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• Safe Harbor 401(k) Plan Offers Many Advantages (August 2010)
  

  Benefit Insights®	August 2010 Newsletter
  Safe Harbor 401(k) Plan Offers Many Advantages
  In this issue: Introduction Nondiscrimination Testing Safe Harbor Plan Eliminates Nondiscrimination Testing Safe Harbor Contributions Nonelective Contributions Matching Contributions How the Plan is Established Notice Requirement Other Rules Suspension of Contribution Automatic Enrollment Safe Harbor Eligible Combined Plan Conclusion
  The continuing popularity of the 401(k) plan has made it the most widely used savings plan in the country. As employers have had to shift limited resources to cover the ever-increasing cost of other benefits, the ability for employees to contribute to their retirement savings helped to ensure the continuation of these plans. There are numerous regulations that govern 401(k) plans by encouraging broad based participation and preventing owners and highly paid employees from receiving disproportionately greater benefits than other employees. Plans must either satisfy a series of nondiscrimination tests each year or be designed to satisfy certain "safe harbor" standards that are predetermined not to be discriminatory. While the term "safe harbor" is used in many different retirement plan contexts, it has a very specific meaning when it comes to 401(k) nondiscrimination tests. Before considering the specifics, it is helpful to have a general understanding of the nondiscrimination rules. Nondiscrimination Testing Contributions to a 401(k) plan may include employee salary deferrals, employer matching contributions and/or profit sharing (a/k/a nonelective) contributions. Each year, the plan must demonstrate that contributions for highly compensated employees (HCEs) are not disproportionately larger than those for non-HCEs (NHCEs). HCEs are generally owners of more than 5% of the company and any employee with compensation in the prior plan year over a specified level ($110,000 for 2009 and 2010). The actual deferral percentage (ADP) test and the actual contribution percentage (ACP) test are run after the end of each plan year. The ADP test compares the average deferral rate for the HCE group to that of the NHCE group. In most cases, as long as the HCE average is not more than 2 percentage points greater than the NHCE average, the test passes. The ACP test works the same way except that it analyzes employer matching contributions. Consider this example: Elaine owns a small company and has one employee, Mark, who earns $150,000 per year. She has eight other employees who all earn under $100,000 per year. All employees are eligible to participate in the company's 401(k) plan. Elaine and Mark are considered HCEs, while the other eight employees are NHCEs. If the average deferral rate for the NHCEs is 3%, then the average for Elaine and Mark cannot exceed 5%. If Mark defers 2% of his compensation, Elaine could defer up to 8% of her compensation and keep their average at or below 5%. The top heavy determination is another test that is based on the assets in the plan. If, on the last day of the previous year, the combined accounts of certain company officers and owners (referred to as "key employees") exceed 60% of the plan's total assets, the plan is considered top heavy. Such plans are generally required to provide a minimum contribution of 3% of compensation for all eligible non-key employees. This can come as an unwelcome surprise for employers that had not anticipated or budgeted for contributions to their retirement plans.   Safe Harbor Plan Eliminates Nondiscrimination Testing The primary benefit of the safe harbor 401(k) plan is that the plan is deemed to automatically satisfy the ADP and ACP tests. This allows HCEs to defer up to the annual dollar limit ($16,500 for 2010) regardless of how much or how little the NHCEs defer. In addition, plans that include only employee salary deferrals and safe harbor contributions (described below) are deemed to satisfy the top-heavy requirements. As a trade-off, safe harbor plans must meet a number of requirements including minimum employer contributions, immediate vesting and participant notices. Safe Harbor Contributions The employer can satisfy the contribution requirement by making either a nonelective contribution or a matching contribution on behalf of each eligible NHCE. The contribution can, but is not required to, be made on behalf of HCEs as well.   Nonelective Contribution The nonelective contribution must be at least 3% of compensation for the plan year for each eligible employee regardless of whether or not they make salary deferral contributions. Compensation earned prior to an employee's eligibility date can be ignored. Plans that allocate profit sharing contributions using a new comparability (a/k/a cross-tested) formula may prefer the nonelective option, because the safe harbor contribution may also be used to satisfy some of the complex testing requirements applicable to such plans. Matching Contribution The matching option requires the employer to match participants' elective deferrals at the rate of 100% of the first 3% of compensation deferred, plus 50% of the next 2% of compensation deferred (maximum match of 4%). The employer can choose to make an enhanced match, for example, 100% of the first 4% of compensation deferred, as long as certain guidelines are followed. Additional matching contributions can also be made, and they will be exempt from the ACP test, as long as: They are not based on deferrals in excess of 6% of compensation, and If they are discretionary, they do not exceed 4% of compensation. How the Plan is Established Any 401(k) plan can be set up as, or amended to become, a safe harbor plan. Generally, safe harbor provisions must be in effect for the entire plan year, although a new plan can be established during the year as long as it will be in effect for at least three months. This can be reduced to as little as one month for newly formed companies with a short initial fiscal year. Existing profit sharing plans without 401(k) provisions can be amended mid-year to become safe harbor 401(k) plans, subject to the three-month requirement. The plan document must specify whether the plan will use the nonelective or matching contributions formula, and it must address all other safe harbor requirements described below.   Notice Requirement A notice must be provided to eligible employees within a reasonable period before the beginning of the plan year (or safe harbor effective date). It will automatically be considered timely if distributed 30 to 90 days prior to the beginning of the plan year. For plans that provide for immediate eligibility, new hires should be provided the notice on their dates of hire. The notice must contain the basic features of the plan, including the safe harbor contribution to be provided and rules relating to elective deferrals, other contributions, withdrawals, vesting, etc. Some details can be provided by reference to the Summary Plan Description. Safe harbor plans using the nonelective contribution can be designed as "maybe" plans. Such a design requires that two notices be provided to participants. The timing of the first notice is the same 30 to 90 days described above, and it must inform participants that the employer might make a safe harbor contribution for the coming year. The second notice is provided 30 to 90 days before the end of the year and informs participants whether or not the contribution will be made. In addition to satisfying this expanded notice requirement, the "maybe" provisions must be reflected in the plan document.   Other Rules Safe harbor employer contributions must be fully vested and are not available for in-service distribution prior to age 59½. An eligible participant cannot be required to work a specified number of hours or be employed on the last day of the plan year in order to receive the safe harbor contribution.   Suspension of Contribution The safe harbor matching contribution can be eliminated during the year by adopting a formal plan amendment and providing notice to participants 30 days prior to the effective date. Contributions must be made through the end of the 30-day period. Plans making this change lose safe harbor status for the entire year, subjecting them not only to the ADP/ACP tests but also to the top heavy minimum contribution requirement which could be more expensive than the safe harbor match would have been. As a result of the struggling economy, the IRS issued proposed regulations in 2009 (which can be relied upon pending final regulations) that also allow employers to suspend safe harbor nonelective contributions if they are experiencing a substantial business hardship. This is determined based upon whether or not: The employer is operating at an economic loss; There is substantial unemployment or underemployment in the trade of business and in the industry concerned; The sales and profits of the industry concerned are depressed or declining; and It is reasonable to expect that the plan would not continue unless the contributions are reduced or suspended. The 30-day notice and testing requirements that apply to the suspension of safe harbor matching contributions also apply to the suspension of safe harbor nonelective contributions.   Automatic Enrollment Safe Harbor   A modified version of the safe harbor plan is available for 401(k) plans that contain automatic enrollment features. They provide that eligible employees will automatically defer a specified percentage of their compensation into the plan unless they elect not to participate, and the default deferral rate must generally escalate each year.   The rules for so-called Qualified Automatic Contribution Arrangements (QACA) are similar to the regular safe harbor rules, except that the QACA matching requirement is 100% of the first 1% of compensation deferred, plus 50% of the next 5% of compensation deferred (maximum match of 3.5%). In addition, safe harbor contributions under the QACA must be 100% vested after two years of service rather than the immediate vesting required of traditional safe harbor plans. The participant notice must contain additional information describing the automatic enrollment features.   Eligible Combined Plan   Beginning in 2010, there is a new type of safe harbor plan that includes the combination of a 401(k) and a defined benefit formula in the same plan. In order to qualify for this arrangement, the plan must include an automatic enrollment 401(k) provision, a safe harbor match or nonelective contribution as well as a minimum defined benefit. The so-called DB(k) plan is only available for employers with fewer than 500 employees and is so new that the IRS has not yet issued regulations describing the mechanics of how the plans are supposed to operate.   Conclusion   A safe harbor design is an excellent way for many employers to get the most out of their 401(k) plans. By eliminating ADP/ACP nondiscrimination testing, all employees can contribute up to the annual deferral limit and not be concerned about the possibility of refunds after year-end. Safe harbor contributions may also eliminate top heavy requirements and can be coordinated with other contribution allocations. There is much to like about the safe harbor 401(k) plan. [top of page]
  The information contained in this newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. You should not act or rely on any information in this newsletter without first seeking the advice of a qualified tax advisor such as an attorney or CPA. © 2010 Benefit Insights, Inc. All rights reserved.

• Roth 401(k) FAQs (June 2010)
  

  Benefit Insights®	June 2010 Newsletter
  Roth 401(k) FAQs In this issue: Introduction What types of plans can allow Roth deferrals? Are there any income restrictions preventing higher wage earners from making Roth 401(k) contributions? What are the limits on the amount of Roth deferrals a participant can contribute? Can catch-up contributions be designated as Roth deferrals? What is all the buzz about Roth conversions in 2010? Can a participant elect to convert pre-tax 401(k) deferrals into Roth 401(k) deferrals? Can Roth 401(k) accounts be directly rolled over into another 401(k) plan or a Roth IRA? Can a Roth IRA be rolled over into a Roth 401(k) or 403(b)? What are the requirements that must be satisfied to receive a tax-free distribution from a Roth account? What is the five-year period and when does it start? Is the plan sponsor or the participant responsible for tracking the five-year period? Does the five-year period start over when a participant goes to work for another company and makes Roth deferrals into his new employer's plan? Is there any coordination between the Roth 401(k) and Roth IRA five-year periods? What happens if a participant takes a loan from the Roth account and then defaults, requiring deemed distribution of the outstanding balance? Do Roth deferrals affect ADP testing? Can availability of Roth deferrals be restricted to those whose incomes are high enough to maximize their contributions? Are Roth deferrals considered when calculating the employer matching contribution? Are Roth deferrals subject to Required Minimum Distributions? Do the automatic IRA rollover rules apply to Roth deferrals? Can a plan that does not otherwise allow Roth contributions accept a Roth rollover? Is the employer required to report any information at the time Roth deferrals are contributed to the plan? How are Roth distributions reported on Form 1099-R? Are there any reporting requirements for a participant who elects Roth deferrals? Which is better for participants — Roth or pre-tax deferrals? Conclusion
  Designated Roth contributions (a/k/a Roth 401(k) or Roth deferrals) have been available since 2006, but a change in the tax laws governing Roth IRAs has reenergized discussions about this feature. This article is in Q&A format and addresses some of the more common questions about Roth 401(k) contributions. But first, a brief overview…   Traditional deferrals reduce a participant's income for federal and, in most cases, state tax purposes at the time of contribution. Those amounts grow on a tax-deferred basis until the participant takes a distribution, which is taxable as ordinary income. Roth deferrals are fully taxable to the participant at the time of contribution. However, if certain requirements are met, so-called "qualified distributions" of Roth deferrals and the earnings thereon are completely tax free.   Apart from the tax differences, Roth deferrals are treated the same as traditional deferrals for all plan purposes. The normal limits and non-discrimination requirements apply. Roth deferrals are also subject to the same withdrawal restrictions, i.e. death, disability, retirement, financial hardship, etc.   What types of plans can allow Roth deferrals?   Both 401(k) and 403(b) plans can include a Roth component.   Are there any income restrictions preventing higher wage earners from making Roth 401(k) contributions?   No. Unlike Roth IRAs, any employee eligible for the plan can make Roth deferrals regardless of income.   What are the limits on the amount of Roth deferrals a participant can contribute?   The salary deferral limit is $16,500 for 2010. Roth and pre-tax deferrals are added together for purposes of this limit.   Can catch-up contributions be designated as Roth deferrals?   Yes. Catch-up contributions merely represent an increase in the regular deferral limit for those who are catch-up eligible.   What is all the buzz about Roth conversions in 2010?   Prior to 2010, those above a certain income threshold (generally $120,000 for individuals and $176,000 for married couples) were not permitted to make Roth IRA contributions. Starting this year, that income cap is removed for those who wish to convert non-Roth IRAs into Roth IRA accounts. The amounts converted must be included in taxable income; however, those who convert during 2010 have the option to spread that tax liability equally over two years.   Can a participant elect to convert pre-tax 401(k) deferrals into Roth 401(k) deferrals?   No. The regulations make it very clear that when a participant elects to make pre-tax deferrals, that election is irrevocable. While the participant may change how future contributions are designated, existing contributions cannot be converted within the plan. However, there has been discussion on Capitol Hill about changing the law to allow conversions inside the 401(k) plan similar to the IRA conversions that are allowed beginning in 2010.   Can Roth 401(k) accounts be directly rolled over into another 401(k) plan or a Roth IRA?   Yes. Roth accounts from a qualified plan or 403(b) plan can be rolled into another qualified plan or 403(b) plan that allows Roth contributions. These amounts can also be rolled into a Roth IRA. Can a Roth IRA be rolled over into a Roth 401(k) or 403(b)?   No. Roth IRAs can only be rolled into other Roth IRAs.   What are the requirements that must be satisfied to receive a tax-free distribution from a Roth account?   A participant must complete a so-called five-year period and the distribution must occur on or after attainment of age 59½, death or disability. A tax-free Roth distribution is referred to as a qualified distribution.   What is the five-year period and when does it start?   The five-year period is generally a holding period a participant must satisfy to take a qualified distribution. It begins on the first day of the first taxable year in which a participant first makes Roth deferrals to the plan. For example, if a participant makes his first Roth deferral on October 1, 2010, the five-year period starts on January 1, 2010.   Is the plan sponsor or the participant responsible for tracking the five-year period?   Plan sponsors and their service providers are required to track the Roth five-year period as well as the amount of basis for each participant. This requirement is likely to present significant record-keeping challenges, especially in takeover situations.   Does the five-year period start over when a participant goes to work for another company and makes Roth deferrals into his new employer's plan?   It depends. If the participant rolls over his Roth account to the new plan, the portion of the five-year period already satisfied is transferred to the new plan. However, if the participant does not roll over the Roth account, his five-year period starts over with respect to contributions to the new plan.   Is there any coordination between the Roth 401(k) and Roth IRA five-year periods?   No. The two five-year periods are determined independently of one another. Thus, a rollover of a Roth deferral account into a Roth IRA requires the five-year period to be redetermined.   What happens if a participant takes a loan from the Roth account and then defaults, requiring deemed distribution of the outstanding balance?   A deemed distribution of a participant loan is never treated as a qualified distribution even if it occurs after the participant has satisfied the five-year period and attained age 59½, died or become disabled. Therefore, the portion of the deemed distribution attributable to Roth is subject to income tax. To avoid confusion in this area, the loan policy can be written to restrict participant loans to non-Roth accounts.   Do Roth deferrals affect ADP testing?   Yes. Roth deferrals are included with pre-tax deferrals for purposes of the ADP test. However, since Roth deferrals are not tax-deductible, lower-paid participants may be unable to defer at the same level as with pre-tax deferrals.   Example: Marge earns $50,000 and has $5,000 available to save for retirement. She is in a combined 25% tax bracket. If Marge makes pre-tax deferrals, she can contribute the full $5,000 to the plan. However, if Marge makes Roth deferrals, she must pay $1,250 (25% of $5,000) in taxes, leaving her with only $3,750 to contribute to the plan. Since Marge is a non-highly compensated employee, her lower deferral percentage would have a negative impact on the ADP test.   Annual Salary: $50,000 Total Available for Savings: $5,000   Pre-Tax Roth Income Tax (25%) 0 $1,250 401(k) Deferral $5,000 $3,750 Deferral Percent 10% 7.5% Employers may want to consider a safe-harbor 401(k) plan if they are likely to experience this situation.   Can availability of Roth deferrals be restricted to those whose incomes are high enough to maximize their contributions?   No. The availability of Roth deferrals is subject to the minimum coverage rules for 401(k) plans and the universal availability rules for 403(b) plans.   Are Roth deferrals considered when calculating the employer matching contribution?   Unless plan terms specify otherwise, pre-tax and Roth deferrals are both considered in the employer match calculation. Matching contributions are always treated as tax-deferred regardless of whether Roth deferrals are used in the calculation.   Are Roth deferrals subject to Required Minimum Distributions?   Yes. The regulations specifically provide that Roth deferrals are subject to the required minimum distribution rules. This is in contrast to Roth IRAs which do not require minimum distributions. It appears that a participant may avoid required minimum distributions on Roth deferrals by rolling over these amounts to a Roth IRA prior to the attainment of age 70½.   Do the automatic IRA rollover rules apply to Roth deferrals?   No. Roth and pre-tax accounts are considered separately for purposes of the automatic rollover rules. Therefore, to the extent the Roth and/or pre-tax portion of a participant's account is less than $1,000, it is not required to be automatically rolled over even though the combined vested account balance may exceed $1,000.   Can a plan that does not otherwise allow Roth contributions accept a Roth rollover?   No. Regulations clearly state that a designated Roth account can only be rolled over into another 401(k) or 403(b) plan that has a designated Roth program.   Is the employer required to report any information at the time Roth deferrals are contributed to the plan? Yes. Employers must report Roth deferrals in box 12 of Form W-2 with code AA for 401(k) plans and BB for 403(b) plans.   How are Roth distributions reported on Form 1099-R?   Roth distributions must be reported on a separate Form 1099-R using Code B. The non-taxable basis is reported in Box 5, and the beginning of the five-year period is reported in an unnumbered box next to Box 10. Are there any reporting requirements for a participant who elects Roth deferrals?   No. The participant is not required to report any additional information with respect to Roth 401(k) or 403(b) contributions. However, a participant rolling over a Roth deferral account into a Roth IRA must keep track of the rollover amounts and the five-year period with respect to the IRA.   Which is better for participants — Roth or pre-tax deferrals?   The answer to this question depends on each individual's financial situation and is beyond the scope of this article. Factors such as current and future tax brackets, estate planning needs and more will impact the decision, so participants should consult their tax and/or legal advisors for assistance in reviewing all of the relevant facts and circumstances.   Conclusion   While Roth IRAs are enjoying significant publicity due to the change in the conversion rules, it is interesting to note that there has not been significant implementation of the feature in 401(k) plans. According to the Profit Sharing/401(k) Council of America's 52nd Annual Survey, 36.7% of plans allowed Roth contributions in 2008; however, only 15.6% of participants that had the Roth option available elected to take advantage of it.   Plan sponsors who are considering Roth 401(k) deferrals should consult with their advisors and service providers to review the potential advantages and disadvantages that the Roth feature provides.   [top of page]
  The information contained in this newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. You should not act or rely on any information in this newsletter without first seeking the advice of a qualified tax advisor such as an attorney or CPA.   © 2010 Benefit Insights, Inc. All rights reserved.

