401(k) Contribution Limits For 2014

Every year the IRS determines whether or not the annual contribution limit for various retirement plans can be increased. Its calculations are based on the official cost-of-living rates. These limits apply to retirement savings plans such as 401(k)s, 403(b)s, certain 457s, and the federal Thrift Savings Plan.

You can set aside pre-tax money if your employer sponsors one of these retirement savings accounts, but the government caps how much each person can shelter from taxes.

The IRS has announced that contribution limits for 401(k) plans and IRA accounts remain unchanged for 2014 but certain other limits have been increased.

All annual contribution limits are applied on a calendar year basis. Any reference here to a 401(k) plan also applies to any other applicable plans.

Benefits Financial Planning

2014 401(k) CONTRIBUTION LIMITS

The basic 401(k) contribution limit remains unchanged total of $17,500 for 2014. You can take advantage of the additional age-50 contribution if you turn 50 by the end of calendar year 2014. You’re eligible for the extra contribution amount if you were born on December 31, 1964 or earlier.  This catch-up limit remains at $5,500 for a grand total of $23,000.

Contact your benefits administrator if you want to maximize your contribution for 2014. Depending on how your employer administers the plan, you might have to complete a paper form or make your election online. You might also be limited to a certain number of changes per plan year. So make sure you understand the rules.

Year Under Age 50 Limit Age 50 and Over Catch-Up Total for Age 50 and Over
2009, 2010, & 2011 $16,500 $5,500 $22,000
2012 $17,000 $5,500 $22,500
2013 & 2014 $17,500 $5,500 $23,000

Traditional IRA Limits

Tax-deductible contributions to traditional Individual Retirement Arrangements (IRAs) are capped by a combination of your Adjusted Gross Income (AGI) as calculated on your tax return and also a hard dollar amount. For 2014, the dollar limit is $5,500 with an additional $1,000 catch-up amount for those age 50 and over.  These amounts are unchanged for 2014.

The tax deduction for contributing to a traditional IRA starts phasing out at an AGI of $60,000 for single filers and $96,000 for married taxpayers filing jointly. Both of these thresholds are increases for 2014.

The thresholds at which the deduction starts phasing out are higher for filers not covered by a workplace plan.  See the IRS website and your financial adviser for more information as well as for the income-based contribution limits for Roth IRAs.

ADDITIONAL LIMITATIONS

While the annual contribution limit can theoretically be as high as shown in the above chart, there are additional rules for certain retirement savings plans that might lower the amounts. Intended to prevent higher paid employees from benefiting disproportionately from the tax savings associated with 401(k) contributions, these rules are applied based on the circumstances at each employer.

If a company sponsors a 401(k) retirement savings plan with a matching feature (e.g., the employer gives a contribution to the plan based how much the employee contributes), it must test its population every year. Based on the participation rates at different salary levels, the employer might be required to cap how much its highest paid employees can contribute.

If you are affected by these testing rules, your employer has likely already notified you. But if you are new to the plan – or had never contributed at a high rate before – double-check with the administrator of your retirement savings plan. Your annual contribution limit might be lower than otherwise allowed.

Please also check with your tax adviser for how these limits apply in your situation.

Basics of the Family and Medical Leave Act (FMLA)

Introduction

The Family and Medical Leave Act – commonly called FMLA – was signed into law by President Clinton in 1993. The core provision of the legislation provides for 12 weeks of leave for employees with serious medical conditions or who need to care for family members. The employee cannot lose his or her job because of the leave from work. The employer is not required to give paid leave, but any health benefits must be continued for the employee.

Congress has made changes to the provisions over the years – tightening, clarifying, and sometimes expanding eligibility standards – but the basics have remained the same. The last major changes to the regulations were issued in 2008.

Like COBRA, FMLA is regulated by the Department of Labor.

Benefits Provided

Under FMLA, an eligible employee at a covered employer who experiences a qualifying event is entitled to

  • 12 weeks of leave (26 weeks for military caregiver leave).
  • Maintenance of health benefits under the same terms as if the employee were working.
  • Restoration to the same or equivalent position. This provision is subject to the Key Employee exception.

