Harry Sit's Blog, page 30

Who’s Leaving 401k Match On the Table?

The standard answer for how to get started in saving for retirement is to get the 401k match. It’s often said to be a 100% return. Although the match isn’t necessarily dollar-for-dollar (50 cents on the dollar is more common), you get the point.

On the other hand, about 1/3 of eligible employees don’t contribute to their 401k. We are not talking about people working for employers that don’t offer a 401k plan, or new employees who aren’t allowed to contribute to their 401k yet. They are already eligible, but they are not contributing. Why are they leaving the 401k match on the table?

Vanguard manages 401k plans for many employers. They publish two detailed reports titled How America Saves every year with data from these plans. One report covers 5 million participants in plans of larger employers and the other report covers 480,000 participants in plans of smaller employers. These reports provide insights in why some employees don’t contribute to their 401k.

Details, Details

First of all, although the vast majority of larger plans offer an employer match, only about half of the smaller plans give a match. When everyone says “get the employer match” it leaves the question what if there’s no match. It can be misinterpreted as you should contribute only when the employer offers a match.

Second, even when the employer offers a match, not all employees get it. Some plans require one year of service before receiving the employer match. 36% of the employees in larger plans and 40% of employees in smaller plans must wait one year before they are eligible for a match. Again when “get the employer match” is drilled in people’s heads, some may choose not to contribute until they are eligible for the match. If they choose not to contribute from the beginning, by the time they are eligible for the match, they don’t necessarily get a reminder from the employer. As a result, some end up not contributing to their 401k even after they are eligible for the match.

Third, after the employees receive the match, they don’t necessarily get to keep it. Some employers require staying with them for up to six years before the match is 100% yours. This is called vesting. Only 41% of employees in larger plans can keep the match as soon as they receive it. For the other 59%, if they change jobs too soon, the employer will take back part of the match or all of it. Employees in half of the smaller plans that do offer a match face less gotcha. 70% of the employees who receive a match can keep the match immediately.

Larger PlansSmaller PlansOffers employer match98%53%Must wait 1 year for match36%40%Immediate vesting41%70%Participation rate74%60%

Anchoring contributing to the 401k on the match can backfire, (a) when there is no match (more likely the case at smaller employers), (b) when there’s a waiting period for the match, or (c) when the match can be forfeited. These all affect the participation rate. However, they may not be the primary driver.

A Matter of Income

The Vanguard reports also show the participation rates by the employees’ income.

You see the same story in both larger and smaller plans. The participation rate increases with the employees’ annual income. At income above $30,000 a year, the participation rate is close to or above the average. It’s significantly lower at incomes below $30,000.

This should not be a surprise. When someone needs every dollar of their income to live on, they can’t afford to contribute to the 401k. The match ends up discriminating against lower-income employees. Match and after-the-fact tax credit or tax deduction don’t work that well as an incentive for people who need the money today. Under the current system, higher-income employees who will contribute regardless collect the match from the employer, and lower-income employees who can really use some help from the employer end up leaving the match on the table. In addition, by not contributing to their 401k, the lower-income employees may also lose out on tax credits, such as the Saver’s Credit and EITC.

People with lower income face huge economic injustice. Losing out on the 401k match is only a small part of many hurdles in front of them. It’s expensive to be poor everywhere they go.

Reference



How America Saves 2019, The Vanguard GroupHow America Saves 2019, Small Business Edition, The Vanguard Group

The post Who’s Leaving 401k Match On the Table? appeared first on The Finance Buff.

2020 2021 Medicare Part B Part D IRMAA Premium Brackets

[Update on August 12, 2020: projections for 2021]

Seniors age 65 or older can sign up for Medicare. Medicare calls people who receive it beneficiaries. Medicare beneficiaries must pay a premium for Medicare Part B that covers doctors’ services and Medicare Part D that covers prescription drugs. The premiums paid by Medicare beneficiaries cover about 25% of the program costs for Part B and Part D. The government pays the other 75%.

Medicare imposes surcharges on higher-income beneficiaries. The theory is that higher-income beneficiaries can afford to pay more for their healthcare. Instead of doing a 25:75 split with the government, they must pay a higher share of the program costs.

The surcharge is called IRMAA, which stands for Income-Related Monthly Adjustment Amount.