• When Should the Check be in the Mail? (April 2010)
  
   

  Benefit Insights®	April 2010 Newsletter
  When Should the Check be in the Mail?
  In this issue: Introduction Plan Asset Rule General Deposit Timing Rule The Confusion Safe Harbor Deadline Offers Welcome Guidance for Small Plans What's the Worst that can Happen? Form 5500 Reporting of Late Deposits The Fix Is In Conclusion
  Every qualified retirement plan has a specific deadline by which employer contributions must be deposited to the plan for each plan year. However, the rules concerning participants' contributions have not been as clear. For example, in 401(k) plans, employees typically defer a portion of their weekly or biweekly paychecks. How soon should these contributions be deposited into the plan?   The question of when participant salary deferrals must be deposited into the plan is a long-standing issue and one about which the Department of Labor (DOL) has been quite vocal. The DOL has also been very active and aggressive in its enforcement in this area. Fortunately, final regulations issued earlier this year have provided welcome guidance for plans sponsored by small employers.   Plan Asset Rule   The regulation describing the deposit requirement is sometimes referred to as the "plan asset rule" since it actually specifies the timing within which participant contributions are deemed to become assets of the plan. This translates into a deposit deadline because it is considered an illegal loan from the plan if an employer is still holding those amounts on or after the date they are deemed to be plan assets. Pre-tax salary deferrals and after-tax employee contributions withheld from payroll as well as loan repayments are considered participant contributions for purposes of the rule.   General Deposit Timing Rule   There are two tests to determine when deferrals have become plan assets and, thus, whether they have been timely deposited. The better known of the two specifies that deferrals become plan assets, at the latest, on the 15th business day of the month following the month in which they were withheld from employees' paychecks. For example, any deferrals withheld during the month of May become plan assets, at the latest, as of the 15th business day of June.   The second test provides that, if it is possible for a plan sponsor to segregate deferrals from its general assets earlier than the 15th business day of the following month, then those deferrals become plan assets as soon as it is reasonably possible to segregate such amounts. This rule presents several operational issues to consider.   It is not uncommon for an employer to have several payroll periods in a month but to wait to deposit salary deferrals until after the final payroll of that month. However, the DOL has indicated that, if it is administratively possible to make a deposit within a certain number of days following the final payroll of the month, it should also be possible to make a deposit within the same number of days after each mid-month payroll. Therefore, any mid-month salary deferrals and loan repayments held and deposited with the final monthly payroll would be considered delinquent.   Example   ABC Company, Inc. has biweekly payroll with pay dates of Friday, April 16 and Friday, April 30, 2010. Salary deferrals for both pay periods are deposited on Wednesday, May 5th. Since the date of deposit is only 3 business days following the last pay date in April, the DOL would likely assert that deferrals from the April 16th payroll should have been deposited no later than April 21st and treat them as 14 days delinquent.   The Confusion   Since what is "reasonably possible" is open to interpretation, there has been a great deal of confusion in the industry as to how to appropriately determine when deferrals become plan assets. This confusion has been fueled by inconsistent DOL enforcement of the issue. For example, in some regions of the country, DOL investigators have treated 10 to 12 calendar days following payroll as timely while other regions have enforced a 3 to 5 calendar day standard. They set the standard and require plan sponsors to present evidence that a longer timeframe should be allowed.   To make matters more challenging, some DOL investigators have claimed the rule requires that deferrals not only be deposited within the requisite timeframe but also allocated to participant accounts and invested. In an effort to comply with such an ambiguous rule, some employers have gone to the other extreme and deposited deferrals as soon as they knew the amounts, even if prior to the actual payroll date.   While such an approach solves the DOL issue, it creates another problem in that IRS regulations prohibit depositing deferrals prior to the pay date to which they relate.   Safe Harbor Deadline Offers Welcome Guidance for Small Plans   Earlier this year, the DOL finalized new regulations that provide much needed clarity to this rule. In short, the new regulations create a safe harbor timeframe in which to deposit employee contributions and loan repayments. As long as those amounts are deposited into the plan no later than the 7th business day following payroll, they are deemed to be timely, even if the employer is able to make the deposit earlier.   The regulations also clarify that it is only the deposit, not the allocation or investment, that must occur within the requisite window.   While the new guidance removes much of the ambiguity, there are several important points to note. First, as with other plan-related safe harbors, the 7-day safe harbor is optional. Employers who choose to make deposits outside of this window or do so inadvertently lose reliance on the safe harbor and are judged by the "as soon as reasonably possible" standard which may call for a 3 to 5 day deposit window. Thus, a deposit on the 8th day will not be considered one day late—it will be 3 to 5 days late.   Second, the safe harbor is only available to plans with fewer than 100 participants as of the first day of a given plan year. While many plan sponsors may define a participant as someone who is actively contributing to the plan, the DOL considers anyone eligible to make contributions to be a participant in addition to terminated employees who still have plan balances. This means that larger plans cannot assume that the DOL will consider deposits made within 7 business days to be timely.   What's the Worst that can Happen?   As noted above, the DOL treats late deposits as a loan of plan assets to the plan sponsor. Such a loan is a "prohibited transaction" (PT) and a breach of fiduciary responsibility. As a PT, the delinquency subjects the plan sponsor to a 15% excise tax. The excise tax is applied again for each year (or portion of a year) in which the PT remains uncorrected.   In addition, another PT, subject to its own excise tax, is deemed to occur each year until correction is made. This is often referred to as a cascading or pyramiding excise tax. There is no proration based on the number of days that elapse, so even though a PT occurs near the end of the year, the full excise tax applies.   Form 5500 Reporting of Late Deposits   Late deposits are required to be reported each year on Form 5500 (line 4a of Schedule H or I, whichever is applicable). New rules imposing penalties on service-providers who improperly complete Form 5500 make it unlikely preparers will "look the other way" on this reporting requirement even if the deposit is only a few days late. In addition, CPAs who audit large plans are required to review the timeliness of deferral deposits and note any delinquencies in their reports.   As if the above isn't enough, the DOL issues monthly press releases announcing lawsuits it has filed against large and small companies alike for failure to timely remit salary deferrals of amounts as low as $5,000.   Further, the DOL recently announced the Contributory Plan Criminal Project that could result in criminal prosecution of employers who "may convert employee payroll contributions for their own personal use or may use employee contributions to pay business expenses."   The Fix is In   Since there are numerous avenues for the DOL to become aware of delinquencies, it is in an employer's best interest to voluntarily take corrective action as soon as possible before an investigator knocks at the door. The DOL's Voluntary Fiduciary Correction Program (VFCP) provides specific guidance on how to correct a late deposit.   Step 1 Deposit all outstanding delinquent amounts as soon as possible.   Step 2 Provide an additional contribution to participants to make them whole for any lost investment earnings. This is required even if the stock market has had negative returns during the timeframe in question.   The DOL provides an online calculator on its website to use to determine the lost earnings amount. The following information is required to use the calculator: Amount of late deferrals; Loss Date: The date the deferrals should have been deposited; Recovery Date: The date the deferrals were actually deposited; and Final Payment Date: The date the lost earnings amount will be deposited. If multiple payrolls are delinquent, each must be entered separately into the calculator.   Step 3 Submit documentation of the correction to the DOL and request a no-action letter.   Some employers choose to make the corrective contributions but forego the formal submission. While that approach may make the participants whole, the employer does not have any assurance against DOL action and must still pay the excise tax. As long as the deferrals in question were not more than 180 days delinquent and the employer follows VFCP to apply for a no-action letter, the excise tax is waived.   Conclusion   The new safe harbor regulation greatly clarifies the deposit requirement for employers that sponsor smaller 401(k) plans. Those who choose not to avail themselves of this relief should carefully review their process for transmitting employee contributions to their plans and maintain careful documentation describing the amount of time it takes to complete the process each pay period as well as an explanation of why it cannot be completed more quickly.   The DOL has made it clear that it plans to continue actively enforcing the deposit timing rules, to ensure employee contributions are used for the purpose for which they were intended. Therefore, it is important for all plan sponsors to review their deposit procedures to ensure contributions are being made on a timely basis. [top of page]
  The information contained in this newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. You should not act or rely on any information in this newsletter without first seeking the advice of a qualified tax advisor such as an attorney or CPA. © 2010 Benefit Insights, Inc. All rights reserved.

• Participants are on a Need to Know Basis...and They Need to Know (February 2010)
  
  
  