A “key employee” is one whose earnings are in the top 10% of all employees at the relevant worksite. An employer is not required to restore a key employee to the same or equivalent job if they can demonstrate “substantial and grievous economic injury” by doing so. To take advantage of the provision, the employer must notify the employee of the key employee designation and the reasons for not reinstating the employee and also give him/her a reasonable opportunity to return to work.

Eligibility

There are two parts to determining eligibility for FMLA leave: employer size and employee status.

Covered Employer

The employee must work for a covered employer. A covered employer is one with at least 50 total employees working at one or multiple locations within a 75 mile radius.

When counting then number of employees, remote workers such as salespeople and telecommuters are counted with the worksite to which they report or from which they take direction.

Employee Status

An employee must meet service and hours of work standards – as well as work for a covered employer – to be eligible for FMLA.

  • The individual must have been employed by the employer for at least 12 months prior to the leave. The months of service don’t have to be consecutive, but the employer doesn’t have to count any time worked before a break in service of seven or more years. The only exception is if the break in service is because of military service.
  • The employee must have worked at least 1,250 hours in the 12 months before the start of the FMLA leave. The burden is on the employer to show through accurate records that an employee did not work enough hours.

Notifications

Even though an employee does not have to specifically request FMLA leave, the employer does have the right to ask for enough information about the employee’s situation to figure out whether or not FMLA applies.

The employee is also expected to give his or her employer at least 30 days notice for foreseeable events based on the expected date of that event. Examples include the birth or adoption of a child or a medical procedure that is generally planned ahead of time such as a knee replacement.

If something changes about the situation – perhaps a baby is born early – the employee or a representative must notify the employer as soon as possible.

Failure to give at least 30 days notice for foreseeable events means the employer potentially has the right to delay the FMLA coverage for the leave.

When a leave is triggered by an emergency, the employee or a representative must notify the employer within the same guidelines normally applied for calling in sick.

The counterpoint to the employee’s obligation to notify the employer of leave situations is the requirement that employers notify employees in some way about the FMLA rules. The Department of Labor makes a poster available for employers that meets the posting requirement.

Eligible Events and “Serious Medical Condition”

FMLA leave has been available for several core reasons since it was first passed:

  • Complications or incapacity related to pregnancy and/or child birth.
  • Caring for a newborn child or newly placed adopted or foster child. Available for both parents. Might be referred to as maternity or paternity leave by some employers.
  • Caring for the employee’s spouse, child (biological, adopted, foster, step, legal ward), or parent who is suffering a serious medical condition.
  • The employee’s own serious medical condition.
Some employers have chosen to broaden the categories of people for whom an employee can take FMLA leave. For example, expanding their policies to include domestic partners, grandparents, or siblings. But this is not required, so check with your employer before making any assumptions.
Employers can ask for reasonable documentation to prove a family relationship being used to get FMLA leave.
The definition of “serious medical condition” has been an area of confusion and conflict from the beginning.  Some situations such as being in the hospital or placed on bed rest during pregnancy are fairly straightfoward. But periods of incapacity – as determined by a medical professional – for more than three straight days also qualify even when they don’t rise to the level of requiring hospitalization.
Certain chronic conditions can also qualify. Asthma is a classic example in this category.
Employers can ask for medical certification in support of a leave request, but they are required to provide proper notice of the requirement. Employees are required to give all the necessary information to support their need for FMLA leave.
The DOL has developed several forms that employers can use to gather the necessary information, although their use is not required. But any alternate data collection method should provide all the same information.
The DOL has a FAQ document that includes a good review of the “serious medical condition” issue (an many others).
Leave specific to military service was added in 2008.

Military-Specific Provisions

The 2008 changes to the FMLA law included a new category known as military family leave.  There are two basic types:

  • Qualifying exigency leave
  • Military caregiver leave
The regular eligibility provisions related to employer size and number of hours worked still apply.
The Department of Labor has plenty of information about this new leave type, including a thorough FAQ document.

Qualifying Exigency Leave

Eligible family members of National Guard or Reserves members may use up to 12 weeks of FMLA leave to take care of a variety of arrangements that suddenly become necessary when a person is called to active duty. Common examples are arranging for child care and making various financial or legal arrangements such as getting wills and powers of attorney set up.  The family member can even take up to five days to spend time with the military member when that individual is on a temporary leave while deployed.
The employer and employee (the eligible family member) can come to agreement about any situations not explicitly mentioned by the DOL as being a qualifying exigency.  These additional situations should arise out the of the call to active duty and should be appropriately documented.  The employer can count these ad hoc situations against the employee’s FMLA allowance.