I haven’t seen any numbers that show how much collecting IRMAA really helps the government in the grand scheme. I’m guessing very little. One report said 5% of all Medicare beneficiaries pay IRMAA. Suppose the 5% pay double the standard premium, it changes the overall split between the beneficiaries and the government from 25:75 to 26:74. Big deal?

The income used to determine IRMAA is your AGI plus muni bond interest from two years ago. Your 2019 income determines your IRMAA in 2021. Your 2020 income determines your IRMAA in 2022.

As if it’s not complicated enough for not moving the needle much, IRMAA is divided into five income brackets. Depending on the income, higher-income beneficiaries pay 35%, 50%, 65%, 80%, or 85% of the program costs instead of 25%. The lines drawn for each bracket can cause a sudden jump in the premiums you pay. If your income crosses over to the next bracket by $1, all of a sudden your Medicare premiums can jump by over $1,000/year. If you are married and both of you are on Medicare, $1 more in income can make the Medicare premiums jump by over $1,000/year for each of you.

* The last bracket on the far right isn’t displayed in the chart.

So if your income is near a bracket cutoff, see if you can manage to keep it down and make it stay in a lower bracket. Using the income from two years ago makes a little harder. Now in 2020 you don’t know where exactly the brackets will be for 2022. Still, you can make reasonable estimates and give yourself some margin to stay clear of the cutoff points.

IRMAA Brackets

The IRMAA income brackets (except the very last one) started adjusting for inflation in 2020. Here are the IRMAA income brackets for 2020 and the projected new brackets for 2021. I made these projections for 2021 based on the inflation numbers so far. Rounding rules make it such that inflation numbers for the upcoming months are unlikely to affect the final results. For example, when a number is rounded to the nearest $1,000, it doesn’t matter whether the number is really $87,600 or $87,800 before rounding. Remember the income on your 2019 tax return (AGI plus muni interest) determines the IRMAA you pay in 2021. The income on your 2020 tax return (to be filed in 2021) determines the IRMAA you pay in 2022.

Part B Premium20202021StandardSingle:
Married Filing Jointly: Single:
Married Filing Jointly: Standard * 1.4Single:
Married Filing Jointly: Single:
Married Filing Jointly: Standard * 2.0Single:
Married Filing Jointly: Single:
Married Filing Jointly: Standard * 2.6Single:
Married Filing Jointly: Single:
Married Filing Jointly: Standard * 3.2Single:
Married Filing Jointly: Single:
Married Filing Jointly: Standard * 3.4Single: > $500,000
Married Filing Jointly: > $750,000Single: > $500,000
Married Filing Jointly: > $750,000

Higher-income Medicare beneficiaries also pay a surcharge for Part D. The income brackets are the same. The surcharges are relatively smaller in dollars.

The standard Medicare Part B premium is $144.60/month in 2020. A 40% surcharge on the Medicare Part B premium is about $700/year per person, or about $1,400/year for a married couple both on Medicare. In the grand scheme, when a couple on Medicare have over $174k in income, they are probably already paying a large amount in taxes. Does making them pay another $1,400/year make that much difference? Nickel-and-diming just annoys people. People caught by surprise when their income crosses over to a higher bracket by just a small amount get mad at the government. Rolling it all into the income tax would be much more effective.

Oh well, if you are on Medicare, watch your income and don’t accidentally cross a line for IRMAA.

IRMAA Appeal

If your income two years ago was higher because you were working at that time and now your income is significantly lower because you retired (“work reduction” or “work stoppage”), you can appeal the IRMAA assessment. The “life-changing events” that make you eligible for an appeal include:

Death of spouseMarriageDivorce or annulmentWork reductionWork stoppageLoss of income from income producing propertyLoss or reduction of certain kinds of pension income

You file an appeal by filling out the form SSA-44 to show that although your income was higher two years ago, you had a reduction in income now due to one of the life-changing events above. For more information on the appeal, see Medicare Part B Premium Appeals.

Not Penalized For Life

If your income two years ago was higher and you don’t have a life-changing event that makes you qualify for an appeal, you will pay the higher Medicare premiums for one year. IRMAA is re-evaluated every year as your income changes. If your higher income two years ago was due to a one-time event, such as realizing capital gains or taking a large withdrawal from your IRA, when your income comes down in the following year, your IRMAA will also come down. It’s not the end of the world to pay IRMAA for one year.

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