  Benefit Insights®	February 2010 Newsletter
  Participants are on a Need to Know Basis...and They Need to Know
  In this issue: Introduction Notices Required for all DC Plans Summary Plan Description (SPD) and Summary of Material Modification (SMM) Summary Annual Report (SAR) Participant Benefit Statement Beneficiary Designation Forms Fee Disclosure Provision-Specific Notices Automatic Enrollment Notice Safe Harbor Notice Investment Disclosures Qualified Default Investment Alternative (QDIA) Notice Diversification of Employer Securities 404(c) Disclosure Event-Driven Notices Distribution Notices Participant Loans Blackout Notice It's Not Easy Being Green Conclusion
  It seems that every time you turn around, you are required to provide yet another notice to the participants in your company's retirement plan. While plan-related notices are not a new phenomenon, the Pension Protection Act (PPA) took the concept to a different level by mandating a host of new notices. Sponsors of 401(k) plans face the task of providing as many as 40 or more different notices. Some apply to all defined contribution (DC) plans and others are plan-design or event driven. While opinions differ on the most effective method to help employees understand this deluge of information, the focus of this article is how to satisfy the regulatory notice requirements to keep your plan in compliance.   Notices Required for all DC Plans All ERISA-covered, DC plans must provide certain notices regardless of the provisions they contain.   Summary Plan Description (SPD) and Summary of Material Modification (SMM)   The SPD is a "plain English" summary of a plan's provisions. All SPDs must describe the following: Eligibility; Contributions; Vesting; Distributions; and Plan contact information. The SPD must be distributed within: 90 days of initial eligibility; 120 days of the plan becoming subject to ERISA; and 30 days of receipt of a written request. Sponsors must generally update their SPDs at least once every five years. For amendments between updates, participants must receive an SMM describing the change. Although the deadline for the SMM is the 210th day of the year following the year the amendment is adopted, it is a best practice to notify participants of the change as soon as possible. The Department of Labor (DOL) can assess a sponsor penalty of up to $1,100 per day if an SPD/SMM is late to a single participant. Failure to provide an SPD/SMM within 30 days of a participant's written request may entitle the participant to up to $110 per day.   Summary Annual Report (SAR)   The SAR provides a snapshot of the financial schedules attached to Form 5500. The SAR advises participants of their rights to additional related information and how to contact DOL if they have further questions. The deadline to distribute the SAR is two months following the due date (with extensions) for filing Form 5500.   Participant Benefit Statement   The participant benefit statement summarizes activity in a participant's account for a given time period. Generally, each statement must include the following information: Beginning account balance; Contributions and/or distributions; Investment gain or loss; Ending account balance; Vesting; Statement regarding importance of diversification; Description of each asset in which funds are invested; and DOL website for more information. Plans that allocate profit sharing contributions using permitted disparity must include a detailed description of the allocation method. A plan's investment arrangement dictates the frequency with which statements must be provided. If any portion of the plan has participant-directed investments, statements must be provided within 45 days of the close of each quarter. For trustee-directed plans, the statement is due annually by the deadline for filing Form 5500. The penalty for late statements is $100 per day per participant. Some participant-directed plans are valued only once each year. Such plans are still required to provide quarterly statements based on the most recently available information. That may result in participants receiving the exact same statement four times throughout the year.   Beneficiary Designation Forms   While not officially notices, beneficiary designation forms are extremely important plan documents. A number of beneficiary disputes are litigated each year in the federal Circuit Courts of Appeals. To lessen the chance of this type of litigation, sponsors should ensure all participants complete beneficiary designation forms and update them any time they experience a "life event" such as a marriage, divorce, etc.   Fee Disclosure   Congress and DOL have recently focused attention on fee transparency in retirement plans. While there is no formal requirement at this time, it is anticipated that in the near future, plans will be required to distribute notices describing the fees allocated to each participant's account each quarter.   Provision-Specific Notices   A plan can include provisions that subject it to additional notice requirements. For example, 401(k) plans must provide information related to salary deferrals while non-401(k) plans do not.   Automatic Enrollment Notice   Plans that include automatic enrollment must notify participants of: The default deferral rate; Their right to defer a different amount or not at all; and The default investment to be used if they do not make an investment election. The notice is due 30 to 90 days prior to initial coverage by the automatic enrollment feature and 30 to 90 days before the start of each subsequent plan year. Plans that provide eligibility on date of hire or very shortly thereafter can provide the notice on an employee's hire date.   Safe Harbor Notice   There are four types of safe harbor 401(k) plans and all are required to notify participants 30 to 90 days prior to the start of each plan year. The notice must describe the plan's contribution, distribution and vesting provisions. Failure to timely provide the safe harbor notice is an operational failure that can subject the plan to disqualification.   Investment Disclosures   Defined contribution plans allowing participants to direct the investment of some or all of their accounts must provide notices that inform and educate participants on the options available to them.   Qualified Default Investment Alternative (QDIA) Notice Participant-directed plans must specify the investment option to be used as the default when a participant does not make an election. Plan sponsors selecting a QDIA as their default must inform participants of the fund selected and notify them of their right to select a different option. The notice must be provided at least 30 days before the initial default investment and 30 days prior to the start of each subsequent year.   Diversification of Employer Securities   Certain publicly traded companies that include employer stock as an investment option must notify participants of their right to diversify their accounts and the importance of maintaining a well-diversified portfolio. This notice is due 30 days before a participant becomes eligible to diversify. Delinquent notices are subject to a penalty of $100 per day per participant.   404(c) Disclosures   Fiduciaries that seek to avail themselves of the ERISA 404(c) safe harbor must provide additional participant disclosures including: List of investment options including general description of risk/return characteristics; List of investment managers; Description of fees; Limitations on the exercise of voting rights; and Contact information for a responsible plan fiduciary. Event-Driven Notices   Some notices are required on the occurrence of certain events or transactions.   Distribution Notices   When participants request distributions, there are several documents that must be provided before and after the date of distribution. Rollover Notice and Special Tax Notice: describes participants' rights and the tax implications of electing a rollover in lieu of cash. Due 30 to 180 days prior to the date of actual distribution. Form 1099-R: Due by January 31st of the year following the year of distribution. Although the IRS recently updated its sample Special Tax Notice, it does not include the rollover notice. Plan sponsors should either incorporate the mandatory rollover language or provide a separate notice to satisfy this requirement. The pre-distribution paperwork for plans providing automatic IRA rollover of vested balances under $5,000 must notify employees of the financial institution and investment option to be used as well as any associated fees.   Participant Loans   In order to qualify for the prohibited transaction exemption for participant loans, the plan must provide the following items when a participant requests a loan: Participant loan program (if not included in the SPD); Loan application; Promissory note; Amortization schedule; Irrevocable pledge; and Truth-in-lending disclosure (not required for loans issued after July 1, 2010). Blackout Notice   A blackout period occurs when participants' access to their accounts is restricted for more than three consecutive business days. In response to several corporate scandals involving 401(k) plans, a notice is now required at least 30 days prior to the start of the blackout. The notice must identify the beginning and ending week, explain rights and investments affected and advise as to the prudence of a diversified portfolio. There is a penalty of $100 per day per participant for failure to give notice, and the failure must be reported on Form 5500.   It's Not Easy Being Green   Many companies are making efforts to "go green" by using electronic communication in lieu of paper. The IRS and DOL permit electronic delivery of most notices to employees who access the electronic delivery system as part of their jobs. Since participant disclosures must generally be "pushed" to employees rather than posted in a common location, providing kiosks to access notices does not satisfy this requirement. Participants without job-related access can follow a detailed process to consent to e-delivery. Employees not fitting into one of these categories must receive hard copy notifications.   Conclusion   These are only a few of the many notices plan sponsors and participants must juggle. There are additional notices for plans that map investments when changing service providers, request a determination letter from the IRS or permit distributions in the form of annuities. Several industry organizations are working with the government agencies to identify more efficient and effective methods to communicate retirement benefits to employees. In the meantime, your participants are on a need to know basis…and they need to know! [top of page]
  The information contained in this newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. You should not act or rely on any information in this newsletter without first seeking the advice of a qualified tax advisor such as an attorney or CPA. © 2010 Benefit Insights, Inc. All rights reserved.

• Mandatory Electronic Filing Applies to Form 5500 Soon! (December 2009)
  

  Benefit Insights®	December 2009 Newsletter
  Mandatory Electronic Filing Applies to Form 5500 Soon!
  In this issue: Introduction Meet EFAST2 Three Components Internet Registration System (I-REG) Internet Filing System (I-FILE) Internet Filing Acceptance System (I-FAS) Who Needs Credentials? Where Do I Sign? Electronic Public Disclosure Room What Do I Need To Do? IRS and  Social Security Annual Limitations
  When Congress passed the Pension Protection Act of 2006 (PPA), it enacted several provisions that affect your Form 5500 filing. The first provision requires that you file Form 5500 electronically, thereby eliminating the expensive paper processing system currently in use by the government.   The second important provision of the PPA relating to reporting and disclosure is the creation of an electronic public disclosure "room" on the Department of Labor's (DOL) web site. Both of these provisions apply to just about every Form 5500 filing made after December 31, 2009.   Meet EFAST2 The new fully electronic processing system is known as EFAST2 and is scheduled to go live on January 1, 2010. Electronic filing applies to all Form 5500 reports filed for plan years beginning on or after January 1, 2009, except Form 5500-EZ which will be filed directly with the IRS on paper. In addition, any amended or late filings submitted after December 31, 2009 must be filed electronically using the new system.   Three Components EFAST2 has three components: I-REG, the Internet registration system, used to apply for credentials to, among other things, sign Form 5500 on behalf of the plan sponsor, the plan administrator or both; I-FILE, the Internet filing system, which provides the ability to go online to create, edit and submit filings for a valid form year and plan year; and I-FAS, the Internet filing acceptance system, which is the function that actually processes the transmitted filing.    Internet Registration System (I-REG) I-REG is the first stop for anyone wanting to interact with the new EFAST2 system. Each person will need an Internet connection and an email address to sign up for credentials via the I-REG program. There's more about establishing your electronic credentials below.   Internet Filing System (I-FILE) I-FILE is a free, limited-function, web-based application that provides the ability to create, edit and submit filings for a valid form and plan year. The I-FILE application includes validation, authentication and specific edit tests/checks to make sure the filing is complete before it is submitted. While most third-party preparers will opt to use software created by an EFAST2-approved vendor, a plan sponsor may find the application useful for preparing filings for welfare plans or small retirement plans.   Internet Filing Acceptance System (I-FAS) I-FAS, as previously noted, actually processes the filings as they are electronically submitted. The most important feature of I-FAS is that it establishes the "filing status" of the transmitted filing. The possible filing status messages are: Filing Unprocessable: Generally indicates that the EFAST2 system could not open the file that was transmitted. In this case, the filing is not treated as filed. Processing Stopped: Indicates that the file could be read but that critical errors were detected. The filer should plan to file an amended return to perfect the data. The filing is treated as "filed" for purposes of the "timely filing" rules. Filing Error: Indicates the file contains errors that are less onerous than indicated by a Processing Stopped filing status; however, the filer should plan to file an amended return to perfect the data. As with the Processing Stopped filing status, the Filing Error status message is treated as "filed." Filing Received: The optimal filing status message inasmuch as it indicates to the filer that the filing appears to be complete. Of course, the DOL or IRS may later request additional information; however, the filing is treated as complete until and unless there is further notification from the agencies.    Who Needs Credentials? The person(s) who signs the face of the Form 5500 on behalf of either the plan sponsor or the plan administrator (or both) must apply for "signer" credentials using the I-REG system. Plan sponsors will receive a postcard from the DOL, probably in January 2010, inviting them to apply for their credentials. There are several important rules about these electronic credentials: Only one set of credentials will be issued for each email address. Signer credentials permit the user to sign as the plan sponsor, the plan administrator or both. If, for some reason, a person wants multiple credentials, he or she must use distinct email addresses to apply for such separate credentials. An individual may apply for credentials as a filing author, filing signer, schedule author, transmitter or third party software vendor. Typically, persons who sign Form 5500 will require only the filing signer credentials because they will rely on their service providers to actually author and transmit the filing. The credentials belong to the individual, not the business for which he or she works. Think of the credentials in the same way you think of an individual's social security number—the social security number always follows the individual, no matter where or whether he or she is employed. For this reason, individuals who have signer credentials will want to update their profiles whenever their email addresses change so that any notification from DOL is delivered to them in a timely fashion. The majority of I-REG applicants will be seeking signer credentials only. The individual applying for credentials will log in to I-REG at www.efast.dol.gov  to register for his or her credentials. There will be a series of input screens for the person to act upon, culminating in the assignment of specific electronic credentials, comprised of a User ID and PIN. Form 5500 preparers may apply for author and/or transmitter credentials in a similar fashion, although the need for such credentials will be driven by which EFAST2-approved third-party software vendor is selected.   Where Do I Sign? While the new system is referred to as a paperless system, that is only on the part of the government. Plan sponsors must maintain a fully executed (wet signature) copy of the Form 5500 with all schedules and attachments. If the filing is for a defined benefit plan, the wet signature copy of the actuarial schedule, Schedule SB or MB, must be part of the plan's permanent records as well. The instructions for the 2009 Form 5500 indicate that the filer may store the plan's copy electronically, so long as the electronic copy captures the handwritten signatures. The electronic "signing ceremony," as it is dubbed, will be a new process for plan sponsors next year. Depending on the software used by your service provider, you will receive a notification (most likely by email) inviting you to link to the provider's software. There, you will be presented with a series of screens to act upon, thereby executing the signing ceremony. By inserting your User ID and PIN, you will have effectively signed the filing electronically. The plan sponsor will no longer ship a paper filing off to Lawrence, Kansas. Instead, in many cases, the service provider will transmit the electronically signed filing and provide the plan sponsor a copy of the filing status report for its records. The filing status, as described earlier, is proof that the filing was processable and verifies the date and time of receipt by the EFAST2 system of the electronic filing.   Electronic Public Disclosure Room The DOL has long maintained a Public Disclosure Room that holds all of the Form 5500 filings ever filed by any plan; however, access to data is available only by phone or by making a written request. Beginning with the 2009 Form 5500, the DOL will be building an electronic public disclosure function on its web site. Only the filings processed by the EFAST2 system will appear on this database and information also will continue to be accessible through the old Public Disclosure Room. The DOL expects to post filings to the new site within 24 hours of receipt by the EFAST2 system.   What Do I Need To Do? Fortunately, your service provider will be able to manage much of the transition to the electronic filing system for you. Software providers are still working out the details of their solutions so that everyone is ready for the January 1, 2010 go-live date. Watch for specific instructions from DOL and your service provider so that you are ready to make the jump to electronic filing.   IRS and Social Security Annual Limitations Each year the U.S. government adjusts the limits for qualified plans and social security to reflect cost of living adjustments and changes in the law. However, the 2009 limits will remain unchanged for 2010 because the applicable cost of living index has not been increased. Many of these limits are based on the "plan year." The elective deferral and catch-up limits are always based on the calendar year. Here are the 2010 limits as well as the three prior years for comparative purposes:   Limit 2010 2009 2008 2007 Maximum compensation limit $245,000 $245,000 $230,000 $225,000 Defined contribution plan maximum contribution $49,000 $49,000 $46,000 $45,000 Defined benefit plan maximum benefit $195,000 $195,000 $185,000 $180,000 401(k), 403(b) and 457 plan maximum elective deferrals $16,500 $16,500 $15,500 $15,500      Catch-up contributions* $5,500 $5,500 $5,000 $5,000 SIMPLE plan maximum elective deferrals $11,500 $11,500 $10,500 $10,500      Catch-up contributions* $2,500 $2,500 $2,500 $2,500 IRA maximum contributions $5,000 $5,000 $5,000 $4,000      Catch-up contributions* $1,000 $1,000 $1,000 $1,000 Highly compensated employee threshold $110,000 $110,000 $105,000 $100,000 Key employee (officer) threshold $160,000 $160,000 $150,000 $145,000 Social security taxable wage base $106,800 $106,800 $102,000 $97,500 *Available to participants who are or will be age 50 or older by the end of the calendar year.   [top of page]
  The information contained in this newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. You should not act or rely on any information in this newsletter without first seeking the advice of a qualified tax advisor such as an attorney or CPA. © 2009 Benefit Insights, Inc. All rights reserved.

• RPG Bulletin - 2010
  

  Major Highlighted Changes for 2010 (posted 10/19/09)

  • Maximum annual contribution to an individual's defined contribution plan accounts remains unchanged at $49,000.
  • Maximum elective deferral contribution to a 401(k) plan remains unchanged at $16,500. For anyone over age 50, there is an additional allowable "catch-up" (414(v)) contribution of $5,500.
  • Highly Compensated (414) Limit remains unchanged at $110,000.
  • Key Employee (416) Dollar Limit remains unchanged at $160,000.
  • Maximum annual payout from a defined benefit plan at the social security normal retirement age remains unchanged at $195,000 per year.
  • Maximum annual compensation that can be taken into account for determining benefits or contributions under a qualified retirement plan remains unchanged at $245,000.
  • The IRS continues to require that qualified plans maintain a fiduciary bond at 10% of plan assets to a maximum bond amount of $500,000.
  • Department of Labor regulations continue to enforce the provision that salary deferrals be sent to the plan account as soon as administratively feasible but never later than the 15th of the following month after deferral.
  • Section 132 (Transit/Parking) limits remain unchanged at $230/month for Mass Transit/Vanpool and $230/month for Parking. Section 125 (Medical/Dependent) limits remain unchanged.***

  ***The 2010 Section 132 limits have not yet been announced but we expect them to remain unchanged. Please check back soon for confirmation.

