| General: | Plan Administration: |
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| Current Issues: | |
Questions are separated into the following categories:
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Is it permissible to post the SAR on a bulletin board and notify participants that it is there?
Posting a SAR would not be sufficient for terminated participants or beneficiaries.
However, with regard to current employees, it can be posted in an area within
the company if it can be reasonably calculated that the participants will receive
the information. (Oct 2004)
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How soon after 401(k) deferral contributions are deducted from participants' paychecks must the deferral contributions be deposited into the 401(k) plan?
Department of Labor regulation 2510.3-102 requires that amounts that a participant
has withheld from his or her wages by an employer be contributed to the plan
on the earliest date on which such contributions can reasonably be segregated
from the employer's general assets. Employee deferrals must be segregated from
employer assets no later than the 15th business day of the month following the
month in which they would otherwise have been payable to the participant in
cash. Note that the 15th business day is not a 'safe harbor', it is the maximum
time period. If DOL feels that the employer could have segregated the deferrals
earlier than the 15th business day after the end of the month, DOL will assess
penalties from the date it determines the deferrals could have been segregated,
and not from the 15th business day. (Oct 2004)
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What are the rules on same sex marriage with regard to 401(k) plans, distribution requests, spousal consent, etc.?
Neither ERISA nor the Internal Revenue Code recognize same-sex marriage. Since
ERISA pre-empts state laws, whether or not individual states recognize same
sex marriage does not affect qualified retirement plans. The same-sex partner
could be named beneficiary but would not be considered a spouse under ERISA
or the Code. (Oct 2004)
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Anyone that "handles" retirement funds. Even if the individual is
not a fiduciary, if they handle funds they need to be bonded. If an individual
receives or disburses plan assets they are deemed to be handling funds. 2580.412-6
states that funds are handled by a person if that person's duties or activities
are such that there is a risk that such funds could be lost in the event of
fraud or dishonesty. The person handling funds does not necessarily have to
be a fiduciary. "Handling" is not an investment control concept, but
rather one related to the receipt, safekeeping, or disbursement of funds.
(Oct 2004)
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A forfeiture is an amount that is removed from a participant's account, generally due to a distribution to a participant who is less than 100% vested. The non-vested amount is forfeited at a specific point in time, as defined in the plan document.
Forfeitures may be used to reduce future contributions or allocated to eligible
participants, per the plan document. (Oct 2004)
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When can a participant take a Hardship Distribution?
First, the plan must allow for Hardship Distributions – review the plan’s Summary Plan Description (SPD) to see if these types of withdrawals are permitted. If yes, then there are 6 specific criteria that satisfy the definition of a hardship:
1. Uninsured medical expenses for the participant, participant’s spouse, or participant’s dependents.
2. Purchase of the participant’s primary residence (renting or secondary residences not acceptable).
3. Prevention of foreclosure or eviction from participant’s primary residence.
4. Payment of college tuition for up to the next 12 months for the participant, participant’s spouse, or participant’s dependents.
5. Funeral or burial expenses for the participant, participant's parents, participant's spouse, or participant's dependents.
6. Expenses for the repair of damage to the participant's principal residence.
Hardship distributions must be used as the last resort to pay for any of the aforementioned expenses. All other methods of obtaining funds must be exhausted including loans from the retirement plan if the plan document permits. The hardship distribution must directly pay the bills associated with the aforementioned criteria. If the bills were paid in any other way (credit card, bank loan, family loan, etc.), then a hardship distribution cannot be taken to pay off the debt.
Hardship distributions are subject to Federal and State taxes and early withdrawal
penalties for participants under age 59½. The amount withdrawn may not
be paid back to the plan at a later date. Finally, the participant must cease
all elective deferral contributions to the plan for a period of 6 months following
the hardship distribution. (Nov 2006)
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What is an Automatic Rollover and how does it affect my plan?
