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"And the Grinch, with his Grinch-feet ice cold in the snow, stood puzzling and puzzling, how could it be so? It came without ribbons. It came without tags. It came without packages, boxes or bags. And he puzzled and puzzled 'till his puzzler was sore. Then the Grinch thought of something he hadn't before. What if Christmas, he thought, doesn't come from a store? What if Christmas, perhaps, means a little bit more?" Dr. Seuss
In celebration of the Christmas holiday, our office will be closed on Monday, December 24th and Tuesday, December 25th. Our regular office hours will resume on Wednesday, December 26th.
AND, in celebration of the New Year holiday, our office will be closed on Monday, December 31st and Tuesday, January 1st. Our regular office hours will resume on Wednesday, January 2nd.
If you have a matter that requires immediate attention when our office is closed, please contact Joe Rollins at jrollins@rollinsfinancial.com or 404.372.2861.
We wish you and your families a holiday season filled with peace, joy and laughter!
Warm regards,
Joe Rollins
One of the benefits of working for your current employer may be that they sponsor a cafeteria plan. Benefits provided under a cafeteria plan may be funded through employer contributions, employee salary deductions, or a combination of both. Cafeteria plans are aptly named because they often allow employees to choose from a “menu” of benefit options. Among these options are health care spending accounts.
A very common health care spending account is a “health care flexible spending arrangement,” commonly referred to as a health FSA. These health FSAs have become increasingly popular because they allow an employee to reduce his or her taxable income by paying for common medical expenses with before-tax dollars. Under the current law, there is no limit on the amount an employee can elect to contribute to a health FSA through salary reductions, unless the plan itself imposes dollar restrictions. However, it is a use-or-lose account, meaning whatever you elect to contribute to your account must be used prior to the end of the year (or within 2½ months of the following year if the plan allows a grace period) or the “left-over” contributions are forfeited.
With the passage of the Health Care Act, the new health FSA limits under Internal Revenue Service code section 125(i) will cap the annual salary reduction contributions at $2,500 per employee beginning January 1, 2013. The $2,500 limit on salary reduction contributions to a health FSA applies on an employee-by-employee basis. Thus, $2,500 is the maximum salary reduction contribution each employee may make for a plan year regardless of the number of other individuals (spouse or dependents) whose medical expenses are reimbursable under the employee’s health FSA. Consistent with this rule, if each of two spouses is eligible to elect salary reduction contributions to an FSA, each spouse may elect to make salary reduction contributions for the full $2,500, even if both participate in the same health FSA sponsored by the same employer.
Also, if either your spouse or you are employed by two or more employers that are not members of the same controlled group, you may elect up to $2,500 under each employer’s health FSA. However, if you are employed by two or more employers that are considered a single employer, then your aggregate elections may not be more than the $2,500 limit. If you are unsure and you have multiple employers, we can help you determine your maximum elections under all plans.
Furthermore, although Internal Revenue Code states that all participants in a cafeteria plan must be employees, there are exceptions for persons who own more than 2% of the shares of an S corporation or who are partners in a partnership. If you fall into those categories, please call our office for guidance.
Although this limit means that the maximum amount you will be able to contribute pre-tax to your flexible spending account for medical expenses is $2,500, statistics show this amount is still higher than what most employees contribute. According to Mercer’s National Survey of Employer-Sponsored Health Plans, the average employee contribution in 2009 was $1,424. The health FSA account will still remain a use-it-or-lose-it account. That is, any unused balance for one year will not be permitted to fund your health care spending in any future year. So you will want to be cautious, as always, in determining how much you will want to contribute since this election must be made prior to the start of the year.
Your employer’s plan may still provide for a grace period of up to 2½ months after the close of the year in which you can use any remaining balance in your account. If your plan provides for this grace period, unused salary reduction contributions to a health FSA for plan year beginning in 2012 or later that are carried over into the grace period for that plan year will NOT count against the new $2,500 limit for the subsequent year.
As an example, let’s assume at 12/31/12 that your health FSA balance is $500. You incur medical expenses of $500 during February of 2013 and use up your remaining balance from 2012 because it is within the first 2½ months of the year and your employer’s plan provides a grace period. You are still entitled to contribute the full $2,500 for the 2013 calendar year. If you also use the full $2,500 by the end of 2013, you would have been reimbursed for $3,000 worth of qualified medical expenses during the year. Keep in mind, however, that you must make your current year election prior to the start of the year regardless of whether you plan to use a remaining balance during the grace period.
