2018 Internal Revenue Code Limitations Update Pilot Defined Contribution Plan Impact Study

Transcription

1 2018 Internal Revenue Code Limitations Update Pilot Defined Plan Impact Study This report updates you on the changes to the Internal Revenue Code (IRC) limits that govern pilot and Company s to the Pilots Retirement Savings Plan (PRSP), which houses the 401(k) s, the 8% Company s and the Money Purchase Plan Account (former Pilot s Money Purchase Pension Plan). By law these IRC limits are indexed to adjust with the Consumer Price Index for All Urban Consumers (CPI-U). It is highly recommended that you read this report, as explanations and examples are provided. This report should not be relied on for investment purposes. Please consult with a qualified financial consultant and tax professional. Contents: Internal Revenue Code (IRC) limits A. 401(a)(17) - Qualified Plan Compensation Limit B. 402(g) - Limit on Employee Pre-Tax Elective Deferrals and Roth 401(k) s C. 414(v) - Catch-Up Employee Pre-Tax Elective Deferral and Roth Limit D. 415(c) - Defined Plan Limit 2018 Over-contribution Scenarios 2018 How & How Much Can I Save Scenarios Q&A A. 401(a)(17) - Qualified Plan Compensation Limit 2017 = $270, = $275,000 The 401(a)(17) limit restricts the total amount of compensation that can be used in determining contributions to the PRSP. This affects the PRSP in two ways: - The 8% Company is based on your compensation, but only up to this limit. You will not receive a Company on compensation in excess of this limit. The maximum Company in any given year equals that year s 401(a)(17) limit multiplied by the Company Percentage. For a pilot earning the compensation at or above the 401(a)(17) limit, the maximum Company is $22,000 in 2018 (it was $21,600 in 2017) with the current 8%

2 Company. When a pilot's earnings exceed the 401(a)(17) limit, the Company automatically ceases contributions to the pilot's PRSP account. This often perplexes pilots the first time they earn above the limit. If you suspect a problem with your PRSP account due to the cessation of Company s, check first to see if your earnings exceeded the 401(a)(17) limit. To find out how close you are to this limit, look at your TOTAL GROSS PAY YTD on your most recent pay notice and subtract the two per diems (pay notice codes of TxblPerDm and & Plt N/T PD), any expense reimbursement and tax gross ups. - After-Tax s (not to be confused with Roth 401(k) s) are limited to the lesser of (a) 20% multiplied by eligible earnings, or (b) the amount that takes you up to the 415(c) limit. So for a pilot earning at or above the 401(a)(17) limit, the theoretical maximum contribution to his or her PRSP After-Tax Account is $55,000 in 2018; however, in practice this amount is lowered by the amount of any Company s, and if elected, any Pilot Pre-Tax/401(k) Elective Deferral and/or Roth 401(k) s and 401(k) Company Matching. Note: The After-Tax s of up to 20% of compensation provides flexibility in the timing of contributions for all pilots and increases the savings opportunity for pilots paid less than the 401(a)(17) limit. WARNING: It is critically important that you use EXTREME care if you contribute to after-tax savings (not to be confused with ROTH 401(k) s). Without careful planning and monitoring, pilot After-Tax s could result in the LOSS of the 8% Company s. B. 402(g) - Limit on Employee Pre-Tax Elective Deferrals and Roth 401(k) s 2017 = $18, = $18,500 The 402(g) limit restricts the total amount a pilot can elect to defer into his or her PRSP Pre-tax/401(k) Account, Roth 401(k) Account, or any combination thereof. All pilots are able to contribute 50% of compensation to their Pre-tax/401(k) Account or Roth 401(k) Account. This provides flexibility in the timing of contributions. Regardless of the percentage you elect, the total amount that can be contributed when adding both Pre-Tax/401(k) Elective Deferrals and Roth 401(k) s together is subject to the same 402(g) limit of $18,500. Example: Say your house is being renovated and you had to zero out your Pre-Tax 401(k) Elective Deferrals and/or Roth 401(k) s to provide cash flow for the work. If you make $240,000 per year, you could wait until you only had two months left in the year and still be able to max out your 401(k) contributions ($18,500) for the year. Please be mindful that the timing in this example used just