Military Caregiver Leave

Eligible family members can take up to 26 weeks of FMLA leave within a 12-month period to take care of a covered servicemember – pretty much any current member of the armed forces or temporary disability retiree – who has a serious injury or illness.
The employer can ask for appropriate medical documentation of the covered servicemember’s condition to make sure it meets the FMLA requirements.  In cases where the family member must fly immediately to Landstuhl Regional Center in Germany under an invitational travel order (ITO) or invitational travel authorization (ITA) to be with a servicemember, the employer must accept the travel papers in lieu of other medical certification.

Ways To Take FMLA Leave

There are several ways to divvy up the available FMLA time:

  • Continuous Leave.
    For example, taking the full 12- or 26-week benefit in one uninterrupted span, assuming the circumstances support the need for the full span.
  • Reduced Leave.
    With this approach, the employee’s work schedule is temporarily reduced.  This reduction can take the form of fewer hours per day, fewer days per week, or some combination.
  • Intermittent Leave.
    In this scenario, the employee takes leave in smaller, multiple chunks.  All absences must be for the same illness or injury.  The employee has an obligation to try and minimize disruption to the operation of the business when scheduling.  The employer has the option of putting the employee in a different position that better suits the employee’s situation.  The new position must provide equivalent pay and benefits.

Regardless of how employee takes FMLA leave, careful record keeping is essential to make sure both the employer and employee understand how much has been used for a particular qualifying event and how much has been used within any given 12-month window.

Beneficiary Designations and Estate Planning

Introduction

I’m in the midst of preparing an epic post on FMLA, but an accumulation of events in my personal and professional lives has inspired me to address some basics of estate planning that are tied to benefit plans. A lot of this can be rather depressing – some of the scenarios we talked about in my law school class on wills and estates were pretty heart-wrenching – but these are things that you should think about to make sure your property is distributed the way you want upon your death.

I work in the human resources field and spend a lot of time on benefits administration issues. Sadly, this sometimes includes addressing issues when an employee dies. In most cases, employees leave their affairs in reasonable order, but we’ve had a few cases in the past two years – including a death about a week ago – that have been unnecessarily complicated because of benefit designation problems.

A friend also recently lost her fiancé a few months ago. He was only 30 years old, fell unexpectedly ill, and died after several months of intensive treatment. He owned his house jointly with his mother, has left enormous medical bills, and had no will. So my friend, who had started to combine her household with her fiancé’s, has no legal standing relative to the estate and still doesn’t know if she’ll be able to claim any of her personal possessions from the house. It’s a mess.

I’ll address two specific benefit types – life insurance and retirement plans – as well as touch on issues related to minors and wills. When it comes to these latter two topics, in particular, your best option is to contact an attorney who specializes in estate planning to review your particular situation (and check to see if your employer offers an Employee Assistance Program that can help you prepare a will). Every state has slightly different laws about wills, inheritance, and the handling of funds and guardianship for minors. I’m simply trying to raise awareness about the need to look at these issues.

Life Insurance

One of the benefits of having a life insurance policy is that the funds usually get to the beneficiaries upon your death pretty fast. It avoids probate and is generally not subject to federal taxes. This can be a real boon when your loved ones are faced with funeral expenses and are dealing with a major upheaval in their lives. But you have to have your beneficiaries properly designated to take advantage of these features.

A life insurance policy, whether group or individual, is considered a contract and so is administered under state contract law. There are generally no requirements to name anybody in particular as a beneficiary, but there are also no automatic beneficiaries if you don’t list them.

But let’s address some terminology that I’ve seen trip up our employees:

  • Beneficiary: A person or entity who will get the money from your life insurance if you die. A beneficiary can be an actual person or an organization such as a college or your house of worship.
  • Primary Beneficiary: The person or persons first in line to get the life insurance funds. You can give it all to one individual or you can divvy it up among multiple parties. Most beneficiary designation forms have multiple lines for this purpose where you can enter a percentage. Just make sure it adds up to 100 percent.
  • Contingent Beneficiary: The person or persons who will get the life insurance funds if all primary beneficiaries die before you do. As with the primary, you can split the proceeds among several parties.