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• Voluntary Corrections for Qualified Plans (October 2009)
  

  Benefit Insights®	October 2009 Newsletter
  Voluntary Corrections for Qualified Plans
  In this issue: Introduction Plan Disqualification Top 10 Plan Qualification Failures Employee Plans Compliance Resolution System (EPCRS) Self Correction Program (SCP) Insignificant Corrections Significant Corrections Voluntary Correction Program (VCP) Audit Closing Agreement Program (Audit CAP) Conclusion
  Given the complex nature of administering qualified retirement plans in accordance with ever-changing pension law, mistakes are inevitable. When the IRS discovers plan mistakes through audit, the plan risks being disqualified which results in severe consequences to the plan sponsor and participants.   Fortunately, the IRS recognizes that mistakes are a fact of life and has responded by developing voluntary error resolution programs. It has also posted on its web site the top ten failures reported through these resolution programs. Since the IRS recently announced its intent to conduct more audits this year, plan sponsors should become aware of the more common types of compliance problems and, if found in their plans, voluntarily correct errors by using the IRS correction programs rather than take a chance that an audit will reveal the mistakes.   Plan Disqualification   In order to reap tax advantages, qualified plans are responsible for complying with complex IRS requirements. Failure to meet these requirements can lead to plan disqualification which results in severe consequences including:   Prior corporate deductions are reversed; The plan trust becomes taxable; Participants are subject to immediate income taxation of vested contributions made on their behalf and cannot roll over these amounts into an IRA or another qualified plan; and Plan fiduciaries may face the risk of lawsuits by participants who were forced to prematurely recognize income.   To create awareness of common errors that may result in plan disqualification, the IRS has released the following list of the top ten failures found in the Voluntary Correction Program.   Top 10 Plan Qualification Failures Failure to timely adopt amendments required by tax law changes. Failure to follow the plan definition of compensation for determining contributions. This error results when certain types of compensation are incorrectly excluded or included (such as bonuses, commission or overtime) which can result in participants receiving either higher or lower contributions than the amount they should have received.  Failure to include eligible employees in the plan or failure to exclude ineligible employees from the plan. By making this mistake, eligible employees may not receive contributions they are entitled to receive. Conversely, the employer may be making contributions for employees who are not entitled to receive contributions.  Failure to satisfy loan provisions. Errors regarding loan provisions include failure to withhold loan payments which results in a defaulted loan, issuing loans that exceed the maximum dollar amount (generally the lesser of 50% of the vested account balance or $50,000) and loans with non-compliant payment schedules.  Impermissible in-service withdrawals. This failure can occur when a distribution is made to a participant and the law or plan terms do not permit a distribution. For example, making a hardship distribution even though the plan does not permit hardship withdrawals.  Failure to satisfy the minimum distribution rules. In general, participants who fall into the following two categories must begin receiving minimum distributions: (1) more than 5% owners who have reached age 70½, even if they are still actively employed; and (2) non-owner employees who have terminated employment and have reached age 70½. Employer eligibility failure. In this failure an employer adopts a plan that it legally is not permitted to adopt. For example, the adoption of a Code Section 403(b) plan by an employer that is not a tax-exempt organization. Failure to pass ADP/ACP nondiscrimination tests. This failure can occur for a variety of reasons including incorrectly classifying employees as either Highly Compensated or non-Highly Compensated employees, using incorrect compensation for testing purposes or excluding from the test eligible employees who elected not to participate in the 401(k) plan. Failure to properly provide top heavy contributions to non-Key employees. In general, a plan is considered to be top heavy if more than 60% of the plan assets are for Key employees. If the plan is top heavy, non-Key employees are entitled to receive minimum contributions. One error that can occur is not using total compensation to calculate the minimum contribution--total compensation must be used even if the plan has a different definition of compensation for allocation purposes. Also, a 1,000 hour requirement cannot be imposed even if it is required by the plan for allocation purposes.  Exceeding the annual contribution limits. The law limits the annual amount of contributions a participant can receive in a defined contribution plan. The annual limit is the lesser of 100% of compensation or an indexed dollar amount ($49,000 for 2009). If not monitored correctly, this limit can be exceeded when taking into account the total of all employer contributions, employee deferrals and forfeitures allocated to the participant's account (all plans sponsored by the employer and related employers must be aggregated for purposes of this limitation).   Plan sponsors who uncover plan qualification failures, such as those listed above, should promptly take advantage of the IRS's Employee Plans Compliance Resolution System.   Employee Plans Compliance Resolution System (EPCRS)   EPCRS is a series of correction programs that can be used by plan sponsors to correct common plan failures and bring the plan back in compliance. "I'm from the government and I'm here to help" is actually true in this case! These programs may be used to correct qualification failures which generally fall into three categories: Plan Document Failures: Failure of the document to conform to the Internal Revenue Code and IRS regulations. Plan sponsors who fail to timely adopt required plan amendments fall within this group. Operational Failures: Includes failure to follow the terms of the plan document, such as failure to cover eligible employees, failing to satisfy the top heavy requirements and failing the ADP and ACP tests for 401(k) plans. Demographic Failures: Failure to meet minimum participation, minimum coverage or nondiscrimination requirements.   The IRS has provided pre-approved methods for correcting many types of common failures. The typical correction method is to put the plan and participants in the position they would have been had the plan been administered correctly. This may require additional contributions (plus earnings) for certain participants. In some cases, the failure can be corrected by a retroactive amendment to the plan. Below is an overview of the three EPCRS programs.   Self Correction Program (SCP)   SCP allows qualified plan sponsors to correct operational failures without filing with the IRS or paying a penalty tax. The program allows the correction of both insignificant defects as well as, in limited circumstances, significant defects. SCP cannot be utilized for demographic and plan document failures or if the failure is egregious. The plan must have established practices and procedures (formal or informal) designed to promote overall plan compliance.   Plan sponsors should document the steps that were taken for fixing the failure in case they are later asked to justify their actions and should also put administrative procedures in place so the mistake does not happen again.   Insignificant Corrections   Generally, in order for a correction to be considered insignificant, it must be an isolated incident, and the plan must otherwise have a history of compliance in all other areas. Several factors need to be analyzed to determine if the correction is deemed insignificant including the number of errors that occurred, the percentage of plan assets and contributions involved in the error and the number of plan participants affected.   Insignificant defects can be corrected at any time following discovery. Also, SCP can be utilized for insignificant defects even if the plan is already under examination by the IRS.   Significant Corrections   To be eligible to utilize SCP for a significant operational failure, the plan must have a current determination letter or, in the case of a pre-approved plan, an opinion letter. For significant corrections, SCP is not available if the plan is already under examination by the IRS.   Significant failure correction must be completed, or substantially completed, by the end of the second plan year following the plan year in which the error occurred.    Voluntary Correction Program (VCP)   Defects that are not eligible for SCP, such as significant operational defects beyond the two-year correction period, plan document failures or demographic failures, may be corrected using VCP. This program is not available if the plan is already under examination by the IRS.   The plan sponsor submits an application to the IRS outlining the failures and proposed correction methods and also pays a fee based on the number of participants. The IRS reviews the application and issues a Compliance Statement setting forth the agreed terms of correction.   If a plan sponsor is hesitant about disclosing plan failures to the IRS, a John Doe submission can be filed which allows the plan sponsor to propose a correction to the IRS anonymously. After a correction method is agreed upon in writing, the plan and plan sponsor are then identified.    Audit Closing Agreement Program (Audit CAP)   Audit CAP is available for problems that were not corrected voluntarily but instead were discovered during an IRS audit. By utilizing Audit CAP, the plan avoids the consequences of disqualification. In addition to correcting plan defects, the plan sponsor must pay a penalty equal to a percentage of the amount of tax that would have been due if the plan were disqualified. The fee is generally negotiated based on the severity of the failure.    Conclusion   Because of the severe penalties associated with plan disqualification, plan sponsors should be aware of and on the lookout for common plan failures. Frequent internal audits of all aspects of plan administration can quite possibly prevent insignificant defects from becoming significant.   If the plan sponsor discovers any instance of noncompliance, the plan's advisors should be consulted to help determine the appropriate correction method. Fortunately, there are several EPCRS programs available for voluntarily correcting plan failures. The least expensive way to correct defects is to discover them early and before the IRS.   [top of page]
  The information contained in this newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. You should not act or rely on any information in this newsletter without first seeking the advice of a qualified tax advisor such as an attorney or CPA. © 2009 Benefit Insights, Inc. All rights reserved.

   

   

• Plan Distributions Are on the Rise (August 2009)
  

  Benefit Insights®	August 2009 Newsletter
  Plan Distributions Are on the Rise
  In this issue: Introduction Financial Hardship In-Service Distributions Termination of Employment Required Minimum Distributions Form of Benefit Spousal Consent Taxation of Benefits Rollovers Participant Loans Conclusion
  The primary goal of a retirement plan is to accumulate savings to provide income after retirement. Most plans also allow distributions before retirement age for a number of circumstances, including termination of employment and financial hardship. Non-taxable participant loans may also be an option.   Not surprisingly, plan administrators have witnessed an increase in the number of withdrawal requests over the past year as a result of the difficult economic times in which we live. Hardship distributions and plan loans are on the rise, as employees struggle to keep up with mortgage payments or put children through college.   This article will review the different types of withdrawals available in a qualified plan and the rules that apply.   Financial Hardship Salary deferral plans often allow participants to withdraw the money they contributed in the event of financial hardship. The available amount is limited to actual deferrals, reduced by prior distributions. Earnings on deferrals may not be distributed unless they were credited to the account before 1989.   To be eligible, the participant must have exhausted all other available resources. Absent information to the contrary, a hardship withdrawal shall be deemed necessary if: The participant has taken all other distributions and loans available under all plans of the employer (loans must be taken first unless they would increase the financial hardship); The distribution amount does not exceed the amount of the financial need (taxes and penalties may be considered); and The participant suspends deferral contributions to the plan for six months. There also must be an immediate and heavy financial need. Under the safe harbor hardship rules, the IRS failsafe list of financial necessities includes the following: Deductible medical expenses for the participant, spouse or dependents; Purchase of a principal residence of the participant; Cost of tuition and related educational expenses for the next 12 months of post-secondary education for the participant, spouse or dependents; Funds needed to prevent eviction from or mortgage foreclosure on the participant's principal residence; Funeral expenses for the participant's parent, spouse, children or dependents; and Deductible repairs for the participant's principal residence. A plan may also permit a hardship distribution if the financial need for medical, tuition or funeral expenses is incurred by the participant's primary beneficiary.   Some profit sharing plans allow hardship distributions from employer contribution accounts. Such hardship distributions would be subject to rules that are similar, if not identical, to the deferral hardship rules. Hardship distributions are not permitted from Qualified Nonelective, Qualified Matching Contribution or safe harbor accounts.   In-Service Distributions Plans may allow in-service distributions upon attaining normal or early retirement age. Pension plans may allow distributions to employees who reach age 62 and continue to work. Profit sharing plans may have more liberal distribution rules for allowing in-service distributions prior to retirement age.   Plans that allow after-tax or rollover contributions may permit these accounts to be distributed at any time at the participant's request.   Termination of Employment Most plans allow benefits to be distributed when a participant terminates employment, whether the termination is due to retirement, disability, death or other separation of service. However, a plan may delay distribution until the terminated employee reaches the plan's normal or early retirement age. Participants still employed as of the plan's normal retirement age must become fully vested in their accrued benefits. Many plans also provide full vesting upon death, disability or early retirement.   If total benefits are $5,000 or more, the participant must consent to the distribution. Benefits of less than $5,000 can be cashed out without consent, if provided under the plan, but if the cash-out exceeds $1,000, it must be an automatic rollover to an IRA for the participant's benefit.   Required Minimum Distributions The beginning date for required minimum distributions (RMDs) is April 1st following the year a participant turns age 70½. However, a plan may provide (and most plans do) that employees who do not own more than 5% of the company will delay their RMDs until the year they actually retire. A bill was recently introduced in Congress to delay the starting age for RMDs from 70½ to 75.   Due to the severe downturn in the stock market in 2008, Congress passed a law waiving the RMD for 2009 only. This will give investors a chance to leave more of their money in their retirement accounts with the hope that losses can be recouped if the market rebounds. The waiver applies to defined contribution plans but not to defined benefit plans. It relates to death benefit distributions as well as age 70½ RMDs. A minimum distribution can still be provided upon request and, since it's not required, it would qualify for rollover treatment.   Form of Benefit Pension plans must provide that an annuity is the normal form of benefit distribution. If the participant is married, the normal form becomes a joint and survivor annuity providing at least a 50% survivor's annuity to the spouse. Alternative forms of distributions may also be provided, but they require spousal consent if the participant is married (see below).   Non-pension plans (e.g., 401(k) and profit sharing plans) do not have to provide an annuity distribution option but, if one is provided, the same spousal consent rules apply to a married participant electing a non-annuity option.   Death benefits must be distributed to the beneficiary within five years of the year of death, unless they are being paid out over the beneficiary's life expectancy, in which case they must begin by December 31st of the year following the year of death. Other rules apply where the participant dies after distributions have begun.   Spousal Consent Pension law provides that if an annuity is available as a benefit option, the spouse must consent to any form of benefit other than a joint and survivor annuity providing at least 50% to the surviving spouse. If the participant elects any other form of distribution, such as a lump sum, direct rollover, etc., the spouse must consent in writing and the signature must be witnessed by a notary or a plan representative.   Such consent must be obtained after the spouse has received timely explanations and benefit projections. A spouse must also consent to a beneficiary designation other than the spouse. Many plans require spousal consent for in-service withdrawals, including participant loans, even if an annuity option is not available.   Taxation of Benefits Participants and beneficiaries must be given a "Special Tax Notice" which explains the tax consequences of the various distribution options. Generally, benefits that are distributed from a qualified plan are taxable to the participant as ordinary income at the participant's applicable tax rate. Distributions from a Roth account are not taxable if the account is at least five years old and the participant has attained age 59½, died or become disabled. If these requirements are not met, the earnings distributed are taxable.   If a distribution is eligible for rollover, mandatory 20% tax withholding is required (certain exceptions apply). Also, a 10% penalty tax applies for taxable distributions prior to age 59½. There are several exceptions including distribution due to disability, death and separation from service after attaining age 55. A bill was recently introduced in Congress to waive the 10% penalty on plan distributions in the event of unemployment or to make mortgage payments.   Rollovers A participant can avoid current taxation of a plan distribution by rolling it over to another qualified plan or an IRA. This is usually accomplished by a direct rollover from trustee to trustee thereby avoiding the 20% mandatory tax withholding.   Currently, a taxable distribution can be rolled over to a Roth IRA if the individual's modified adjusted gross income does not exceed $100,000. This results in the distribution being currently taxable and treated like a Roth IRA conversion. The $100,000 adjusted gross income restriction is repealed as of 2010 at which time anyone can do a taxable Roth rollover.   A spouse beneficiary can roll over a death benefit distribution to an IRA or another qualified employer plan and delay distribution until age 70½. As of 2007, plans were allowed to provide that nonspouse beneficiaries can directly rollover death benefit distributions to an IRA which will be treated like an inherited IRA (in 2010 this will become a mandatory provision). Inherited IRAs are subject to the same distribution rules applicable to death benefits under a qualified plan; therefore, distributions cannot be delayed until age 70½. The advantage of this option is where the decedent's plan does not allow for lifetime payments to the beneficiary, since this would now be available from the rollover IRA.   Participant Loans Many defined contribution plans allow active participants to borrow money against their retirement accounts. The advantages of taking a loan instead of an in-service distribution are: the loan is non-taxable and not subject to the 10% premature distribution penalty; it does not deplete retirement savings; and, in the case of participant directed accounts, it is a guaranteed investment, secured by the participant's vested interest.   Loans are limited to the lesser of $50,000 (reduced by the highest loan balance of the prior 12 months) or 50% of the vested benefits. They must bear a reasonable rate of interest and be repaid within five years (longer terms are allowed for the purchase of a principal residence). A plan may impose other restrictions such as a minimum loan amount or a limit on the number of outstanding loans.   Loans that are in default become taxable to the participant, including the 10% penalty (unless participant has attained age 59½).   Conclusion Tough economic times have led to an increase in hardship distributions and participant loans over the past year. While it's a blessing to have such money available in time of need, pre-retirement withdrawals can result in reduced benefits at retirement. A plan loan may be preferable to a taxable distribution, especially since it avoids a 10% premature distribution penalty. [top of page]
  The information contained in this newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. You should not act or rely on any information in this newsletter without first seeking the advice of a qualified tax advisor such as an attorney or CPA. © 2009 Benefit Insights, Inc. All rights reserved.