3 one income level. Different yearly income and variability in month-to-month income levels may create different timing. C. 414(v) - Catch-Up Employee Pre-Tax Elective Deferral and Roth Limit 2017 = $6, = $6,000 Pilots who are age 50 and older or who will turn age 50 within the 2018 calendar year are eligible to make additional "catch-up" contributions into their PRSP Catch-Up Account. The maximum Catch-Up amount is unchanged from 2017, which is $6,000 in Catch-Up s do not count toward the 415(c) limit defined below, thus providing a separate and additional $6,000 savings opportunity. WARNING: s into your PRSP Catch-Up Account are not turned on automatically when you become eligible. You must log onto click on Manage my money on the left hand tab, then click on Change my paycheck deduction. Once there, you must enter your Catch- Up Elective Deferral or Catch-up Roth percentage under Catch-Up s and click the Continue button. Finally, confirm your actions on the next page. D. 415(c) - Defined Plan Limit 2017 = $54, = $55,000 The 415(c) limit restricts the total amount a pilot and the Company, in aggregate, can contribute to the pilot s PRSP Account. The contributions that count toward this limit are: The pilot's Pre-Tax 401(k) Elective Deferrals The pilots after-tax Roth 401(k) s The pilot's regular After-Tax s The 401(k) Company Matching s ($500) The 8% Company s, and The Company s s associated with the end-of-year excess sick buyback (as defined in CBA Section 14.E.). The excess sick buyback contribution is the last to go in. If the sick buyback causes the 415(c) limit to be exceeded for the year, the pilot is paid cash for the excess amount. As noted in the section above, a pilot s 414(v) Catch-Up s provide a separate and additional $6,000 savings opportunity that does not count toward the $55, (c) limit.

4 2018 Over-contribution Scenarios Worst Case Scenario for a pilot making $300,000 at a constant rate of $12,500/pay period, contributing 20% After-Tax s and 50% Pre-Tax/401(k) s: Pay Period Check Date 1 Pilot 401(k) (Pre-Tax or Roth) Company Matching Pilot After-Tax 20% Company 8% 415(c) Remaining $55,000 January 15 $6,250 $500 $2,500 $1,000 $44,750 January 31 $6,250 $2,500 $1,000 $35,000 February 15 $6,000 2 $2,500 $1,000 $25,500 February 28 $2,500 $1,000 $22,000 March 15 $2,500 $1,000 $18,500 March 31 $2,500 $1,000 $15,000 April 15 $2,500 $1,000 $11,500 April 30 $2,500 $1,000 $8,000 May 15 $2,500 $1,000 $4,500 May 31 $2,500 $1,000 $1000 June 15 $1,000 $0 ($1,000 lost) $0 June 30 $0 ($1,000 lost) $0 July 15 $0 ($1,000 lost) $0 July 31 $0 ($1,000 lost) $0 August 15 $0 ($1,000 lost) $0 August 31 $0 ($1,000 lost) $0 September 15 $0 ($1,000 lost) $0 September 30 $0 ($1,000 lost) $0 October 15 $0 ($1,000 lost) $0 October 31 $0 ($1,000 lost) $0 November 15 $0 ($1,000 lost) $0

5 November 30 $0 ($1,000 $0 lost 3 ) December 15 $0 $0 December 31 $0 $0 WARNING: Be aware that Vanguard totals contributions by calendar year, not by tax year. This can lead to confusion if you use the Vanguard YTD totals as they may include contributions that count toward the prior year s tax limits. 1 Both Pilot and Company s will be deposited with Vanguard within a few days of the check date for the pay period in question. Any Pilot or Company s generated from a Dec. 31 check or the Section 14.E. Excess Sick Surplus Program will be deposited in January. This deposit counts towards the prior year s tax limits because it is based on earnings in the prior tax year. 2 Pilot 401(k) contributions will automatically stop when the sum total of Pre-tax/401(k) s and Roth 401(k) s hits $18,500 in The 8% Company s will stop once a pilot's earnings exceed the 401(a)(17) limit of $275,000. In the Worst Case scenario above, the pilot s own savings filled up the 415(c) bucket causing insufficient room for the Company s full 8% contribution, which should have been $22,000. In total, the pilot lost out on $12,000 of Company money. This pilot's $55, (c) limit was filled with Pilot 401(k) s of $18,500 and $26,000 of Pilot After-Tax s, along with Company Matching s of $500 and $10,000 in the 8% Company s. Safer-Though-Not-Completely-Safe Case Scenario for a pilot making $300,000 at a constant rate of $12,500/pay period, contributing 5% to after-tax savings and 50% to their 401(k): Pay Period Check Date 1 Pilot 401(k) (Pre-tax or Roth) Company Matching Pilot After-Tax 5% Company 8% 415(c) Remaining $55,000 January 15 $6,250 $500 $625 $1,000 $46,625 January 31 $6,250 $625 $1,000 $38,750 February 15 $6,000 2 $625 $1,000 $31,125 February 28 $625 $1,000 $29,500 March 15 $625 $1,000 $27,875 March 31 $625 $1,000 $26,250