Unless state law or your insurance policy say otherwise, the estate of a primary beneficiary does not inherit the person’s share of your life insurance if they predecease you: that person’s share will be distributed among the surviving primary beneficiaries. So if you list your three sisters as your primary beneficiaries but one of them dies before you do, her children don’t automatically have a right to a one-third share of your life insurance. You would have to change your beneficiary form to add them as primary if you want them to get funds upon your death. If you don’t update your beneficiary designation, your surviving two sisters would share the proceeds.

It’s smart to have a contingent named to account for the worst case scenario. For example, it’s very common for couples to name each other as primary beneficiaries, but should both die within a short period of time (in an accident, for example), the longer surviving party will receive the other’s life insurance proceeds with his/her own policy paying to any named contingent(s). If there is no contingent, the funds will go to the general estate to be distributed through probate.

A big problem can arise, however, if people don’t fill out the primary and contingent sections properly. Maybe a person doesn’t know exactly what the terms mean, or maybe s/he simply doesn’t notice how the sections of the beneficiary form are labeled.  The result can be a beneficiary designation that’s unclear and must be interpreted by the plan administrator or insurance company.

In a recent case at work, the employee put his daughter as primary with his two sons as the contingent beneficiaries. Since they’re all minors (an additional wrinkle I’ll address below), it seems odd that he wouldn’t provide for all of them – and based on his conversation with my assistant at the time he was completing his benefit forms we know he intended to leave the life insurance to all of them equally. He simply completed the beneficiary designation form incorrectly.

Fortunately, the employee completed the “percentage share” field on the form for each child, giving each one third. Without this information, we would have had a much harder time getting the insurance company to agree with our interpretation of equal division: his daughter would have received everything with the sons being left out. This distinction is important in this case since his daughter is from his first marriage (the first wife died from childbirth complications) while the boys are from his current relationship.

The moral of the story? Pay attention to the forms! Every insurance company has a bit different design, but Primary and Contingent should be clearly labeled. Also make updates as your circumstances change. Do you want to split the proceeds among your children? Make sure you complete a new designation form if you have another child.

And all of this applies whether the forms are paper or electronic! If the latter, you have even fewer excuses to keep everything updated.

Retirement Plans

Whether it’s a 401(k), 403(b), or some other retirement savings or income vehicle, this is a benefit that also needs attention in terms of beneficiary designations. With most of these plans, you have the added wrinkle of ERISA, a vast federal law first passed nearly 40 years ago that regulates retirement plans (among other benefits). In most cases, ERISA provisions trump – or overrule – state law with regards to plan administration.

One important thing to remember is your employer might not be able to help monitor your beneficiary designations. Depending on the policies of the company that holds the funds (such as Fidelity or Vanguard), your employer might not be able to see who you have listed. YOU have to take responsibility.

The concepts of Beneficiary, Primary, and Contingent that I discussed above with regards to life insurance also apply to retirement plans. But with an extra twist, of course.

The single biggest consideration when it comes to naming your beneficiaries is that, if you’re married, your spouse is automatically entitled to 50%. If you want to leave the funds in such a way that your spouse would get less than 50%, he or she must sign a waiver of their rights to that 50% share.

Note that this requirement is not yet fully explored in a legal sense in the context of same sex marriage. Since the Defense of Marriage Act (DOMA) is still in place as of this writing, the federal government does not officially recognize same sex marriages, even though they are perfectly legitimate under state law in places such as Massachusetts and Iowa. Make sure your beneficiary designations are complete and clear to ensure your spouse receives the funds you intend.

We have a situation at work that is one of the messier I’ve encountered and that demonstrates how important it is to pay attention to the details. Failure to properly update his beneficiaries on his retirement plan will potentially cost the children of one employee thousands of dollars in legal fees to straighten out the mess.

We had two long-term (and highly paid) employees who were married to each other. As we learned shortly before the husband’s death, he had been previously married and divorced over 30 years ago. The man and his second wife – also our employee – had two children. Over the years, they separated but never divorced and cooperated well in raising their children who are now young adults.