• ERISA Fiduciary Responsibilities (June 2009)
  

  Benefit Insights®	June 2009 Newsletter
  ERISA Fiduciary Responsibilities
  In this issue: Introduction Who is a Fiduciary? Fiduciary Duties Selecting and Monitoring Service Providers Selecting and Monitoring of Investments Investment Policy Statement Participant Directed Accounts Paying Reasonable Expenses Plan Administration and Compliance Following the Plan Documents Participant Communications Government Reporting Bonding Conclusion
  Are you a fiduciary of your company's retirement plan? If you're not sure, it's time to find out because if you are a fiduciary, it is important to know exactly what your responsibilities are.   The Employee Retirement Income Security Act of 1974 (ERISA) imposes rigorous standards on plan fiduciaries, and a fiduciary who breaches any obligation or duty can be held personally liable to make good any losses incurred by the plan resulting from the breach. That means the fiduciary's individual assets are subject to loss in a fiduciary breach suit.   Unfortunately, many employers offering qualified plans to their employees are not fully aware of their fiduciary responsibilities and the potential personal liability. Because the stakes are so high, it is especially important during the current financial market turmoil that all fiduciaries understand their responsibilities to comply with ERISA.   Following is a simplified explanation of who the plans fiduciaries are and their required duties.   Who is a Fiduciary? A fiduciary is anyone who: Is specifically identified in the plan document as a fiduciary; Exercises discretionary authority over the management and disposition of plan assets; Renders investment advice for a fee; or Has discretionary authority or responsibility in the administration of the plan. When an employer establishes an ERISA plan, it is the initial fiduciary. Typically it is the board of directors or corporate president who decides whether to appoint individuals or committees to be the plan's fiduciaries.   The appointment of a fiduciary is itself a fiduciary act. So, whoever appoints the officers or committee members has a duty to prudently select those persons and to periodically review their work to make sure they are doing their job.   In general, professional service providers offering legal, accounting or auditing, third-party administration or actuarial services are not considered fiduciaries because they do not exercise discretion or control over the plan.   Fiduciary Duties The primary duty of all ERISA fiduciaries is to act solely in the interest of plan participants and beneficiaries and with the exclusive purpose of providing benefits to them. Other duties include: Selecting and monitoring any service providers to the plan; Selecting and monitoring the plan's investments; Paying only reasonable plan expenses; Following the plan documents (unless inconsistent with ERISA); Making sure participants receive the information required by ERISA; and Filing the necessary government reports. ERISA prohibits fiduciaries from engaging in a variety of transactions that are inherently tainted by conflicts of interest (referred to as "prohibited transactions"). Specifically, a fiduciary may not engage in transactions with the plan in which he uses plan assets for his own interest, acts for a party whose interests are adverse to the plan or plan participants or receives compensation from a party dealing with the plan.   Fiduciaries can be held responsible for the actions of co-fiduciaries if they knowingly participate in another fiduciary's breach, conceal the breach or fail to take steps to remedy such breach. For example, a fiduciary with knowledge of a breach by another fiduciary must take action to correct it or he will also be held liable for the breach.   Selecting and Monitoring Service Providers Plan fiduciaries must carry out their duties with the care, skill, prudence and diligence of a prudent person familiar with the matter and acting under similar circumstances. Competent outside advisors can be engaged who possess the expertise and experience in performing the required duties such as third-party administrators. However, the plan fiduciary's obligations do not end with the selection of a competent service provider because ERISA imposes an ongoing duty to monitor the provider with reasonable diligence.   A formal review process should be established and followed at reasonable intervals to monitor the provider's performance. Details of these periodic reviews should be documented in writing.   Selecting and Monitoring of Investments ERISA imposes the requirement that plan fiduciaries invest the assets of a qualified retirement plan in a prudent manner with proper diversification to minimize the risk of substantial loss.   If a fiduciary does not have the necessary investment expertise, an outside trustee or investment manager should be hired to explicitly take on this responsibility. However, fiduciaries must exercise prudence in selecting an appropriate investment manager and have a responsibility to review performance as well as the fees associated with the investments on an ongoing basis.   Establishing prudent and diligent written investment policies solely in the interest of participants and beneficiaries can significantly reduce exposure to fiduciary liability.   Investment Policy Statement An Investment Policy Statement (IPS) is a written document that provides the plan fiduciaries responsible for plan investments with guidelines for selecting, reviewing and changing the plan's investments. Although ERISA does not specifically require an IPS, it is one of the first things that the Department of Labor will ask to see when it audits a plan and will want proof that it was followed.   The IPS is essential in providing the framework for selection of appropriate investments or, in the case of participant-directed retirement plans, the selection of investment alternatives. It also serves as a yardstick for evaluating and monitoring performance and can provide important documentation that demonstrates the fiduciaries are meeting their fiduciary responsibilities.   Investments (or investment alternatives) should be monitored, at the very least, on an annual basis to ensure that they continue to be appropriate choices. A detailed file, including notes from meetings as well as any reports evaluating investments, will be helpful if a fiduciary ever is required to defend his decisions.   Participant Directed Accounts Under ERISA section 404(c), plan fiduciaries may be relieved of fiduciary liability for investment choices made by participants if the plan satisfies certain requirements.   Many employers are under the misconception that if their plans are designed to comply with ERISA section 404(c) safe harbor requirements, they have no fiduciary liability. Unfortunately, this is not the case since the plan fiduciaries are still liable for selecting and monitoring the investment alternatives that are made available under the plan.   Poor investment performance is not necessarily a breach of fiduciary responsibility. On the other hand, offering participants investment choices that consistently perform well below their peers may be.   Paying Reasonable Expenses Plan expenses can generally be paid from the plan assets as long as they are prudent and reasonable and permitted by the plan document. Since these fees directly affect participants' account balances in defined contribution plans, fiduciaries need to continually monitor plan expenses to ensure that they are reasonable in light of the services provided.   Plan Administration and Compliance While plan investments are at the heart of fiduciary responsibilities, in practice plan fiduciaries more often run afoul of ERISA's other administrative and compliance requirements described below.   Following the Plan Documents ERISA requires a qualified plan to have a written plan document. From time to time plan amendments are needed due to legislative changes and should be adopted promptly.   Fiduciaries are responsible for overseeing the administration of the plan. They must understand the provisions defined in the plan document and monitor compliance with those requirements including the following functions: Verifying that the plan covers the right employees or does not exclude employees who may be entitled to participate in the plan; Depositing and investing employee contributions and loan repayments in a timely manner; Paying plan benefits; Making plan loans; and Ensuring the plan is in compliance with applicable compliance testing. Participant Communications Fiduciaries must ensure that plan participants and beneficiaries receive adequate information regarding the plan including: Summary Plan Description; Summary of Material Modifications; Individual benefit statements; Summary Annual Report; Blackout period notice (if applicable); and Automatic enrollment notice (if applicable). Government Reporting Plan administrators generally are required to file a Form 5500 with the government each year which includes information regarding the plan's financial condition, number of participants, fees paid to service providers, etc. For larger plans an accountant's report is necessary. Penalties apply for failure to file these forms in a timely manner.   Bonding As an additional protection for plans, those who handle plan funds generally must be covered by a fidelity bond which is a type of insurance that protects the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond. In general, the bond must be at least 10% of the value of the plan assets but not more than $500,000. Certain types of plan investments may increase bonding requirements.   Since the bond does not protect fiduciaries to the extent claims are made against them for breaches of fiduciary duty, a separate fiduciary liability insurance policy should be considered as added protection.   Conclusion Don't put your personal assets at risk. Determine if you are considered an ERISA fiduciary and make sure you understand your duties. Courts have held plan fiduciaries who were completely ignorant of their fiduciary responsibilities personally liable to restore plan losses for breaching their fiduciary duties of prudently investing the plan assets.   Fiduciary duties are numerous and complex. Fortunately, fiduciaries can seek guidance from competent, experienced outside advisors who have experience with these complex rules. Procedures should be in place for evaluating and monitoring these service providers on an ongoing basis.   Having an IPS will greatly reduce the risk of ERISA fiduciary liability as long as it is correctly drafted, implemented and followed. In addition, fiduciary insurance should be considered to provide added protection in case of fiduciary breach.   [top of page]
  The information contained in this newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. You should not act or rely on any information in this newsletter without first seeking the advice of a qualified tax advisor such as an attorney or CPA. © 2009 Benefit Insights, Inc. All rights reserved.

• Layoffs Can Result in a Partial Plan Termination Requiring 100% Vesting (April 2009)
  

  Benefit Insights®	April 2009 Newsletter
  Layoffs Can Result in a Partial Plan Termination Requiring 100% Vesting
  In this issue: Introduction Background Clearer Guidance from the IRS The 20% Presumption Calculating the Turnover Rate Defining Employer-Initiated Severance Facts and Circumstances Applying the IRS Rules Small Plans Series of Layoffs Other Concerns Conclusion
  With the current economic conditions, many companies have been forced to downsize either by laying off a portion of the workforce or closing a plant or line of business. These layoffs can have an impact on a qualified plan. If enough employees are terminated, a partial plan termination can occur which requires that the affected workers become fully vested in their benefits.   To avoid administrative problems, it is important to identify whether a partial termination has occurred at the time of the event and not several years later. The situation is particularly problematic in a defined contribution plan once the terminated employees' nonvested benefits have been forfeited. If, at that point, the IRS determines that a partial termination had occurred, the employer would be required to make additional contributions to restore the forfeited account balances of the nonvested participants.   Unfortunately, neither the tax code nor IRS regulations explain how plans sponsors should determine whether a partial plan termination has occurred. Fortunately, in a 2007 revenue ruling, the IRS provided guidance for making this determination.   This article will review the procedures for determining whether a partial plan termination has occurred along with providing examples of the application of these procedures.   Background Over the years both the IRS and the courts have offered insight into how to determine whether a partial termination has occurred. Treasury regulations provide that whether a partial termination has occurred is determined with regard to all the facts and circumstances in a particular case.   The regulations point out that a partial termination can arise in a number of situations including: The termination of a group of employees formerly covered under the plan; A plan amendment excluding a group of employees who have previously been covered; A plan amendment that adversely affects the rights of employees to vest in benefits under the plan; or In a defined benefit plan, the reduction or cessation of future benefit accruals resulting in a potential reversion to the employer. The regulations also clarify that the full vesting provisions only apply to the employees affected by the partial plan termination.   A number of courts have also ruled on this issue. In probably the most important case, Matz v. Household International Tax Reduction Investment Plan, the court held that there is a rebuttable presumption that a 20% or greater reduction in plan participants is considered a partial termination.   Clearer Guidance from the IRS With this background, the IRS revisited the partial termination issue in a 2007 revenue ruling. This ruling was important because it established much clearer standards for determining whether a partial termination has occurred.   The case involved an employer that ceased operations at one of its four business locations. As a result, 23% of the plan's participants ceased active participation due to a severance from employment. Some of those terminated participants were already fully vested at the time of termination.   The IRS found that the facts and circumstances supported a finding of a partial termination because the severances from employment occurred as a result of the shutdown of one of the employer's business locations (and not as a result of routine turnover).   The 20% Presumption In the ruling, the IRS adopted the Matz holding that, if the turnover rate is at least 20%, there is a presumption that a partial termination has occurred. It also adopted another court position that both vested and nonvested participants are counted in making this calculation.   Calculating the Turnover Rate The IRS specified that the turnover rate is determined by dividing the number of participating employees who had an employer-initiated severance from employment during the "applicable period" by the sum of all of the participating employees at the start of the applicable period plus the employees who became participants during the applicable period (both vested and nonvested employees are included in this calculation).   The IRS defined the applicable period as a plan year or a longer period if there are a series of related severances from employment.   Example: Plan W has 300 participants at the beginning of the plan year. Due to a plant closing, 80 participants are terminated from employment during the year. An additional 20 employees become eligible to participate during the plan year. The turnover rate is 80÷320 or 25%.   Defining Employer-Initiated Severance The IRS broadly defined "employer-initiated severance" to include any severance other than a severance that is on account of death, disability or retirement on or after normal retirement age. A severance is even considered employer-initiated if caused by an event outside of the employer's control, such as severance due to depressed economic conditions. However, the employer may be able to prove that an employee's severance was voluntary and not employer-initiated through documentation such as information from personnel files, employee statements and other corporate records.   Example: Plan X has 120 participants at the beginning of the plan year. Due to economic conditions, the company lays off 20 employees. In addition, 8 employees terminate on a voluntary basis (which can be documented). No new employees become eligible during the plan year. The turnover rate is 16.7% (20÷120).   Facts and Circumstances Even though the focus is on the 20% presumption, the 2007 revenue ruling notes that whether or not a partial termination occurs is still ultimately dependent on all of the facts and circumstances in a particular case.   If the employer can demonstrate that the turnover rate for an applicable period is routine for the employer, this will favor a finding that there is no partial termination for that applicable period. In making the comparison, information as to the turnover rate in other periods and the extent to which terminated employees were actually replaced, whether the new employees performed the same functions, had the same job classification or title, and received comparable compensation are relevant to determining whether the turnover is routine for the employer.   Thus, there are a number of factors that are relevant to determining whether a partial termination has occurred as a result of turnover, both in the case where a partial termination is presumed to have occurred due to the turnover rate being at least 20% and in the case where the turnover rate is less than 20%.   Applying the IRS Rules The IRS guidelines go a long way toward creating discernable standards. Especially helpful is the clearly defined method for determining the turnover rate. Even though the test is still a facts and circumstances test, the 20% presumption and the IRS's discussion of what facts are relevant should make it easier to decide whether a partial termination has occurred in a particular case.   Small Plans The 20% presumption test may be most problematic for small employers. A small employer can face the partial termination issue if only one or two employees are laid off.   Example: Plan Y has 6 participants at the beginning of the plan year. Due to economic conditions, the company lays off 2 employees and no new employees become eligible to participate during the plan year. The turnover rate is 33.3% (2÷6) and the presumption is that a partial termination has occurred.   Note that even when the 20% threshold has been met, the employer can rebut the presumption with facts that show that this is a normal turnover rate--which may very well be the case with a small employer. Also, the potential for problems demonstrates the necessity to keep records documenting the circumstances of each employee's termination.   Series of Layoffs If a partial termination occurs on account of turnover during an "applicable period," all participating employees who had a severance from employment during the period must be fully vested in their accrued benefits. According to the IRS's definition of the "applicable period," the IRS could look at the series as a single event. It's not entirely clear when or how this determination would be made, which could be problematic for the many employers facing this situation today.   Example: Plan Z has 100 participants at the beginning of the plan year. Due to economic conditions, the company lays off 10 employees in February. Fifteen months later in May of the following year 15 more employees are terminated. If the IRS considers this one "applicable period," it appears that the employees laid off in February must be fully vested, even though these layoffs did not result in a 20% or more turnover rate.   Other Concerns In addition to these issues, here are several additional concerns under the current partial termination guidance: An employer should not rely entirely on the IRS guidance as courts have sometimes come to different conclusions. For example, some courts have focused on the number of terminated employees in contrast to the IRS's focus on the percentage involved. This could have an impact on larger employers. The 20% presumption does not preclude a finding of a partial termination if the percentage reduction is less than 20%. What changes is the IRS would have the burden to demonstrate that the partial termination occurred instead of the employer having to rebut the presumption. The rules not only apply to employee terminations but also can apply when exclusion from the plan is a result of a plan amendment. The IRS has not traditionally applied the partial termination rules in these cases, but the IRS revenue ruling reminds us of this possibility. Conclusion In these trying economic times, it is important for employers to be aware that layoffs or plan cutbacks can result in a partial termination of the company's qualified plan. The determination whether a partial termination has occurred should be made at or about the time of the employer-initiated reduction. Failure to 100% vest all affected participants can result in plan disqualification.   Since employees who terminate voluntarily are not affected by a partial plan termination, it is important for employers to document the circumstances of each employee's termination.   An employer facing a situation of reducing its workforce should review all the facts and circumstances in detail with the plan's advisors to determine the appropriate course of action.   [top of page]
  The information contained in this newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. You should not act or rely on any information in this newsletter without first seeking the advice of a qualified tax advisor such as an attorney or CPA. © 2009 Benefit Insights, Inc. All rights reserved.

