. The loan policy language would require immediate repayment of the loan, utilizing a portion of the retirement benefits.
If the retirement distribution is paid out in a lump sum, and the participant is able to pay off the loan amount using after tax funds, then the remainder of the distribution may be rolled over into another qualified plan, depending upon age and payout status (i.e. taking into account any required minimum distribution rules).
Divorce
A common feature of divorce proceedings is the production of a "Qualified Domestic Relations Order," usually referred to as a QDRO. A QDRO is usually necessary if either or both of the parties participated in a qualified retirement plan during their term of marriage. The purpose of the QDRO is to describe how much of each plan's assets will be allocated to each participant as part of the divorce proceedings.
If there is a participant loan still outstanding at the time of divorce, the QDRO must address how this plan asset will be allocated. The QDRO must be drafted with complete understanding and full agreement from both parties on this sensitive issue. Usually, a QDRO will require that the plan participant maintain the repayment obligation under the terms of the original promissory note, with the alternate payee receiving only liquid assets. However, each situation and subsequent solution is unique.
Leave of Absence
During an approved leave of absence, the loan repayments may be suspended for up to one year. However, this suspension does not extend the five-year repayment period. Upon resumption of employment, the repayment amount is re-calculated to pay off the loan at the original date, considering the missed payments.
Military Leave
If the participant is in the military and is called into active duty, the employer may suspend the loan payments for the entire period of active service. When the participant returns to work, the five-year loan period may be extended to include the period of service and with no re-calculation of the original payment amount.
Natural Disaster
Plan Termination
Since plan termination involves the liquidation of plan assets, and participant loans are a class of asset, then all outstanding loans must be called. Similar to the retirement situation above, a portion of each participant's lump sum termination amount can be utilized to pay off the loan balance, after tax.
However, a terminating under-funded DB pension plan covered by the Pension Benefit Guaranty Corporation may run into a difficult situation if its assets are insufficient to pay the full value of benefits for all participants, some of whom have outstanding loans. The PBGC has broad powers to investigate company practices regarding its plans, and could bring action against a company that has not exercised due diligence in their administration.
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Nevada Pregnant Workers' Fairness Act Takes Effect
The Nevada Pregnant Workers' Fairness Act (NPWFA) went into effect October 1. The NPWFA applies to employers with 15 or more employees* and generally expands the scope of protections provided to female employees for pregnancy, childbirth or related medical conditions (protected conditions). The act makes it an "unlawful employment practice" for an employer to:
- Refuse to provide a reasonable accommodation to a female employee or applicant for a protected condition.
- Take adverse action against or deny an employment opportunity to an otherwise qualified female employee or applicant due to a request for, or use of, a reasonable accommodation.
Like the Americans with Disabilities Act, the NPWFA requires the employer and employee to engage in a "good faith and interactive process" to determine an effective and reasonable accommodation. This process is triggered when a female employee or applicant "requests an accommodation" for a protected condition. The employer is permitted to require a statement from the employee's physician concerning the specific accommodation recommended.
An employer may not require a female employee or applicant affected by a protected condition to accept an accommodation if she has not sought one or chooses not to accept one. And, the employer is not required to create a new position or discharge or transfer any employee with more seniority unless the employer has or would take similar action to accommodate other classes of employees.
Employers are also prohibited from requiring female employees affected by a protected condition to leave employment if there is a reasonable accommodation that would allow the employee to continue to work-although leave can be a reasonable accommodation if the employer and affected employee agree.
Finally, employers subject to the act are required to provide two distinct written or electronic notices to inform:
- Employees that they have the right to be free from discriminatory or unlawful employment practices pursuant to the NRS 613.335 and Sections 2-8 of the act.
- Female employees that they have the right to a reasonable accommodation for pregnancy, childbirth or related medical condition.
The first notice must be provided to new employees upon beginning employment. The employer must provide the second notice within 10 days after the employee notifies her immediate supervisor that she is pregnant.
The employer is required to post notice of these rights in a conspicuous place at its place of business and in an area accessible to employees.
*the act does not specify if only companies having a physical facility in NV must comply.
SHRM.com
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CYBER SECURITY: IT'S NOT A QUESTION OF WHETHER
YOU'LL BE ATTACKED, BUT WHEN
Businesses keep a lot of sensitive personal and business information in both paper and digital files. We don't keep paper for the aesthetics of rows of file cabinets, or digital files for the joy of typing and scanning, we keep them because we need to retain certain information in the ordinary course of conducting our businesses, and because the law requires us to keep much of it. And by all accounts, the information is increasingly being stored electronically, on computers, external hard drives, flash drives, phones, and in the "cloud". Of course, we not only store, but also transmit information electronically and, increasingly, we're seeing governmental agencies and the courts mandating electronic filing.