6 April 15 $625 $1,000 $24,625 April 30 $625 $1,000 $23,000 May 15 $625 $1,000 $21,375 May 31 $625 $1,000 $19,750 June 15 $625 $1,000 $18,125 June 30 $625 $1,000 $16,500 July 15 $625 $1,000 $14,875 July 31 $625 $1,000 $13,250 August 15 $625 $1,000 $11,625 August 31 $625 $1,000 $10,000 September 15 $625 $1,000 $8,375 September 30 $625 $1,000 $6,750 October 15 $625 $1,000 $5,125 October 31 $625 $1,000 $3,500 November 15 $625 $1,000 $1,875 November 30 $625 $1,000 $250 December 15 $250 $0 $0 December 31 $0 $0 WARNING: Be aware that Vanguard totals contributions by calendar year, not by tax year. This can lead to confusion if you use the Vanguard YTD totals as they may include contributions that count toward the prior year s tax limits. 1 Both Pilot and Company s will be deposited with Vanguard within a few days of the check date for the pay period in question. Any Pilot or Company s generated from a Dec. 31 check or the Section 14.E. Excess Sick Surplus Program will be deposited in January. This deposit counts towards the prior year s tax limits because it is based on earnings in the prior tax year. 2 Pilot 401(k) s will automatically stop when the sum total of Pre-tax/401(k) s and Roth 401(k) s hits $18,500 in In this scenario, the pilot s own savings were kept to an appropriate level within the 415(c) bucket causing there to be sufficient room for the Company s full 8% contribution, which was the maximum possible contribution of $22,000. The pilot lost out on $0 of Company money. The $55, (c) limit was filled with Pilot 401(k) s of $18,500 and $14,000 of Pilot After-Tax s, along with Company Matching s of $500 and $22,000 in the 8% Company s.

7 This last scenario is illustrative, but it s completely unrealistic for pilots to have the exact same pay each pay period during the calendar year. In real life our pay is dynamic. So here is where the "safer-though-notcompletely-safe" wording is explained. Using 5% for your after-tax savings rate will keep you in the ballpark of the 415(c) limit, but due to an administrative processing issue with the timing of the different contribution sources, you can still miss out on some of the 8% Company s if you re not vigilant. The issue stems from the fact that Pilot s are calculated before the Company s. Whichever type of contribution is calculated first fills up the 415(c) bucket first, leaving less room for the other contribution. Remember, when your total Pilot and Company s hit the 415(c) limit, ALL contribution sources are stopped for the year. Let s say in 2018 you ve earned $265,000 YTD, have been consistently contributing 5% in After-Tax s and have already maxed out your Pilot 401(k) of $18,500. You ve been diligently keeping track of your approach to the 415(c) limit and know that YTD your $18,500 in Pilot 401(k) s and $13,250 in After-Tax s, along with the $500 Company Matching and $21,200 in the 8% Company s have your total YTD qualified contributions at $53,450. So, with the (c) limit being $55,000, you have $1,550 of room left in your bucket. So far everything looks great. However, the administrative issue described above may or may not be possibly lying in wait for you and unfortunately you won t know until it s too late. Let s say you make $20,000 in your next pay check bringing your YTD eligible earnings to $285,000. With the (a)(17) limit of $275,000, you know that you should get an 8% Company contribution on the $10,000 in eligible earnings from your last pay check, which is $800. Now for this example let s assume you left your After-Tax rate at 5%. With no maximum dollar limit on After-Tax s other than the 415(c) limit, it is possible at a 5% contribution rate for this $20,000 pay check to generate a $1,000 After-Tax. If you add the $800 Company and $1,000 pilot After-Tax together you get $1,800 which exceeds the $1,550 left in your 415(c) bucket. It now comes down to which contribution gets calculated first. Since the $1,000 pilot After-Tax is calculated first, it counts first against your remaining $1, (c) room. This leaves $550 of room in your 415(c) bucket which would then be filled to the brim with only $550 of the possible $800 of Company topping you off at $55,000 in total qualified retirement contributions. In this case you lose out on $250 in Company s.