• Payment Options for Plan Expenses (February 2009)
  

  Benefit Insights®	February 2009 Newsletter
  Payment Options for Plan Expenses
  In this issue: Introduction Expenses Borne By Employer Administrative Expenses Payable From Plan Assets Allocation Methods Allocate Fee to Specific Participant Pro Rata or Per Capita Allocation Using Forfeitures to Pay Expenses Defined Benefit Plans Plan Document and Disclosure Requirements DOL Proposals Conclusion
  Qualified retirement plans provide tax deductible benefits for employers and employees, as well as an opportunity for significant savings for the post-retirement years. But these plans require adherence to numerous governmental regulations, and there are costs involved in the establishment and ongoing maintenance of the plan.   The list of expenses includes the preparation of plan documents, recordkeeping and government reporting, to name just a few. It is important that these functions be carried out by trained professionals who are familiar with the Internal Revenue Service (IRS) and Department of Labor (DOL) rules and regulations for qualified plans.   Many of these expenses are permitted to be paid from the assets of the plan, although certain expenses must be paid by the sponsoring employer. In hard economic times, employers who have been footing the bill for administrative expenses may choose to reconsider and have some of the fees paid from the plan assets.   Expenses Borne By Employer The DOL does not permit expenses which relate to "settlor functions" to be paid from the plan assets. A "settlor function" is an independent business activity or decision of the employer. These activities are thought to primarily benefit the employer.   Expenses such as the following cannot be paid from plan assets, although they are deductible as ordinary business expenses: Plan design expenses, such as studies of the plan's feasibility and projections; Preparation of the initial plan document; Preparation of voluntary plan amendments (required amendments due to law changes may be paid from plan assets); and Certain plan termination fees. Example: The XYZ Company established a 401(k) plan effective January 1, 2006. The cost for preparation of the documents to establish the plan is a business expense that must be paid by the employer and not the plan. In 2009 the company was informed that the plan had to be restated for EGTRRA (the Economic Growth and Tax Relief Reconciliation Act) which was enacted in 2001 and other laws that were passed since that time. Because the restated document is required by a change in the law and not a voluntary amendment instituted by the employer, the restatement fee can be charged to participants' accounts under the plan if the employer chooses not to pay that cost.   Administrative Expenses Payable From Plan Assets If the employer wishes, fees related to the administration of the plan can generally be paid by the plan if they are prudent and reasonable and permitted under the plan document. Reasonable administrative costs that may be charged to plan participants include the following: Participant recordkeeping; Nondiscrimination and top heavy testing; Preparation and distribution of benefit statements; Preparation of Form 5500 and schedules; Accountant's audit report required for large plans (those with over 100 participants); Summary Annual Reports; Notices for automatic enrollment, default investments and safe harbor 401(k) plans (where applicable); Expenses for computing benefit payments and processing loans; Plan amendments/restatements required by law changes or new regulations; IRS determination letter requests; Purchase of trustees' fidelity bond; Trustee fees; Investment management fees; and Fees to process participant enrollment and investment elections. One issue to consider when deciding if a fee should be paid from the plan assets is the size of the plan relative to the amount of the fee. Allocating a $1,500 fee among 100 participants with total plan assets of $1,000,000 will have much less of an impact than if the plan has only 10 participants with assets of $100,000.   The employer, as a fiduciary of the plan, is required to monitor plan expenses to insure that they are reasonable and prudent.   Allocation Methods Once it's been established that a fee can properly be paid by the plan, the method of allocating the fee must be determined. There are several alternatives outlined below.   Allocate Fee to Specific Participant The fairest method for allocating certain service fees is to charge them against the account of the participant involved in the transaction or service, although such fees can be allocated to the entire plan. Participants should be informed of the amount of the fee in advance. The following fees are typically charged to the affected participant's account: Fees to prepare distribution election and consent forms; Hardship withdrawal expenses; Fees to prepare participant loan documents and the annual loan administration expenses; and Qualified Domestic Relation Order (QDRO) determination and processing fees.    Pro Rata or Per Capita Allocation Plan expenses that are not being charged to a specific participant's account can be allocated to all plan participants on either a "pro rata" or a "per capita" basis.   A pro rata allocation is done proportionately based on account balances. Per capita means that the amount is allocated equally based on the number of participants in the plan. Here is an example of how a $1,000 fee would be allocated under each method: Participant Account Balance Pro Rata Allocation Per Capita Allocation A $60,000 $600 $250 B 20,000 200 250 C 15,000 150 250 D 5,000 50 250 Total $100,000 $1,000 $1,000 As you can see, the participant with the highest account balance would have the largest fee deducted under the pro rata method.   DOL rules require that the allocation method chosen be prudent and solely in the interest of all participants. It must have a rational basis, with some reasonable relationship to the services provided. It may be more appropriate to allocate certain investment fees pro rata based on account balances, while some administrative fees may be more appropriately allocated per capita, where each participant pays the same amount. It depends on the facts and circumstances of each situation, with prudence and reasonableness being the primary considerations.   The DOL has stated that it could be reasonable to treat terminated employees differently than active employees when it comes to the allocation of plan expenses. This may be more easily justified where the terminated employee had a choice and elected to remain in the plan, as compared to the situation where terminees cannot receive a distribution until reaching normal retirement age.    Using Forfeitures to Pay Expenses Some plans provide that allowable expenses may be paid from the forfeiture account (accumulated from employees who terminated employment without full vesting). The impact that this will have depends on how forfeitures are treated under the terms of the plan. If forfeitures are used to offset employer contributions, such as matching contributions in a 401(k) plan, it's as if the employer were paying the expense because the reduced forfeitures will likely result in additional employer contributions. But if the forfeitures are allocated to remaining participants, then it's as if the participants are paying the fee, due to the reduced forfeiture allocation.   Defined Benefit Plans Defined benefit plans may also pay expenses from plan assets, but participants' benefits will not be reduced as a result. That's because the benefits are stipulated under the terms of the plan, and paying expenses from the plan would only reduce the assets available to pay benefits, which could increase the employer's funding obligation. However, where investments have outperformed actuarial assumptions creating overfunding, paying expenses from the plan may be desirable.    Plan Document and Disclosure Requirements Expenses may only be paid from the plan assets if the plan document authorizes plan expense payments or is silent on the payment of expenses. The document may contain specific details for the payment and allocation of plan expenses, although it is not required to provide such detail. Plan documents that specifically prohibit the payment of expenses by the plan may be amended prospectively to remove this provision and allow the plan to pay expenses in the future. However, the expenses of this amendment must be paid by the employer as a voluntary amendment.   Participants need to be informed if plan expenses can be deducted from their accounts. Such information should be included in the Summary Plan Description (SPD) which is required to be distributed to each employee upon entering the plan. Specific details including the amount of and method for allocating the various types of expenses should be included.    DOL Proposals Last year the DOL proposed fiduciary disclosure requirements for participant-directed accounts which would require additional information to be provided about investment options and more detailed information about fees. The rules were supposed to have been effective January 1, 2009, but it is now uncertain when, or if, this regulation will be finalized.   Another DOL proposed regulation concerns the contracts or arrangements between the plan fiduciary and a service provider. Under the proposal, in order for a service provider's fee to be paid by the plan without resulting in a prohibited transaction, the contract must be in writing and disclose the fees to be paid. In addition, the service provider must disclose any relationship it has with other parties that could create a conflict of interest.   Although it is unclear when, or if, this regulation will be finalized, it may be advisable to adhere to a service provider disclosure policy to prevent violations of the fiduciary and prohibited transaction rules under ERISA.   One DOL change that has been finalized is the increased reporting of fees paid to service providers on Schedule C of Form 5500 for large plans, effective for plan years beginning in 2009.    Conclusion Employers have the option of paying certain expenses of a qualified plan from the business or from the assets of the plan, in which case the plan participants share the burden of such costs. The DOL has provided rules to determine which expenses may be paid by the plan and the allowable allocation methods among participants' accounts.   The plan document must allow the plan to pay reasonable expenses in order for it to take place, and the expense policy must be communicated to employees through the SPD. Recent DOL proposals seek to increase disclosure of plan expense information to participants, fiduciaries and the DOL.   [top of page]
  The information contained in this newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. You should not act or rely on any information in this newsletter without first seeking the advice of a qualified tax advisor such as an attorney or CPA. © 2009 Benefit Insights, Inc. All rights reserved.

• Timely Deposit of Plan Contributions (October 2008)
  

  Benefit Insights®	October 2008 Newsletter
  Timely Deposit of Plan Contributions
  In this issue: Introduction 401(k) Salary Deferrals Existing Deferral Deposit Rules New Safe Harbor for Small Plans Loan Repayments Effective Date Matching Contributions QNECs and QMACs Safe Harbor 401(k) Contributions Profit Sharing Plans Money Purchase Pension Plans Top Heavy Contributions Defined Benefit Pension Plans Conclusion
  The Department of Labor (DOL) has finally provided much anticipated guidance for the timely deposit of elective deferrals in qualified 401(k) plans. The proposed regulation keeps the same basic framework for determining if contributions are timely deposited but adds a safe harbor rule that many plans can utilize.   This newsletter will discuss the new rules, as well as the timing requirements for other types of plan contributions.   401(k) Salary Deferrals A large percentage of retirement plans today are funded by employees' own contributions. In a 401(k) plan, participants can elect to defer a portion of their salary which is withheld from each paycheck. Deferrals can also be made from bonuses or other special compensation awards, if the plan allows.   The question arises as to how quickly the employer must transmit such deferrals to the plan once they have been withheld.   Existing Deferral Deposit Rules Until now, DOL regulations provided only that salary deferrals must be deposited as soon as they become plan assets and that occurs as of the earliest date such contributions can reasonably be segregated from the employer's general assets. The DOL did not provide any more specific instructions on how this date could be determined.   The regulations also state that in no event shall the segregation date be later than the 15th business day of the month following the month the contribution was withheld. But the DOL has stated emphatically that this was not to be relied on as a safe harbor date and that most employers should be able to segregate the funds much sooner than the outside limit.   Upon audit, many employers were penalized for late deposits based on the enforcement of these regulations in a highly subjective manner. That's because the rules did not adequately provide objective standards that could be fairly applied to every situation. For many years there has been no definitive standard for determining if deferrals were being deposited on a timely basis in the opinion of the DOL.   When deferrals are not deposited on a timely basis, the employer is considered to be commingling plan funds with its own funds. The employer becomes liable for the payment of lost earnings to participants' accounts as well as prohibited transaction penalties. Trustees may also be liable for fiduciary breach penalties.   New Safe Harbor for Small Plans On February 29, 2008 the DOL issued proposed regulations providing additional guidance on this issue. The existing standard of making deposits as soon as the money can be segregated from the employer's general assets remains in force. But a clear safe harbor time frame is established for small plans with fewer than 100 participants at the beginning of the plan year. The safe harbor deadline is the 7th business day after the day on which such amounts would have been payable to the participant in cash (in other words, withheld from paychecks).   The 100 participant cut-off for small plan status under the safe harbor deposit rule is not the same as small plan filing status of Form 5500. That is, a plan with a participant count between 100 and 120 may be able to file Form 5500 as a small plan but cannot utilize the 7-day safe harbor deposit rule. Plans with 100 or more participants at the beginning of the plan year are subject to the existing deposit rules.   Loan Repayments Loans to plan participants, secured by their vested benefits, are common in 401(k) plans. Repayments are often deducted from the employee's wages, similar to salary deferrals. The same 7-day safe harbor deposit rules apply to loan repayments.   Effective Date The new safe harbor rule will become effective on the date of publication of final regulations in the Federal Register. But the DOL has clearly stated that employers can rely on the proposed safe harbor deadline until final regulations are issued. This provides immediate relief for many employers who now have at least 7 business days to make timely deposits without the uncertainty that previously existed.   Small employers who feel that they can't reasonably segregate withheld deferrals from their general assets within the 7-day period may want to rely on the existing deposit rules and ignore the safe harbor. But that may be a risky position to take now that a safe harbor has been established.   Matching Contributions In order to encourage employees to participate in their 401(k) plans, employers will often provide a matching contribution. It is usually based on the employee's elective deferrals or a portion of such deferrals. Matching contributions are often deposited throughout the year along with deferral contributions.   The actual deadline for making matching contributions that are to be allocated for a particular year and included in the nondiscrimination test is the last day of the following plan year. But in order to be deducted on the employer's tax return for the year allocated, the contribution must be deposited by the tax return due date, including extensions. Different deduction rules apply where the employer's fiscal year is different than the plan year.   Example: ABC Company's fiscal and 401(k) plan year are both the calendar year. The company always deposits the entire matching contribution after the plan year end. For 2007, ABC filed for an extension (to September 15, 2008) to file its federal tax return. The matching contribution is made September 12, 2008. Since it was contributed before the federal tax return due date (including extension), it is deductible on the 2007 return.   QNECs and QMACs Each year a separate nondiscrimination test must be performed for salary deferrals (ADP test) and matching and/or voluntary after-tax contributions (ACP test) under a 401(k) plan. One method of passing an otherwise failed test is for the employer to make a qualified nonelective contribution (QNEC) or a qualified matching contribution (QMAC) to some or all of the non-highly compensated employees.   In order to be utilized in the test for a particular plan year, these contributions must be made by the last day of the following plan year. The timing issues that apply to the deduction of matching contributions also apply to QNEC and QMAC contributions.   Safe Harbor 401(k) Contributions A 401(k) plan will be treated as automatically passing the ADP test for any year that it satisfies the safe harbor contribution requirement and the notice requirement. The contribution requirement can be met by either a specified matching contribution rate or an employer nonelective contribution of 3% of eligible employees' compensation.   Generally, the safe harbor contribution must be made by the last day of the following plan year. The timing issues that apply to the deduction of matching contributions also apply to safe harbor contributions.   Where the safe harbor matching contribution is being made on a per payroll basis instead of an annual compensation basis, the match must be deposited by the last day of the following plan quarter.   Profit Sharing Plans Employer nonelective contributions to a profit sharing plan are generally credited in the year they are deposited. However, contributions made after the end of the employer's fiscal year but before the due date for filing its federal tax return (including extensions) may be considered to have been paid as of the last day of the fiscal year. If the employer's fiscal year is different than the plan year, other factors may have to be considered.   Example: The XYZ Corporation's fiscal year is the calendar year. XYZ's profit sharing plan also has a calendar plan year. For 2007, the due date of XYZ's federal tax return was extended to September 15, 2008. Any employer nonelective contributions deposited by that date can be considered deposited on December 31, 2007 and allocated under the plan as of that date. They would be deductible to the corporation for 2007.   Money Purchase Pension Plans Unlike profit sharing plans, in which employer contributions are often discretionary, money purchase pension plans require a specific contribution formula. Failure to deposit the required contribution is a violation of the minimum funding standards. The contribution deadline for minimum funding purposes is 8½ months after the end of the plan year. If the deadline is not met, the employer is subject to a late funding penalty.   Where the employer's fiscal year is the same as the plan year, this date matches the day a corporation could extend the due date of its tax return. This allows the employer to deduct the payments necessary to fully fund the plan within the allowable funding period. However, the 8½-month funding period exists regardless of whether or not the corporation files for an extension.   Non-corporate entities such as partnerships and sole proprietors have different tax filing due dates which must be taken into consideration for deduction purposes.   Top Heavy Contributions If a plan is considered to be top heavy (i.e., at least 60% of the benefits belong to key employees), it must provide minimum contributions, usually 3% of compensation, to non-key employees. Though there is no clear deadline for top heavy contributions, it is advisable to make such contributions by the employer's deduction deadline.   Defined Benefit Pension Plans The funding requirements for defined benefit pension plans are based on actuarial calculations which spread out payments over the years to provide for specific benefits as they become due.   As with money purchase plans, defined benefit plans are also subject to the minimum funding rules which allow required contributions to be made up to 8½ months after the end of the plan year. Plans that do not contribute enough money to fully fund the current benefit liabilities must make deposits on a quarterly basis or else notify employees that quarterly deposits will not be made.   The timing issues that apply to the deduction of money purchase plan contributions also apply to defined benefit plan contributions.   Conclusion Earlier this year the DOL provided long-awaited relief from the vague and confusing salary deferral deposit rules for small employers. The new 7-day safe harbor is a reasonable deadline that most small companies should be able to meet. If not, the existing guidelines are still available. Failure to make timely deposits could subject the plan to lost interest payments and penalties.   It is important that both employee and employer contributions be deposited by the required due dates to keep the plan properly funded and in compliance with qualification requirements.   [top of page]
  The information contained in this newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. You should not act or rely on any information in this newsletter without first seeking the advice of a qualified tax advisor such as an attorney or CPA. © 2008 Benefit Insights, Inc. All rights reserved.