Roughly 10 years ago the wife was diagnosed with cancer, and she passed away a few years later. The husband had no need for the funds in her retirement account, so, as part of her estate planning, he had waived all rights to the money. Their children shared the proceeds equally upon her death.

Sadly, a few years ago he was also diagnosed with cancer and passed away less than a year later. He had always been notoriously bad with his paperwork over the years, and, as we learned upon his death, that carried over to his beneficiary designations on his retirement plan. Despite his knowing he should make sure everything was in order – his late wife was the one who was meticulous with this sort of thing – he never quite got around to it. He had even mentioned to one of his kids that he should make sure his beneficiaries were right.

Well, we discovered that the first wife from all those decades ago had been named as his beneficiary on his initial election forms, and he never changed it. Now his children have to work out with the lawyers and the plan vendor who exactly is entitled to this pretty significant pot of money (nearly a million dollars if I recall correctly). They don’t know if this woman is even still alive, what her current name might be, and what the terms of the divorce were. Clearly their mother would have had a claim on at least 50% of the account were she still alive, but their own direct claim is less certain.

I still don’t know how this case will turn out. As far as I know the children are still working on it.

Lesson? Check your beneficiaries!

Minors

The issue of naming minors as beneficiaries or in a will deserves a quick mention. PLEASE check with an attorney about exactly what the best options are since so many of the details vary from state to state.

Minors – children under age 18 – cannot independently manage money or enter into contracts. A parent or guardian must, at least on paper, be involved. This includes receiving funds from an inheritance.

Depending on the state and family situation, funds might be simply put in the child’s saving account, or something as elaborate as a court-monitored trust might have to be established. Do your best to anticipate the particulars of the situation you’re dealing with – and be sure to address the issue with an attorney if you’re doing a will.

The big thing is not to assume how everything will work. Do your research. And, yes, it’s time for another story from what I’ve seen at work.

An employee named his mother, brother, and niece as beneficiaries on his life insurance. He died very unexpectedly about 2 years ago. His niece was 12 at the time.

Both of the girl’s parents are alive, so you would think handling the funds would be pretty easy. Well, no. Seems the parents are split, and they’re arguing about who will handle the money and who has to set up the trust account. Still.

The employee’s mother and brother received their shares within a month or so of his death. His niece has yet to receive her funds.

As for the first story I told you in the Life Insurance section about the man with three children, it’s much cleaner. The daughter has been mostly raised by her maternal grandmother who already has legal guardianship, while the mother of the two boys is their sole surviving parent.

Wills and Medical Directives

Working in Human Resources, I don’t get involved in wills and such. I’ve been thinking about this issue more because of a situation a friend is in that shows you’re never too young to think about things like power of attorney, medical directives and a will.

The terminology will vary a bit from state to state, but here’s how I’m using these terms:

  • Power of Attorney: A legal document you use to designate who will handle your financial affairs when you’re not able to do so.
  • Medical Directive: A legal document you use to designate who should make medical decisions on your behalf when you’re not able to do so.

As I mentioned in the introduction, a friend’s fiancé died recently leaving behind no will, a house owned jointly with his mother (and that holds a bunch of my friend’s personal possessions), and a pile of medical bills. He and my friend were living in a temporary location while the house underwent repairs after being flooded, but it was almost done and so they had started moving things in from storage.

What’s going on is a complex mix of property, intestacy (when you die without a will), and indebtedness law, all pretty much state-specific. His mother will most likely be named executrix of the estate (as of my most recent conversation with my friend, nothing had happened yet with getting everything to the probate court), and so my friend will have to work with her to claim back the personal property that’s in the house and hope that the creditors of her fiancé’s estate won’t care about those small things. (I think she’ll be fine in the end: what’s a used XBox against $500K in medical bills?)

Additionally, while he was in the hospital, even though he had verbally told them (while he was still able) that my friend should make the medical decisions, the medical staff continued to defer to his mother. He had no medical directive on file, and so the hospital clearly felt they had too much of a liability taking direction from a person without a legally-defined status. In this context, “parent” has legal meaning but “fiancée” not so much.

So, in addition to losing her fiancé, my friend lost her say in his care to an extent while he was ill and is now living in a limbo state when it comes to her belongings and living situation.

Complete a power of attorney and a medical directive. Do up a will.