Use It or Lose It – A Third Alternative

Posted on September 28th, 2009 in Newsletter Articles, Retirement Planning by wayne

Does your company have a “use it or lose it” policy with respect to your vacation or sick leave?  If so, the IRS has recently issued new guidelines that can help you save more for retirement when you are unable to use all of your allotted annual leave.

In September, the IRS released Revenue Rulings 2009-31 and 2009-32 to clarify steps that employers can take which would allow employees to contribute unused vacation and sick leave to 401(k) and other qualified retirement accounts.  These IRS rulings describe how employers can permit employees to convert the value of their unused leave into contributions to tax-qualified retirement plans.

From an employee morale viewpoint, a “use it or lose it” policy may not be in a company’s best interests.  While the intention behind the policy is to insure that employees take their allotted time off, it is often difficult to do this every year.  This is especially true of valuable, longer term employees who have accumulated several weeks of annual paid leave.

The repercussions of a “use it or lose it” policy is that valuable employees are often “forced” to take time off near the end of the calendar year, a time when most companies need every available employee to meet their year-end goals.  The new IRS rulings allow companies to offer an alternative that benefits both the employee and employer.

The new IRS rulings apply to qualified retirement plans, including 401(k)s, Keoghs, profit-sharing plans and SIMPLE IRAs.  The rules can apply to unused vacation, sick leave or personal days that accrue either annually or when an employee leaves a job.

The rulings allow the employee to contribute the entire amount of their unused leave to the company’s retirement plan, unless the employee has already exceeded the annual plan contribution limit.  For 401(k) plans, the 2009 contribution limit is $16,500, or $22,000 for those over age 50.  For a SIMPLE IRA, the 2009 contribution limit is $11,500 or $14,000 for those over age 50.

Companies can opt to pay workers for unused leave only if is deposited into their qualified retirement plan.  This provides a positive alternative to the “use it or lose it” approach.  Instead of being forced to take time off in the critical end of year time frame, employees have the option of saving their unused leave in their retirement plan.

Employers that don’t currently pay workers for unused leave may want to consider this approach.  Putting unused leave into an employee’s retirement account compensates valuable workers and encourages retirement savings with no increase in base pay.

Another benefit of adding this alternative is that neither the employer nor the employee will pay FICA taxes on the contribution, since the payment is to a qualified retirement plan.  An employer who offers this benefit must offer it to all plan participants.  However, the employer is not required to offer it every year. The employer can also prorate or limit the amount of leave for which they will pay.

If you own a company that has a 401(k) or SIMPLE IRA retirement plan, you may want to consider modifying your plan to allow for unused paid leave to be put into the qualified retirement plan.  As a business owner in trying economic times, you are likely very concerned about keeping company morale high.  You are also aware of the correlation between high employee morale and high employee productivity.  Providing a method for your employees to retain their earned leave time plus save for retirement could be a major morale booster for your company

If you are an employee of a company that has both a qualified retirement plan and a “use it or lose it” vacation policy, talk to your company management or personnel department about these recent IRS rulings.  They may not be aware of how the new IRS rulings can provide a new alternative to “us it or lose it.”

Our nation must begin to save more for our long term health and security.  Hopefully, many companies will take advantage of this opportunity to help employees save more for retirement.

Is It Time to Invest in Real Estate?

Posted on September 28th, 2009 in Investments, Newsletter Articles by wayne

There are indicators that the real estate market may be reaching its nadir.  If so, now would be the time to consider investing in either rental property, for those interested in active management, or REITs, for those who prefer passive real estate investments.

The Wall Street Journal recently published a study prepared by LPS Applied Analytics, a leader in the collection and analysis of mortgage data.  The results of this report demonstrate that the housing market is far from fully recovering.  This article focuses on the “shadow inventory” of homes.  These are homes that are delinquent in their mortgage payments but have not yet been foreclosed upon.

The LPS report states: “As of July, mortgage companies hadn’t begun the foreclosure process on 1.2 million loans that were at least 90 days past due, … An additional 1.5 million seriously delinquent loans were somewhere in the foreclosure process, though the lender hadn’t yet acquired the property. The figures don’t include home-equity loans and other second mortgages.”

From this we can see that the “shadow inventory” is at least 2.7 million mortgages, that have not been foreclosed upon and are at least 90 days past due.

Another section of the report states: “Moreover, there were 217,000 loans in July (2009) where the borrower hadn’t made a payment in at least a year but the lender hadn’t begun the foreclosure process. In other words, 17% of home mortgages that are at least 12 months overdue aren’t in foreclosure, up from 8% a year earlier.”

This demonstrates that the problem of delayed foreclosures is increasing and is almost double the number from one year ago.

It is interesting to understand the reasons behind this increasing “shadow inventory” of homes that are (slowly) on their way to foreclosure.

The first reason is that the banks are having difficulty with determining which homes qualify for the government’s mortgage assistance policies, which may allow the banks to modify loans with government subsidies.

The second reason is the inability of banks to handle the paperwork required for such a large amount of impending foreclosures.  Most banks do not have adequate personnel to handle all of the required foreclosure documents in a timely fashion.

The third reason is the most insidious.  Some banks may not want to foreclose on all of these homes.  Banks are only required to write down their mortgages after they have been foreclosed upon.  Up until that point, banks are allowed to maintain the full amount of the mortgage as an asset on their financial statements.  If banks were forced to write down all of their delinquent mortgages, their reserves could be greatly depleted and their ability to lend could be significantly curtailed.  This could lead to another banking crisis (or in reality the ultimate conclusion of the one that began in late 2007).

Amherst Securities Group LP has found that the total number of mortgages with delinquent payments tops 7 million.   If that number is accurate, over 10% of all homes in the US are delinquent in their mortgage payments.  Their bearish analysis considered the impact of over 7 million homes that could eventually be foreclosed upon.

It seems likely that the number of homes that will eventually hit the housing market due to foreclosure is between 2.7 million and 7 million.  With this huge overhang on the real estate market, it would seem prudent to be very cautious of new real estate investments at this time.