• RPG Bulletin - 2009
  

  Major Highlighted Changes for 2009 (posted 10/17/08)

  • Maximum annual contribution to an individual's defined contribution plan accounts increases from $46,000 to $49,000.
  • Maximum elective deferral contribution to a 401(k) plan increased from $15,500 to $16,500. For anyone over age 50, there is an additional allowable "catch-up" (414(v)) contribution of $5,500 (increased from $5,000 in 2007).
  • Highly Compensated (414) Limit increased from $105,000 to $110,000.
  • Key Employee (416) Dollar Limit increases from $150,000 to $160,000.
  • Maximum annual payout from a defined benefit plan at the social security normal retirement age increases from $185,000 to $195,000 per year.
  • Maximum annual compensation that can be taken into account for determining benefits or contributions under a qualified retirement plan increases from $230,000 to $245,000.
  • The IRS continues to require that qualified plans maintain a fiduciary bond at 10% of plan assets to a maximum bond amount of $500,000.
  • Department of Labor regulations continue to enforce the provision that salary deferrals be sent to the plan account as soon as administratively feasible but never later than the 15th of the following month after deferral.
  • Section 132 (Transit/Parking) limits have been increased to $120/month for Mass Transit/Vanpool and $230/month for Parking. Section 125 (Medical/Dependent) limits remain unchanged.

   

• EGTRRA Restatements...The time has come (August 2008)
  

  Benefit Insights®	August 2008 Newsletter
  EGTRRA Restatements...The time has come
  In this issue: Introduction Background and History Types of Plan Documents Protected Benefits Restatement Documents Deadlines IRS Determination Letter Plan Restatement Cost Determination Letter User Fees Pension Protection Act of 2006 Conclusion
  It's that time again! Time for what, you ask? To participate in that never ending ritual of qualified retirement plan restatements! As legislation affecting retirement plans is enacted, the Internal Revenue Service (IRS) requires all plan sponsors to restate or "rewrite" their plans to conform to current law.   The Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which was signed into law in June 2001, introduced sweeping changes to the retirement plan arena. The restatement deadline is now upon us to incorporate the EGTRRA provisions into qualified plan documents.   Some of the key provisions of EGTRRA are: Increased benefit and contribution limits; Increased elective deferral limits; Increased compensation limit; Created a "catch-up" provision for older workers, allowing individuals age 50 and older to make additional elective deferrals; Liberalized the rollover rules; Created the Roth 401(k); and Created additional incentives for small employers to offer retirement plans to their employees. Background and History After new tax legislation is enacted, the law is analyzed by the IRS to determine how it will affect qualified plans in actual operation. This analysis usually takes years, and practitioners may be left to operate their plans on a "good faith" basis during this period. In other words, plans are required to be operated in the best possible way based on the prevailing understanding of the current law even though official regulations and/or guidance has yet to be issued. As a result, many plan sponsors have adopted "good faith" amendments to bring their plans into temporary compliance with EGTRRA pending this restatement period.   Over the last few years, a significant amount of guidance and other relative information has been released from the IRS about how and when plans were to be amended for EGTRRA.   Types of Plan Documents All qualified plans are required to have a written plan document. The plan document can take various forms including:   Individually Designed Plan Documents: This type of plan document is custom designed to meet the plan sponsor's specific needs. An individually designed plan offers the greatest degree of flexibility possible.   Volume Submitter Plans: Volume submitter plans may look like individually designed documents, but they consist of language that has been pre-approved by the IRS. Volume submitter plans generally offer more flexibility than prototype plans but not as much as individually designed plans.   Prototype Documents: Prototype plans are also pre-approved by the IRS and come with two types of adoption agreements–standardized and non-standardized. A standardized prototype is more conservative and prevents the plan sponsor from designing a plan that will not satisfy any of the various coverage or discrimination tests, provided it is operated in accordance with its terms.   Non-standardized plans offer additional flexibility, including the ability to exclude certain forms of compensation for allocation purposes or exclude certain employees from plan or contribution eligibility, within the boundaries of IRS standards.   For the first time, the IRS is allowing prototype documents to include age-weighted, age-based and comparability allocation formulas. Previously, plan sponsors desiring to use these allocation formulas needed to utilize a volume submitter or individually designed plan document.   Protected Benefits Special care must be taken to ensure one plan document does not blindly replace another plan document. For example, if a prototype plan is used to restate an individually designed plan, there are special issues to consider such as ensuring certain benefits, called "protected benefits," are not accidentally eliminated or reduced. Protected benefits include forms of distributions (such as lump sum and annuities) and timing of distributions (such as early retirement provisions).   Restatement Documents Once the plan has been reviewed, additional requested changes have been made (if any) and the restated documents are drafted, they should be read very carefully. The final signature-ready documents may consist of the following: A restated plan document; A resolution adopting the restated document; A separate trust document (in some cases); and An adoption agreement (for prototype documents). The plan's summary plan description is also required to be updated and will need to be distributed to all participants and beneficiaries to inform them about the restated plan's provisions.   Deadlines The actual restatement deadline will partly depend on the type of document being utilized and the type of retirement plan being restated.   There is a staggered cycle for submitting documents to the IRS. This staggered approach applies both to individual retirement plan sponsors (who adopt plans to benefit their own employees) and retirement plan drafters (who design prototype and volume submitter plans which get approved to be utilized by retirement plan sponsors around the country).   Volume Submitter and Prototype Plans (collectively referred to as pre-approved plans by the IRS): Pre-approved plans need to be submitted once every six years. Pre-approved defined contribution plans were recently approved and may be utilized for restatements up through April 30, 2010. Pre-approved defined benefit plans will follow in about two years.   Individually Designed Plans: These plans have a five-year staggered cycle beginning in 2006 depending on the last digit of the employer's taxpayer identification number. The IRS has created five cycles: A, B, C, D and E. Each cycle will create a 12-month period in which plan sponsors of individually designed plans may submit their plan documents to the IRS for approval. Prior to each cycle, the IRS announces on what issues plan sponsors may request a ruling.   Currently, Cycle C is underway (February 1, 2008 through January 31, 2009) for single plan sponsors that have a 3 or an 8 as the last digit of their taxpayer identification number or sponsors of Code Section 414(d) governmental plans.   Special rules apply to plan sponsors that want to change from an individually designed plan document to a pre-approved plan document or vice versa.   IRS Determination Letter In order to receive a measure of assurance that a given plan is in full compliance, as it relates to the documents, a plan may be presented to the IRS to receive a "determination" as to its acceptability and qualification under current pension law. To receive a determination letter, the plan must be submitted to the IRS along with standard forms and supporting data.   Pre-approved plans, which meet the IRS's standards, are issued favorable opinion letters by the IRS. Adopting employers of pre-approved plans may generally rely on the opinion letters without applying for their own determination letter. Sponsors of pre-approved plans that have coverage or nondiscrimination issues or have made modifications to the document will generally want to apply for a determination letter.   Plan Restatement Cost The cost of restating a plan will vary, depending primarily on the type of plan. Some variables that may influence plan restatement cost are: Nature of plan design; Nature of plan sponsor demographics; Nature and number of contribution types; Type of plan document structure; and Preparation of IRS determination letter submission, if applicable. Since no two plans or companies are exactly alike, an appropriate fee is generally determined through overall plan evaluation. Necessary expenses to restate the plan for IRS compliance may be paid from the plan assets if permitted by the plan document.   Determination Letter User Fees The IRS charges a fee to review the plan and issue a determination letter. This fee is called a "user" fee and ranges from $300 to $1,800 depending upon the type of plan, the type of document being utilized and the scope of the request.   A Form 5307 (pre-approved plans) submission carries a user fee of $300 to $1,000. A Form 5300 (individually designed plans) has additional complexities and the user fees are between $1,000 and $1,800 for single retirement plan sponsors.   There is an exemption from the user fee for certain small employers who sponsor a plan that has at least one non-highly compensated employee and, for defined contribution plans, the plan was effective on or after January 2, 1997.   Pension Protection Act of 2006 President Bush signed the Pension Protection Act of 2006 (PPA) into law in August 2006. Some have called this tax act the most sweeping reform of pension legislation since ERISA was enacted in 1974. Indeed it contained many adjustments to the rules affecting defined benefit and defined contribution plans including: Enhanced a number of the rules around the funding of defined benefit pension plans; Liberalized the rules around funding such that plan sponsors can contribute more heavily in positive economic years and build a "cushion," keeping their plan solvent in more difficult times; Created clear rules around automatic enrollment in defined contribution plans; Mandated additional participant disclosures; Expanded hardship distributions to meet the financial needs of any person who is listed as the participant's beneficiary under the plan; Provided greater access to professional advice about investing for retirement; and Made permanent the increased contribution and deduction limits passed by EGTRRA. We are a number of years away from officially restating retirement plans for PPA. However, the IRS will likely mandate amendments to be adopted in the coming years for existing retirement plans to insure that the PPA rules are being followed ahead of the official restatement.   Conclusion Sponsoring and maintaining a qualified retirement plan is a serious matter. So many individuals, participants and beneficiaries alike, eagerly look forward to the day when they will realize their hard earned benefits. Protecting these benefits is something to be taken seriously.   Ensuring the tax-favored status of those benefits is the fundamental principle upon which the restatement requirement is founded. We are committed to providing the support, attention and professional expertise needed throughout this restatement period to make it a positive experience for all.   [top of page]
  The information contained in this newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. You should not act or rely on any information in this newsletter without first seeking the advice of a qualified tax advisor such as an attorney or CPA. © 2008 Benefit Insights, Inc. All rights reserved.

• Solving 401(k) Testing Problems With New Design Options (June 2008)
  