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) included a provision requiring qualified pension plans to automatically rollover mandatory distributions (distributions made without the participant's consent) of more than $1,000 and less than or equal to $5,000 to an individual retirement account (IRA).
Under the rules, the fiduciaries of the plan are required to establish an IRA to which mandatory distributions will be automatically rolled over. The Department of Labor has issued final regulations that establish a safe harbor under which a plan fiduciary will be deemed to have satisfied his or her fiduciary duties under ERISA when selecting the IRA's and making initial investment elections for the IRA's. In order to have safe harbor protection, plan fiduciaries must satisfy the following requirements:
1. The present value of the distribution may not exceed $5,000;
2. The distribution must be to an IRA;
3. The plan administrator must enter into a written agreement with the investment provider that provides that rolled over funds will be invested in such a way that will preserve principal and will maintain the dollar value of the original investment and provide a reasonable rate of return (whether or not such return is guaranteed). In addition, fees and expenses charged by the investment firm of the IRA may not exceed fees and expenses charged for comparable IRA's. The participant on whose behalf the IRA was established must have the right to enforce the agreement against the IRA provider;
4. Participants must be given information prior to automatic rollover in a Summary Plan Description (SPD) or Summary Material Modification (SMM) describing the types of investments that will compose the IRA and how fees will be charged. In addition, a notice must be sent to the participant's most recent mailing address on file identifying the trustee or issuer of the IRA.
Plan sponsors may prefer to avoid the automatic rollover requirement by amending their plans to eliminate the mandatory distribution provision or to reduce the mandatory distribution cap to below $1,000. If the plan sponsor chooses to retain the mandatory distribution option, plans must be amended no later than the last day of the plan year ending in 2005 to reflect the automatic rollover rules. The automatic rollover requirement will generally apply to any mandatory distribution made on or after March 28, 2005. However, the IRS Notice contains a number of transition rules that may postpone the effective date of the new automatic rollover requirement.
Uniglobal is currently working with several investment companies on the procedures
for setting up these IRA's for automatic rollovers. Once we have additional
details, we will post our findings. Should you have any questions, please feel
free to contact your Uniglobal representative for more information. (Mar
2005)
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What are the rules concerning participant loan repayments?
Taking a loan from a qualified retirement plan subjects the participant to strict repayment rules governed by the Internal Revenue Code. During the loan distribution process, the participant is provided with a Promissory Note and Amortization Schedule which dictate the timing, method, and amount of loan repayments. Loan repayments must be made in accordance with the amortization schedule. Since loans are not valued on a daily basis, but rather on a per-payment basis, there is no advantage to "paying down" the loan quicker by submitting additional principal with each payment. Doing this may pay the loan off more rapidly but will not reduce the total overall interest paid - and acutally may cause the loan to be re-amortized which may cost additional fees.
Loan repayments must be made through regular payroll deductions on an after-tax basis and submitted within 15 business days of the end of the month in which they were withheld. Loan repayments must be identified as such when depositing with the asset provider and should be credited to the participant's account in the manner in which the loan withdrawal originally occured (i.e. if the loan withdrawal came out of the participant's deferral account, the after-tax repayments should be redeposited in the deferral account as well).
Note to the participant: Since the interest paid back is going to the particpant's own account, the participant is not permitted to deduct interest paid on personal tax returns, regardless of the reason for the loan.
Failure to maintain the proper number and amount of loan repayments may force the loan into a default status which creates tax liability for the participant. Default status generally occurs if loan repayments are not repaid properly within 90 days. There are exceptions to this rule for participants on military leave.
In a recent court ruling, the IRS appeared unwilling to accept any excuses or retroactive corrections of missed payments beyond the plan’s grace period. Therefore, if loan payments have not been withheld (irrespective of who is at fault) and the participant has not made-up the missed payments within the plan’s grace period, the loan is taxable to the participant either as a deemed distribution (because there is no distributable event) or as a loan offset (because there is a distributable event).