This $2,500 limit is expected to be indexed for inflation for plan years beginning after 2013. It is also important to understand that the statutory $2,500 limit under IRS code section 125(i) applies only to salary reduction contributions under a health FSA. It does NOT apply to certain employer non-elective contributions (i.e. flex credits), to any type of contributions or amounts available for reimbursement under any other type of FSAs, health savings accounts, or health reimbursement arrangements, or to salary reduction contributions to cafeteria plans that are used to pay an employee’s share of health coverage premiums. This means that your salary reduced pre-tax share of your employer’s health plan is not included in the $2,500 limit nor is any type of flexible spending arrangement for dependent care assistance or adoption care assistance. The flexible spending arrangement for dependent care assistance remains at $5,000 per family.
If you are an employer, you must amend your current cafeteria plan to reflect this new annual limit. Plan amendments can be made at any time through the end of 2014 as long as the plan operates in accordance with the limitation after 2012 and the amendments are effective for plan years beginning after 2012. A cafeteria plan that fails to comply with the new code section 125(i) regulations for plan years beginning on January 1, 2013 will not be considered a section 125 cafeteria plan and the value of the taxable benefits that an employee could have elected to receive under the plan during the plan year will be includable in the employee’s gross income. It is extremely important if you offer these benefits to your employees that you remain in compliance with the new regulations. Our affiliated CPA firm, Rollins & Associates, PC, can assist you in amending or establishing your employer-sponsored cafeteria plan. Rollins & Associates can have a customized plan prepared for your company for $1,000 or less.
The foregoing is based on the regulations as imposed by the Health Care Act and IRS code section 125(i). This information was taken from the Internal Revenue Service Bulletin, Notice 2012-40.
If you have any questions, please feel free to contact us at 404.892.7967 or mail@rollinsfinancial.com and we will be happy to provide a complimentary assessment of your specific situation.
Best regards,
Rollins Financial, Inc.
From the Desk of Joe Rollins
After President Obama was reelected in early November, the equity markets took a noticeable hit. Many investors perceive Obama to have little regard for satisfying the current deficit, intent on increasing taxes and being anti-business, and therefore, the equity markets sold off to the tune of an over 6% loss in just over one week. Fortunately, however, the markets rallied prior to the end of the month, closing the month essentially flat.
For the month of November, the Standard & Poor’s Index of 500 Stocks ended with a .6% gain. The NASDAQ Composite was up 1.3%, and the Dow Jones Industrial Average was down a marginal .2%. Year-to-date, the S&P is up exactly 15%, the NASDAQ is up 16.9%, and the DJIA is up 9.3%. If you recall, at the beginning of the year I expected the S&P to have a mid-double-digit gain for the year, and that expectation has now been reached. If the month of December remains steady, excellent returns will have been realized for 2012. In spite of the negative news, 2012 has been a great investment year.
Although the equity markets have been especially volatile the first two months of the 4th quarter, the S&P is down an only marginal 1.4% for the 4th quarter so far. Given the high volatility, you might expect for the loss in equity markets to have been greater.
Historically, December through May of the following year are the best months for the equity markets; this is not a coincidence. Many corporations – and individuals, to a lesser degree – fund their retirement plans during these months. Corporations are obligated to fund their pension plans, 401(k) plans, and matching contributions during the month of December through the first quarter of the following year. Traditionally, this has allowed the equity markets to float up during this period. The term ’Santa Clause Rally’ has been used by Wall Street almost since the beginning of time, and it’s not at all based on Christmas sales. Rather, it’s based on corporate funding of retirement accounts at year-end.
While it makes some sense to review prior year trends when making stock market projections, at Rollins Financial we believe projections should be based on more than just theory. As I have explained in prior posts, the best projections come from analyzing corporate profits. Therefore, the current fiscal cliff fixation is relatively immaterial to long-term investing. Going over the cliff could certainly create hefty, short-term swings, but in the end, it is not likely to have much of an overall negative long-term effect.
Unfortunately, the bozos in Washington can’t seem to focus on reality. Neither side is currently making a valid attempt to negotiate the issues. I find it unbelievable that the President’s answer to solving the country’s deficits is to dramatically increase taxes and increase spending, moves that have proven in the past to only increase deficits. And while Republicans have conceded to some tax increases, they are also too fixated on not increasing marginal tax rates which must be negotiated if they are committed to getting something done.
History documents that higher tax rates do not lead to higher revenue for the government, but it doesn’t appear to me that President Obama has read any of those reports. For example, in fiscal 2010-2011, Britain instituted a 50% income tax rate on millionaires (the previous rate was 40%) causing the number of taxpayers declaring income of £1 million for the year to fall more than 60% from the prior year.