Electronic storage and transmission of information can be more efficient, faster, more mobile, and "green", but there lurks the dark fact that at some point in time, our networks, computers, and other electronic storage devices will be attacked in an attempt to destroy, steal or hold information for ransom. A consensus among security experts is emerging: it is not a question of whether we'll be attacked, but when, and then how to respond and recover. Depending on the type of attack and the information affected, the consequences can range from being nettlesome, to dooming for our business operations, and also our employees, vendors, customers, and anyone else whose information we store or transmit. Fortunately, the news isn't all doom and gloom. There are steps that you can reduce the risk of an attack, and to mitigate the damage in the event of one.
The Federal Trade Commission (FTC) has the authority to regulate cyber security under the Federal Trade Commission Act. Its Rules require businesses to keep consumer information secure, and also hold them responsible for ensuring their affiliates and service providers safeguard information in their care. Rules also require proper disposal of information by taking reasonable measures to protect against unauthorized access to or use of information in connection with its disposal.
In its publication, "Protecting Personal Information: A Guide for Business", the FTC offers advice on creating and implementing a plan for safeguarding personal information. A sound data security plan is built on five key principles. (1) Take Stock: Know what personal information you have; (2) Scale Down: Keep only what you need; (3) Lock It: Protect the information that you keep; (4) Pitch It: Properly dispose of what you no longer need; (5) Plan Ahead: Create a plan for responding to security incidents.
Another FTC publication, "Start With Security - A Guide For Business", provides 10 lessons, distilled from 50 law enforcement actions it has taken, on vulnerabilities affecting companies and guidance on how to reduce risk. (1) Start with security. Don't collect personal information that you don't need, hold on to it only as long as you have a need for it, and, don't use personal information when it isn't necessary. (2) Control access to data sensibly. If there is a legitimate business need to hold onto sensitive data, restrict access to it to those who must use it, and limit administrative access to systems. (3) Require secure passwords and authentication. Store passwords securely; suspend or disable user credentials after a certain number of unsuccessful login attempts; and protect against authentication bypass. (4) Store sensitive personal information securely and protect it during transmission. Sensitive information must be kept secure throughout its lifecycle using industry-tested and accepted methods and ensuring proper configuration. (5) Segment your network and monitor who's trying to get in and out. (6) Secure remote access to your network. Network security is only as strong as the weakest security on a remote access computer, so appropriate endpoint security is essential. (7) Apply sound security practices when developing new products. Before going to market, insure that your engineers are trained in secure coding, follow platform guidelines for security, verify that privacy and security features work, and test for common vulnerabilities. (8) Make sure that your service providers implement reasonable security measures, put it in writing, and verify compliance. (9) Put procedures in place to keep your security current and address vulnerabilities that may arise. Security is an ongoing process. It imperative to update and patch third-party software and to respond quickly to security warnings. (10) Secure paper, physical media, and devices. Securely store sensitive files, protect devices that process personal information, keep safety standards in place when data is en route, and dispose of sensitive data securely.
The National Institute of Standards and Technology (NIST), an agency of the U.S. Department of Commerce, offers a number of steps to take to safeguard information. Ransomware is a form of malware that uses tools such as encryption to hold data hostage, usually in exchange for some kind of payment. Some will try to steal data; some will delete files; and some will lock the screen, inform the victim that the computer has been compromised, and usually give some instruction on how to get the data back. Ransomware can steal consumers' data on the network and is therefore a serious risk. Phishing scams are the most common way in which ransomware is delivered, and it is accordingly critical to develop a plan of defense, including a combination of training and education, cyber hygiene, and backups. (1) Train employees to be cautious when online, and not to click on things if they don't know where they are coming from, especially if they are coming from outside of the organization. (2) Backups are key to being able to recover from an attack, but to be effective they must be done regularly and routinely, and kept separate from the network. Paying Ransomware offers no guarantee that you will get your data back, and some who pay are only met with increased demands, or their data is deleted anyway.
The NIST Cybersecurity Framework is a risk based compilation of standards and guidelines to identify risks and improve security practices. It offers a way to identify risks, set goals, and develop a plan to address them. It requires companies to assess and mitigate risk in ways that are reasonable in light of the complexities, in light of the type of information held, including its volume and sensitivity, and in light of tools available to address risks and improve data security. Essentially what the FTC requires is risk assessment and mitigation, which is exactly what the NIST Cyber Security Framework requires.
Protecting business, employee, customer, and vendor sensitive information is not just good business sense; failure to take reasonable precautions can have devastating consequences in terms of administrative agency action and private litigation.
And there's an added benefit. In 2015, the Internal Revenue Service (IRS) issued an Announcement that it would not assert that an individual whose personal information may have been compromised in a data breach must include in gross income the value of the identity protection services provided by the organization that experienced the data breach, and would not assert that such amounts must be reported on an information return such as Form W-2 or Form 1099-MISC. In 2016, the IRS extended its earlier announcement to include the value of identity protection services provided to employees or other individuals before a data breach occurs.