The IRS and the court ruled that the participant was primarily responsible
for determining whether the loan payments have been withheld since he was ultimately
subject to tax consequences and was in the best position to monitor his paycheck.
Employers failing to withhold loan payments may nevertheless feel responsible
for the error and may wish to assist the participant with the tax consequences,
particularly where the participant has brought the error to the employer’s
attention. However, even employers who feel responsible for the error may feel
that at some point the responsibility is the participant’s. (Apr
2005)
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What does Top Heavy mean with regards to my company's retirement plan?
All qualified retirement plans are subject to Top Heavy rules (IRS Reg. §1.416-1).
A defined contribution plan is a Top Heavy plan for a plan year if, as of the
determination date, the sum of the account balances of participants who are
“key employees” (see next question below) for the plan year exceeds
60% of the total plan assets. A plan that is determined to be Top Heavy must
provide non-key employees with a minimum contribution of up to 3% of compensation
(IRC 416(c)). A Top Heavy plan must also provide a vesting schedule of either
a 3-year cliff (100% vested after 3 years), or a 6-year graded vesting schedule
(IRC 416(b)). (Apr 2005)
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A Key Employee is defined as any employee who meets at least one of the following conditions:
1. An officer-in-fact (as opposed to an officer-in-title) earning at least $140,000 in 2006 (indexed). Examples are generally President, Vice President, Secretary, Treasurer, CEO, CFO, etc.
2. A more-than-5% owner of the employer.
3. A spouse, parent, grandparent, or child of a more-than-5% owner of the employer who is employed with the employer.
4. A more-than-1% owner of the employer earning at least $150,000 in 2006 (indexed).
(Nov 2006)
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What is a Highly Compensated Employee (HCE)?
A Highly Compensated Employee (HCE) is defined as any employee who meets at least one of the following conditions:
1. A more-than-5% owner of the employer at any time during the current or prior plan year.
2. Is/was a spouse, parent, grandparent, or child of a more-than-5% owner of the employer.
3. Received in excess of $95,000 during the preceeding plan year (through 2005, $100,000 for 2006).
(Nov 2006)
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Can a Highly Compensated Employee elect not to participate in a Profit Sharing Plan?
A plan may exclude from participation designated classifications of highly
compensated employees, but an employee can elect only once to not be covered.
The plan must offer the election when the employee is first eligible to participate.
(Apr 2005)
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Are there any special di minimus rules concerning distributing small account balances of terminated employees?
Unfortunately, no. Even for balances under $15, the employer must still go
through the standard procedure of sending distribution forms, etc. to terminated
participants to allow them to elect their method of payout. (Apr 2005)
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What happens if a terminated employee dies before taking a full distribution of assets from the retirement plan?
Regardless of the reason for separation from the employer, an employee remains
a participant of the plan so long as his/her assets remain with the plan.
Therefore, should the former employee pass away prior to withdrawing all funds
from the plan, the beneficiary(-ies) of the employee would then be eligible
to receive the benefit under the rules of a standard death benefit claim.
In most cases (subject to the provisions of the plan document), the entire remaining
account balance would become fully vested and all eligible beneficiaries would
be required to complete the necessary paperwork to process the distribution.
(Apr 2005)
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What happens to employees on military leave?
Employees serving in the military have certain employment rights, as it relates to your company’s qualified retirement plan, under the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA). You, as the plan administrator, must be aware of these rights. They are as follows:
· The returning veteran must be given the opportunity to make up any missed elective contributions [for 401(k) and 403(b) plans];
· Matching contributions must be made by the employer for any elective deferrals made up from above [for 401(k) and 403(b) plans];
· Loan repayments may be suspended for the period of service [refer to your loan policy];
· Employer contributions (such as Profit Sharing), if made to other employees during the period of leave, must also be made to a returning veteran. However, the employer is not required to make up earnings or applicable forfeiture allocations;
· Reemployed veterans do not incur a break in service while serving in the military;
· Reemployed veterans include time spent in military service toward vesting or service credit;
· State laws granting greater rights than USERRA are not pre-empted.