8 Possible technique to ensure receipt of full 8% Company s in 2018 while allowing you to safely max out your Pilot 401(k) and After-Tax opportunities (WITH THE NEW INFORMATION ON THE ADMINISTRATIVE GOTCHA SPELLED OUT ABOVE, THIS IS SLIGHTLY DIFFERENT THAN PRIOR METHODOLOGY. PROFESSIONAL ASSISTANCE ON THIS IS HIGHLY RECOMMENDED): At the beginning of the year, initiate a safe-though-not-completely-safe 5% pilot After-Tax. Monitor your contributions and the Company. Remember, Vanguard YTD totals do not necessarily reflect your contributions on a tax YTD, so you should do your own independent calculations. Your pay check stub has YTD amounts for both employee and employer contributions. Keep track of the room left in your 415(c) bucket. When your earnings will exceed the 401(a)(17) limit on your next pay check (or if you have not exceeded the 401(a)(17) by your 12/15 pay check), estimate the earnings of that check and do the following: o Determine the amount of eligible earnings (including vacation buyback, if applicable) that will be paid. To estimate this, take the lesser of A) 401(a)(17) limit minus eligible earnings YTD on your last pay notice, or B) your total estimated earnings (including vacation buyback, if applicable). Then multiply that lesser number by 8% for the possible Company amount. As a cross-check for pilots who will be exceeding the 401(a)(17) compensation limit on this next pay check, the possible Company amount when added to the YTD Company s should equal $22,000. o Subtract the possible Company from the room left in your 415(c) bucket. Take your estimated remaining room in your 415(c) bucket after subtracting the estimated possible Company s and divide it by the total amount of earnings you estimate will be on this next pay check (including vacation buyback, if applicable). Round down to the nearest integer. This will give you a more accurate percentage to use for your Pilot After-Tax s on this next check which should allow you room to receive the full 8% Company (though not guaranteed to be exact due to the possibility your pay comes in differently than you estimated). If you are a pilot who has not exceeded the 401(a)(17) compensation limit by the 12/15 pay check and will not be exceeding 401(a)(17) for the year, you will see an increase in your calculated after-tax savings rate above 5%. It is, of course, up to you if you want to try and increase your savings on this last check. o By the Friday before payroll runs (schedule with run dates can be found on the FedEx intranet, keyword payroll ), log onto and perform the following steps: Click Manage my money on the left hand tab list Click Change my paycheck deduction under the PRSP

9 Then enter your newly calculated After-Tax rate Click Continue The next page asks if you would like to sign up to automatically increase your PRE-TAX/ 401(k), which if you have it dialed in where you like it you should select the No radio button, then click Continue Review your elections and your contact info, if everything is correct click Submit By the Friday before payroll runs on your 1/15 pay check, decrease your pilot After-Tax back to 5%. The decrease will first apply to your 1/15 paycheck. Repeat each year taking into account any changes in the applicable IRC limits How & How Much Can I Save Scenarios (Note: All scenarios assume a full Disability Sick and Regular Sick accounts to demonstrate the highest end of the benefit spectrum under the IRC limits.) Scenario A: For a pilot who earns above the 401(a)(17) limit, has the highest hourly pay rate under the CBA, and contributes the maximum in all areas with focus on Pre-Tax/401(k) s (remember max continuous safer-though-not-completely-safe after-tax contribution is 5%, see Over- Scenarios above), the scenario would look like this: Company (8%) $21,600 $22,000 Company Matching ($500) $500 $500 Pilot's Pre-Tax/401(k) Elective Deferral $18,000 $18,500 Pilot's After-Tax (5%) $13,250 $13,750 Excess Sick (72 CH X EOY Pay Rate) $21, $22,554 TOTAL $75, $77, (c) Defined Plan Limit $54,000 $55,000 Summary: Total Qualified s $54,000 $55,000 Check cut for excess sick buyback $21, $22,304 * A pilot age 50 or older or who will turn age 50 during the calendar year may make a Catch-Up of up to $6,000 in 2017 or $6,000 in 2018 without affecting the above scenario. As noted in section C above, this is a separate and additional $6,000 savings opportunity above the 415(c) limit in 2017 of $54,000 or in 2018of $55,000.

10 Scenario B: For a pilot who earns above the 401(a)(17) limit, has the highest hourly pay rate under the CBA, and contributes only enough to receive the maximum Company s, the scenario would look like this: Company (8%) $21,600 $22,000 Company Matching ($500) $500 $500 Pilot's Pre-Tax/401(k) Elective Deferral $1,000 $1,000 Pilot's After-Tax s $0 $0 Excess Sick (72 CH X EOY Pay Rate) $21, $22,554 TOTAL $44, $46, (c) Defined Plan Limit $54,000 $55,000 Summary: Total Qualified s $44, $46,054 Check cut for excess sick buyback $0 $0 * A pilot age 50 or older or who will turn age 50 during the calendar year may make a Catch-Up of up to $6,000 in 2017 or $6,000 in 2018 without affecting the above scenario. As noted in section C above, this is a separate and additional $6,000 savings opportunity above the 415(c) limit in 2017 of $54,000 or in 2018 of $55,000.