Since many data breaches occur as a result of employees' actions in mishandling emails, or their use of the internet for non-business related matters, education is a key part of your cyber security plan. By providing identity protection services, you will not only be providing a valuable benefit, but will be instilling in your employees the sense that you take data protection very seriously and so must they. Your employees will enjoy this protection tax-free (State Law may vary), and you will also obtain a business deduction for the expense, making this benefit a valuable investment in your company's security.
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What would you like to see in a future issue?
Contact our office with your suggestions.
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2017 Retirement Plan Limits
All limits are based on the calendar year.
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2017
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2016
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2015
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Maximum Annual Defined Benefit
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$215,000
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$210,000
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$210,000
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Maximum DC Annual Addition ($$)
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$ 54,000
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$ 53,000
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$ 53,000
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Maximum 401(k) Deferrals
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$ 18,000
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$ 18,000
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$ 18,000
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Older EE Catch-Up Contribution
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$ 6,000
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$ 6,000
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$ 6,000
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Maximum Plan Compensation
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$270,000
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$265,000
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$265,000
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Highly Compensated Threshold
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$120,000
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$120,000
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$120,000
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Key Employee in a Top-Heavy Plan
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$175,000
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$170,000
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$170,000
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Income Subject to Social Security Tax
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$127,200
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$118,500
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$118,500
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PBGC Maximum Monthly Guarantee*
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$5,369.32
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$5,011.33
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$5,011.33
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Maximum DC Annual Addition (%)
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100%
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100%
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100%
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Social Security Tax - Employee
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6.2%
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6.2%
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6.2%
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Social Security Tax - Employer
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6.2%
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6.2%
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6.2%
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Medicare Tax**
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1.45%
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1.45%
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1.45%
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DC Plan Deduction Limit
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25%
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25%
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25%
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Definition of Compensation for DC Plan Deduction Limit
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Includes
Deferrals
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Includes
Deferrals
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Includes Deferrals
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*Life Annuity at age 65
** Individuals with earned income over $200,000 pay an additional 0.9% in Medicare taxes
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If you have not received our business card with these numbers printed on it and would like one, please let us know! We would be happy to mail you one (or a few to share!)
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about MFYCO ...
- Michael F. Yates & Company, Inc. can help you with a variety of services ranging from retirement plans to providing results-oriented survey instruments, training and development programs for your employees. Our products and services are intended to help you maximize the effectiveness of your Human Resources function.
- These products and services incorporate our years of experience so that you receive rapid results and exceptional value. From onsite consulting, to strategic business integration, to Web enablement, we understand how Human Resources can be applied to solve your problems and achieve your goals. As a result, we can help you get the most out of your investment and turn your most precious resource into a competitive advantage.
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We offer Consulting, Retirement Planning, Pension and 401(K) both qualified and non qualified Plans, Welfare Plans, Communications, Computer Systems, Executive Plans, Compensation, Mergers, Acquisitions, Divestitures and Other Services.
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We offer a true and honest, Client Partnership.
Take the Michael F. Yates & Company, Inc. challenge!
Call us today ... 908-689-4200
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Michael F. Yates & Company, Inc.
_________________
101 Belvidere Avenue
P.O. Box 7
Washington, NJ 07882-0007
908-689-4200
fax: 908-689-6300
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Our staff and firm are proud members
of the following professional organizations:
Society of Actuaries
American Society of Pension Professionals & Actuaries
Society for Human Resource Management
GAPS (Global Association Pension Services)
WorldatWork
American Management Association
National Federation of Independent Business
Better Business Bureau
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The site ("from the HR perspective" hence herein referred to as MFYCO.com) is made available by Michael F. Yates & Company Incorporated. All content, information and software provided on and through 'from the HR perspective' and MFYCO.com ("Content") may be used solely under the following terms and conditions ("Terms of Use".)
YOUR USE OF THIS WEBSITE CONSTITUTES YOUR AGREEMENT TO BE BOUND BY THESE TERMS AND CONDITIONS. IF YOU DO NOT AGREE TO THESE TERMS, YOU SHOULD IMMEDIATELY DISCONTINUE YOUR USE OF THIS SITE.
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"Human Resources provides the leadership, supportive services, guiding principles, policies, structures and standards needed for a quality organization to survive in today's business environment."
MFYCO PRIVACY POLICY
Michael F. Yates & Company, Inc.
believes strongly in protecting the privacy of its users.
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Concluding Note As always, any statements regarding federal tax law contained herein are not intended or written to be used, and cannot be used, for the purposes of avoiding penalties that may be imposed under federal tax law or to market any entity, investment plan or arrangement.
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