  Benefit Insights®	June 2008 Newsletter
  Solving 401(k) Testing Problems With New Design Options
  In this issue: Introduction Testing Requirements Traditional Safe Harbor Options Nonelective Contributions Matching Contributions Qualified Automatic Contribution Arrangement Choosing a Safe Harbor Option for the First Time Automatic Enrollment Electing a Safe Harbor Design Plans Currently Using a Safe Harbor Design Conclusion
  One of the more frustrating aspects for the small business maintaining a 401(k) plan is satisfying the special nondiscrimination requirements. The tests require adequate participation by "non-highly compensated employees" (NHCEs) in order for the "highly compensated employees" (HCEs) to maximize their own salary deferrals. Failure to satisfy the tests requires a correction which often means the painful process of returning salary deferrals to the HCEs.   For a number of years, employers have had the option to simplify this process and avoid the tests altogether by providing a "safe harbor" contribution for NHCEs. Beginning in 2008, plans that use automatic enrollment have a new, somewhat more flexible, safe harbor option.   To help those employers still struggling with the nondiscrimination tests or for those who have chosen a safe harbor design and would like to consider the new option, this article will review and contrast the various safe harbor options that are now available, as well as discuss automatic enrollment as a method of solving testing problems.   Testing Requirements Absent a safe harbor contribution, a 401(k) plan must satisfy the ADP test each plan year. This requires calculating each eligible participant's deferral percentage and comparing the average percentage of the HCEs to the average percentage of the NHCEs. HCEs are employees who: Owned more than 5% of the employer in the current or previous year, or Earned more than a specified limit in the previous year ($100,000 for 2007). Employer matching contributions and after-tax employee contributions must satisfy a similar ACP test. Failure to satisfy either test requires either returning excess deferrals or contributions to the HCEs (within 2½ months of the end of the plan year) or making additional employer contributions (within 12 months after the end of the plan year).   In addition, a "top heavy plan" (more than 60% of the benefits under the plan belong to "key employees") must satisfy special contribution requirements. Even if the sponsor makes matching contributions, additional top heavy contributions may have to be made to ensure that all non-key participants receive the required contribution which, in most cases, is 3% of compensation.   Traditional Safe Harbor Options If a qualifying safe harbor contribution is made to a 401(k) plan, the plan is deemed to satisfy the ADP test. This means the HCEs may make the maximum allowable deferral of compensation ($15,500 in 2008 plus $5,000 catch up contribution if age 50 or over).   In most cases the ACP test is also avoided and the plan is deemed to have satisfied the top heavy requirements. The safe harbor contributions must be 100% vested and are not available for hardship or other in-service withdrawals before age 59½.   The employer must adopt a safe harbor provision prior to the beginning of the plan year. Also, participants must be notified of the employer's intent to make safe harbor contributions within 30 to 90 days prior to the beginning of the plan year. There are several types of employer contributions that can satisfy the safe harbor.   Nonelective Contributions One option is to make a 3% nonelective contribution for all NHCEs eligible to participate in the plan. Contributions must be made for all eligible participants regardless of whether the participant has worked 1,000 hours during the year or was employed on the last day of the plan year.   Matching Contributions As an alternative, the employer can make a basic matching contribution for all eligible NHCEs who choose to make salary deferrals at the following rate: 100% of the first 3% of compensation deferred, plus 50% of the next 2% deferred. The sponsor may contribute an "enhanced" match equal to at least the amount of the basic match (e.g., 100% of the first 4% deferred). Under the enhanced match, the contribution rate cannot increase as an employee's deferral rate increases, and the contribution rate for HCEs cannot exceed the contribution rate for the NHCEs.   Qualified Automatic Contribution Arrangement For plan years beginning in 2008, the Pension Protection Act established a "qualified automatic contribution arrangement (QACA) that acts as an additional type of safe harbor design (meaning the plan automatically satisfies the ADP and ACP tests as well as top heavy requirements).   Under a QACA, an eligible employee automatically has a specified percentage of compensation withheld unless he makes an affirmative election either not to participate or to change the amount of the default election. A QACA can allow automatic deferrals of up to 10% of compensation but, as a minimum, the plan must require automatic deferral of 3% the first year, 4% the second, 5% the third and 6% thereafter.   The employer can make either: A 3% nonelective contribution for each NHCE, or A match contribution of 100% of the first 1% deferred and 50% of the next 5% deferred. Unlike the traditional safe harbor design, contributions do not have to be fully vested until an individual has earned two years of service.   A QACA is similar to a traditional safe harbor design in several respects. Contributions are required to be subject to withdrawal restrictions and cannot be restricted to those meeting an eligibility requirement (1,000 hours of service or employment on the last day of the plan year). Also the same rules apply concerning the timing of the plan amendment and annual notice to participants about the safe harbor contributions.   There is also an annual required notice about the automatic enrollment feature that must notify participants of: The level of elective contributions under the default; The employee's right to elect out of or change the amount of the deferral election; and How contributions will be invested in the absence of an employee investment election.    Choosing a Safe Harbor Option for the First Time A 401(k) plan sponsor struggling with testing issues should seriously consider one of the safe harbor designs. An employer reluctant to make the required contributions should also consider automatic enrollment (without a safe harbor contribution) as a method to increase participation and thereby improve test results.   Automatic Enrollment Based on evidence that automatic enrollment can increase participation significantly, the Pension Protection Act included several automatic enrollment options to encourage this practice. The concept is simple: automatic enrollment brings in those who fail to participate simply because of inertia. This is likely to have the biggest impact on the young, a group that benefits the most from compounding returns over an accumulation period of 30 years or more.   An "eligible automatic contribution arrangement" (EACA), which is also new for 2008, can be an effective approach that does not require a safe harbor contribution. With an EACA, the sponsor sets the default deferral percentage at any level and does not have to increase it each year as under a QACA.   The program requires the use of a qualified default investment arrangement, and the sponsor has the option to allow new enrollees the option to withdraw contributions within 90 days of enrollment. The EACA has one other advantage: the 2½ month correction period under the ADP and ACP tests is extended to 6 months.   Electing a Safe Harbor Design Other employers will want to consider adopting either a traditional safe harbor or QACA. It's important to understand that each of these options provides the sponsor design flexibility. In addition to the safe harbor contribution, the sponsor can make an additional discretionary matching contribution and still avoid the ACP test as long as certain requirements are met.   It can also be meaningful that the safe harbor options, in most cases, eliminate the complication of any top heavy problems. However, if the plan uses a matching contribution to satisfy the safe harbor and any other employer contributions are made, the plan must still demonstrate compliance with the top heavy rules.   When selecting one of the options there are several clear differences between the traditional safe harbor and the new QACA. First, the QACA does not require immediate full vesting--two years of service can be required. Second, the maximum required matching contribution is effectively 3.5% of compensation and not 4%. This can reduce the employer's contribution cost somewhat, but this advantage may be offset by a higher rate of participation under a plan that has automatic enrollment.   Plans Currently Using a Safe Harbor Design If an employer is currently using a traditional safe harbor design with the 3% nonelective contribution, a QACA with a nonelective contribution is a good alternative. The contribution cost is the same, but added participation means more retirement security. Some employers will appreciate the ability to have a vesting provision, although changing the vesting provision does complicate administration.   As discussed above, a QACA with a matching contribution may be more or less expensive than the current safe harbor, depending upon the circumstances. If the safe harbor plan currently has a high level of participation or if it is not expected that automatic enrollment will have much of an impact on participation levels, then the QACA safe harbor contribution will cost less than the traditional approach. Even if the cost is a bit more, due to increased participation, an employer motivated by the other benefits of automatic enrollment may still choose to switch.   Finally, note that an employer that appreciates the benefits of automatic enrollment but is satisfied with the current safe harbor can also choose to add an automatic enrollment feature and maintain the current safe harbor design.   Conclusion With the introduction of new options, it is a good time for a 401(k) plan sponsor to review current plan design. Testing problems can now be addressed with automatic enrollment either with or without a safe harbor contribution. Some employers concerned about the retirement preparedness of employees may choose to add automatic enrollment, even if the plan doesn't have testing problems.   Current safe harbor designs should also be reviewed to determine whether it's appropriate to switch to the QACA approach, either as a way to save on the cost of the required contribution, the ability to have vesting or simply out of concern for the well-being of the participants.   [top of page]
  The information contained in this newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. You should not act or rely on any information in this newsletter without first seeking the advice of a qualified tax advisor such as an attorney or CPA. © 2008 Benefit Insights, Inc. All rights reserved.

• Top Heavy Rules May Impact Plan Design (April 2008)
  

  Benefit Insights®	April 2008 Newsletter
  Top Heavy Rules May Impact Plan Design
  In this issue: Introduction Top Heavy Defined Key Employee Top Heavy Determination Requirements of Top Heavy Plans Minimum Benefits or Contributions Minimum Vesting 401(k) Plans Top Heavy Exemption Impact of Additional Contributions Conclusion
  Retirement plans have been subject to "top heavy" rules for about 25 years. By now you'd think that their application would be fairly straightforward. But lately these provisions have affected some plans in unexpected ways, surprising plan sponsors who thought top heavy was a non-issue for their plan. This is due in part to regulations which exempt some plans from the top heavy requirements but only if certain conditions are met.   What follows is a close-up look at the top heavy rules and what can be done to avoid some unwelcome consequences.   Top Heavy Defined A plan is considered top heavy if more than 60% of the benefits under the plan belong to "key employees" as of the applicable determination date. Multiple plans of an employer in which a key employee participates must be aggregated to form a top heavy group. Plans of the same employer not covering a key employee can also be aggregated as part of the top heavy group under certain circumstances.   Key Employees The classification of key employee is sometimes confused with "highly compensated employee" (HCE) which is used for nondiscrimination purposes. In fact, the definitions are similar in some respects, and while most key employees are HCEs, many HCEs are not key employees.   A key employee is an employee who at any time during the determination year was: An owner of more than 5% of the employer; An owner of more than 1% of the employer with annual compensation in excess of $150,000; and An officer of the employer with annual compensation exceeding a specified dollar amount, adjusted for cost-of-living ($150,000 for 2008).   Stock attribution rules apply in determining ownership for key employee purposes. An employee is considered as owning the stock or interest owned by his spouse, parents, children and grandchildren.   The number of officers who can be considered key employees is limited to the greater of (a) 10% of the total number of employees, to a maximum of 50 officers, or (b) three.   Top Heavy Determination The date for determining if an ongoing plan is top heavy is generally the last day of the preceding plan year (determination year). For the initial year of a plan the determination date is the last day of the first plan year.   In defined benefit plans, the present value of accrued benefits is used to calculate if the key employees' share exceeds 60% of the total. In defined contribution plans, the participants' total account balances are used to perform the test. Vesting is not considered in top heavy calculations.   Certain adjustments must be made to the accrued benefits or account balances when performing the top heavy test. The following items must be included: Outstanding balances of participant loans; Related rollovers, e.g., from another plan previously maintained by the same employer, and unrelated rollovers received prior to 1984; Distributions during the determination year to participants who terminated employment that year; In-service distributions during the five-year period ending on the determination date to those still employed as of the first day of the determination year; The cash surrender value of any whole life insurance policies in the plan; and Salary deferrals and required employer contributions for the determination year that are deposited after the determination date. For the first plan year accrued discretionary contributions are also included. The following items are not included in the top heavy test: Benefits of prior year terminees (those who did not perform an hour of service during the determination year); Distributions to prior year terminees; Benefits of former key employees (those who were key employees but are now classified as non-key employees in the determination year). The same holds true for any amounts distributed to former key employees; and Unrelated rollovers received after 1983.    Requirements of Top Heavy Plans Top heavy plans must provide certain minimum accrued benefits or contributions to non-key employees and meet special vesting requirements. These provisions do not apply to union employees.   Minimum Benefits or Contributions The minimum benefit in a defined benefit plan is a life annuity at normal retirement age of 2% of average compensation for each year of service up to a maximum of 10 years (a maximum required benefit of 20% of average compensation). It must be provided to each non-key employee who is credited with at least 1,000 hours of service during the plan year. Frozen defined benefit plans are no longer required to provide top heavy benefits.   For defined contribution plans, the minimum contribution is the lesser of 3% of compensation or the highest contribution rate allocated to a key employee. For example, if the highest contribution rate for a key employee is 2%, then the top heavy minimum contribution is 2%; if the highest contribution rate for a key employee is 5%, then the top heavy minimum contribution is 3%; and if no key employee receives a contribution, then the top heavy contribution is 0%.   The top heavy contribution must be given to each eligible non-key employee who is employed on the last day of the plan year, regardless of the number of hours worked. An allocation of forfeitures, derived from the accounts of participants who terminated employment without full vesting, is counted towards satisfaction of the minimum top heavy contribution. The deadline for making the contribution is the last day of the following plan year.   Where an employer sponsors multiple plans, only one plan has to provide the top heavy benefit. Special rules apply where an employer sponsors both a defined benefit and a defined contribution plan.   Minimum Vesting Top heavy plans must have a vesting schedule no less restrictive than one of the following two schedules: Years of Service 6-Year Graded 3-Year Cliff 1 0% 0% 2 20% 0% 3 40% 100% 4 60%   5 80%   6 100%     Under the Pension Protection Act of 2006, all defined contribution plans are required to use a vesting schedule no less restrictive than one of the top heavy schedules as of 2007. Only certain defined benefit plans can still use a non-top heavy schedule (7-year graded or 5-year cliff).   401(k) Plans Salary deferrals under a 401(k) plan are treated differently than other types of contributions for top heavy purposes. Deferrals made by key employees are considered employer contributions for purposes of determining the minimum top heavy contributions owed to non-key employees.   However, deferrals made by non-key employees do not count towards satisfaction of the required contribution. For example, if any key employee defers 3% or more of his compensation, the employer must make a 3% contribution for all eligible non-key employees.   Matching contributions in a 401(k) plan can be used towards satisfaction of the top heavy contribution. But such contributions may not cover the required minimum for those who deferred, and those who didn't defer would be entitled to a full top heavy contribution.   Top Heavy Exemption A safe harbor 401(k) plan is a plan that elects to eliminate the annual average deferral percentage (ADP) and average contribution percentage (ACP) nondiscrimination testing. It does so by providing either a 3% nonelective contribution for all eligible employees or matching contributions of at least 100% of the first 3% of compensation deferred, plus 50% of the next 2% of compensation deferred. An annual safe harbor notice must also be provided.   Safe harbor 401(k) plans are automatically deemed to be not top heavy if the only contributions to the plan are salary deferrals and either the 3% safe harbor nonelective contribution or the safe harbor match contribution. Additional match contributions can also be made as long as they meet the ACP safe harbor requirements.   Beginning in 2008, the same exemption applies to a Qualified Automatic Contribution Arrangement (QACA), which is a type of safe harbor 401(k) plan that utilizes an automatic enrollment feature.   The top heavy exemption provides an added incentive for some employers to elect safe harbor status.   Although a safe harbor 401(k) plan may be exempt from the top heavy rules, it can still be part of an aggregated top heavy group. In that case, employer contributions under the 401(k) plan can be used towards the contribution requirements of the top heavy group.   Impact of Additional Contributions Safe harbor plans that provide additional contributions from those mentioned above (including forfeiture allocations) are not exempt from the top heavy rules. This can create some surprising results.   A plan that would be top heavy if not for the exemption would lose its exemption by making even a small profit sharing contribution. But this contribution, together with other employer contributions under the plan (such as the safe harbor match), may not be sufficient to meet the top heavy requirements. As a result, the employer might be obligated to contribute thousands of dollars more than it originally intended.   A similar situation can occur when forfeitures are allocated resulting in the elimination of the top heavy exemption. For this reason, it is wise to design a safe harbor 401(k) plan so that forfeitures are used to offset future contributions or pay administrative expenses.   Keep in mind that in a straight profit sharing plan without salary deferrals, the top heavy contribution requirement can be met simply by allocating the contributions and forfeitures proportionately by compensation. Then every participant would receive the same allocation rate as the key employees. The scenario changes in 401(k) plans due to the treatment of key employee deferrals.   Conclusion The increased popularity of 401(k) plans has limited the number of retirement plans considered to be top heavy. When a plan is top heavy it must provide certain minimum benefits or contributions, and defined benefit plans must use one of the accelerated vesting schedules.   Some safe harbor plans are exempt from the top heavy requirements, but additional contributions or forfeiture allocations to those plans can eliminate the exemption and create further contribution obligations. Advanced planning can help prevent some unexpected consequences and keep plans in compliance with the top heavy rules.   [top of page]
  The information contained in this newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. You should not act or rely on any information in this newsletter without first seeking the advice of a qualified tax advisor such as an attorney or CPA. © 2008 Benefit Insights, Inc. All rights reserved.

• RPG Bulletin - 2008
  
  Major Highlighted Changes for 2008 (posted 10/19/07)

   

  • Maximum annual contribution to an individual's defined contribution plan accounts increases from $45,000 to $46,000.
  • Maximum elective deferral contribution to a 401(k) plan remains at $15,500. For anyone over age 50, there is an additional allowable "catch-up" (414(v)) contribution of $5,000 (unchanged from 2007).
  • Highly Compensated (414) Limit increased from $100,000 to $105,000.
    Key Employee (416) Dollar Limit increases from $145,000 to $150,000.
  • Maximum annual payout from a defined benefit plan at the social security normal retirement age increases from $180,000 to $185,000 per year.
  • Maximum annual compensation that can be taken into account for determining benefits or contributions under a qualified retirement plan increases from $225,000 to $230,000.
  • The IRS continues to require that qualified plans maintain a fiduciary bond at 10% of plan assets to a maximum bond amount of $500,000.
  • Department of Labor regulations continue to enforce the provision that salary deferrals be sent to the plan account as soon as administratively feasible but never later than the 15th of the following month after deferral.
  • Section 132 (Transit/Parking) limits have been increased to $115/month for Mass Transit/Vanpool and $220/month for Parking. Section 125 (Medical/Dependent) limits remain unchanged.