11 Scenario C: For a 12 th year WB FO who at 1000 CH per year in 2017 pay is $205,680 and in 2018 pay is $211,860, earns less than the 401(a)(17) limit, and contributes only enough to receive the maximum Company s, the scenario would look like this: Company (8%) $16, $16, Company Matching ($500) $500 $500 Pilot's Pre-Tax/401(k) Elective Deferral $1,000 $1,000 Pilot's After-tax s $0 $0 Excess Sick (72 CH X EOY Pay Rate) $15, $15, TOTAL $33, $34, (c) Defined Plan Limit $54,000 $55,000 Summary: Total s to Both Plans $33, $34, Check cut for excess sick buyback $0 $0 *A pilot age 50 or older or who will turn age 50 during the calendar year may make a Catch-Up of up to $6,000 in 2017 or $6,000 in 2018 without affecting the above scenario. As noted in section C above, this is a separate and additional $6,000 savings opportunity above the 415(c) limit in 2017 of $54,000 or in 2018 of $55,000.

12 Q&A Q: Will you turn 50 in 2018 or are you already older than that? A: If yes, you have the opportunity to save an additional $6,000 in Pre-Tax/401(k) s or Roth 401(k) s in 2018, on top of your regular $55,000 in combined pilot and Company contributions. See section 5.C above. Q: Are there any peculiarities to withdrawing from the PRSP After-Tax Account? A: Yes. In the PRSP, your After-Tax s and its earnings, if any, are available for in-service (this means before you retire) withdrawals twice a year at any age. It's important to understand that the balance you have in your After-Tax Account is made up of two kinds of money. The amount of money you contribute to your After-Tax Account in your PRSP is always considered after-tax money. The money in the After-Tax Account will grow without being taxed, although the earnings are considered by the IRS to be pre-tax dollars. So the balance you see in the After-Tax Account, if it has earnings, is made up of both after-tax contributions and pre-tax earnings. Vanguard keeps track of this accounting behind the scenes. If you request an in-service withdrawal of all or a portion of the balance from your After-Tax Account, the withdrawal will include the pre-tax earnings, if there are any. The pre-tax portion, if not rolled over into another qualifying plan (e.g., an IRA) within the required time limits, will be taxable to you and could include early withdrawal penalties. The after-tax portion of the withdrawal can be rolled over to a qualified plan, or a Roth IRA, or distributed directly to you without incurring tax. You also have the option of converting your After-Tax s into Roth s through a Roth in-plan conversion. Please consult a tax professional for possible tax consequences. Q: Can having the Company excess sick contribution spill out and paid to me in cash affect my defined benefit pension plan (aka, the A-Plan)? A: Yes, if you have not yet attained your high five. While there are many considerations surrounding excess sick spilling out as cash paid to the pilot, like taxability, the one that affects your pension is its pensionability. Any excess sick paid to you in cash is pensionable earnings. This means that it counts towards the earnings for purposes of your pension benefit under the A-Plan. Let s use Scenario A above to help explain this. Assume the pilot has earnings of $275,000. The $22,304 maximum of excess sick paid to the pilot in cash is added to the earnings used to calculate that year's pensionable earnings. The compensation that year for purposes of your pension will be $297,304 instead of $275,000! Remember the final average earnings (FAE) number that goes into your pension calculation is the average of your highest five years of

13 pensionable earnings. This is how it gets the shorthand name of high five and the five years don't have to be in a row. The FAE is limited by contract to $260,000, but an individual year's earnings have no limit. As soon as you have any five individual years of pensionable" earnings that add up to $1,300,000 ($260,000 X 5), you will max out your FAE. So having Company excess sick contributions spill out and paid to you in cash can increase the pensionable earnings in a year and help you to move the date that you have maxed out your high five to a point earlier in your career. Q: Does my last will and testament control who will be the beneficiary of my PRSP in the event of my death? A: NO!! The beneficiary you assign through Vanguard will be the one who receives your PRSP if you die. This is regardless of what your will says, even if your will is dated more recently than when you last elected beneficiaries with Vanguard. Don t leave an accidental inheritance to people you no longer like! Keep your beneficiaries up to date by checking your beneficiary designation at regular intervals and after major life events such as marriage, divorce, birth of child, etc. You can check your current beneficiary designation and update as needed at Hover over the My Profile tab in the top row and click on the Beneficiaries link. There you can designate a primary and secondary beneficiary. Note: If you are married, your assignment under the PMPPP sub-account inside the PRSP to someone other than your spouse is subject to spousal consent unless you are legally separated as evidenced by a court order.