Britain’s goal in this 10% increase was to raise an additional £2.5 billion in revenue. But at the 50% rate, Her Majesty’s Revenue and Customs yielded £6.5 billion from millionaires whereas in 2009-2010, British millionaires paid £13.4 billion in taxes. Even though results such as these are well-documented, we continue hearing remarks like, "We're going to have to see the rates on the top two percent go up and we're not going to be able to get a deal without it," from President Obama.
President Obama seems totally unable to deal with the U.S.’s long-term fiscal issues, but neither side is proposing anything that resembles a meaningful plan to solve the huge and growing deficit. Perhaps we would all be better off going over the cliff. If that happens, at least there is a plan in place to solve the deficit problem. However, you can call me Pollyanna, but I still believe that some compromise will be reached despite the gross incompetence in Washington.
We have prepared a few charts and supporting exhibits that will hopefully leave you feeling a little more optimistic about the markets and the economy. The chart below reflects that the performance of the stock market closely follows the performance of corporate earnings.
As the chart above indicates, stock prices increase as corporate earnings rise. The reality is that for most of the 2000 years, the S&P 500 was selling at greater than corporate earnings. In recent years, corporate earnings have increased dramatically higher than the stock indexes even with the reality of lower interest rates. We believe this bodes well for higher stock prices in the future. See Exhibit 1 for more details.
Historically, the average price/earnings multiple for the market is about 15 times earnings. The reasonable price for the S&P 500 is currently 14 times 2012 earnings estimates of approximately $102, which means that it is slightly undervalued at the present time.
However, there are many reasons that the current P/E multiple may be low. Given the current low interest rate environment of practically zero, arguably, the market could easily sell at a much higher multiple than the historic rate of 15. Additionally, over the last several years, there has clearly been a recession in Europe and a slowdown in Asia. Many argue that corporate earnings of the 500 largest U.S. corporations could explode to the upside if Europe solves its problems and Asia begins accelerating again. See Exhibit 2 for more details.
The unemployment chart below further illustrates my foregoing point. Unemployment has not improved dramatically, but it is gradually improving. Again, while job growth is still lackluster and unemployment is way too high, the chart does demonstrate how corporate earnings could be positively impacted if unemployment dropped to a more normal level. With more people working, corporate earnings will be higher. See Exhibit 3 for more details.
The chart below reveals that housing has finally turned the corner. The recovery has not been an upward explosion, but even a minor improvement in housing has a major positive economic impact. So many people are employed, directly or indirectly, in the housing market. While we all consider contractors to be dependent upon the housing market, there are also many suppliers who are dependent upon the housing market. Many industries sell to the housing industry that will be positively affected in the way of earnings if housing recovers to the pre-boom years. See Exhibit 4 for more details.
Corporate bonds in November were basically flat while high-yield bonds and foreign bonds had gains almost equal to the S&P 500. Undoubtedly, we are in an interesting time. Under normal circumstances, we would expect interest rates to begin accelerating upward as the economy improves. However, the Federal Reserve has essentially guaranteed that short-term rates will not increase before 2015. Never in the history of American finance has the Fed provided such guarantees. Therefore, even though it’s intuitive and reasonable to believe that bonds would suffer major losses in 2013 due to this artificial restraint of interest rates, it’s unlikely that we’ll see an increase in overall interest rates paid by corporations. This low interest rate environment and moderate increase in inflation is positive for corporate earnings, and therefore, also bodes well for higher stock prices. See Exhibit 5 for more details.
The final exhibit reflects some of the political developments presently at hand. These are short-term issues we are facing, and none of us can know exactly how this political ping pong match will end. Regardless of the outcome, my argument from an investment standpoint is that we are better off investing using the information we have at hand rather than attempting to invest based on uncertainties. See Exhibit 6 for more details.
I wanted to provide you with real information rather than hyperbole. Rather than attempt to evaluate the investment environment in the future, we want to provide you with facts that should provide a level of comfort that the market is not in for a major downturn for the long-term. In fact, we anticipate that the market could gradually move higher over the next 13 months. Moreover, I expect returns for 2013 to be approximately 10%, or an amount five times the current rate of inflation – but with high volatility along the way. With mid-double-digit returns in 2012 and double-digit returns in 2013, we should have nice two-year returns, building wealth for our clients.
If you aim to build true wealth for your retirement years, no other investment vehicle offers you the potential for gains going forward than the equity markets. I am often stunned by an investor’s apprehension to invest early in a year. If you want to maximize your IRA returns, the very best time to invest is in January of each calendar year.
As always, we welcome the opportunity to meet with you and discuss your financial goals and strategies. If we do not see you during the holidays, we certainly wish you a happy and healthy season.
As always, the foregoing are my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.
Best regards,
Joe Rollins