The Veterans Benefits Improvement Act of 2004 (VBIA) requires all employers
to notify employees of their rights, benefits and obligations under USERRA.
Employers may meet this obligation by posting the USERRA notice or by delivering
the notice by hand or via e-mail. The Department of Labor has a sample poster
that may be downloaded for such use at www.dol.gov/vets/programs/userra/poster.pdf.
If you have any questions regarding your duties and obligations, please contact
your Uniglobal plan administrator. (Apr 2005)
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Where do I mail the 5500 Forms?
The 5500 Form package, once reviewed and signed by the Plan Sponsor/Trustee, must be mailed to the Employee Benefits Security Administration (EBSA) of the Department of Labor. Address are as follows:
| Regular Mailing: | EBSA |
Overnight Delivery: | EBSA/NCS |
Be sure to include all schedules and attachments as provided and instructed in your 5500 Package sent by Uniglobal. Send original copies! Do not send duplicates of the forms as the special bar codes at the bottom of each page will not scan properly and the forms will be rejected.
Electronic filing (EFAST) is also available. To initiate this option you must
(1) apply
for an EFAST signature, and (2) provide the assigned PIN and ID numbers
to Uniglobal. Only Uniglobal has the ability to file the forms electronically
– you cannot do this yourself. To apply for your own EFAST signature,
visit http://www.dol.gov/ebsa/pdf/EFAST-1.pdf.
Complete the form (check Box A only in Part I) and mail
as instructed to the EBSA for processing. Form instructions may be found
at http://www.dol.gov/ebsa/pdf/EFAST-1-Inst.pdf.
(Jul 2005)
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What is a Summary Annual Report (SAR)?
A Summary Annual Report (SAR) is a document produced each year summarizing
plan year asset activity and balances. ERISA (Employee Retirement Income Security
Act of 1974) requires that you distribute a Summary Annual Report for the plan
to each participant within 9 months (or 11½ months with filed extension)
from the end of the plan year. This report may be provided in written format,
e-mailed or publicly posted. (Jul 2005)
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What is the deadline for submitting my company's employer contributions after the plan year is over?
Employer contributions (match, profit sharing, etc.) must be submitted no
later than the date the corporate tax return is filed for the corresponding
year. Generally, for calendar year plans, the contribution is due by March 15th
following the end of the plan year. If a 6-month corporate tax return extension
is filed, then technically the deadline for submitting employer contributions
is September 15th following the end of the plan year. Corrective contributions
(QNEC, Top Heavy Minimums) are due by the last day of the plan year following
the plan year for which they are effective. (Jul 2005)
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Why would my plan need a mid-year discrimination test performed?
Mid-year discrimination testing (ADP/ACP testing) is not required. However,
having such a test performed may give an indication of where things are headed
for the current plan year, and may encourage Highly Compensated Employees to
alter their deferral elections to avoid refunds at the end of the year should
the test indicate failure. Mid-year tests can be run as of any date during the
year – usually at the half-way point or later for best results. Note
that a mid-year discrimination test is not official and does not guarantee any
results at year-end; its only purpose is to estimate the plan’s
current course with respect to the 401(k)/401(m) tests. The plan sponsor must
provide Uniglobal with all year-to-date census data in the same format that
would be supplied at the end of the year. There may be a fee charged for this
service. Contact your Uniglobal plan administrator for more information.
(Oct 2005)
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What is the difference between “amending” and “restating” a plan document?
“Amending” a plan document is simply making small changes to the existing provisions or information found in the adoption agreement or to the plan document itself. An amendment is necessary to change basic information such as the employer address or plan trustee, or to change plan procedures such as vesting schedules, eligibility requirements, contribution allocations, payout options, etc. It may be possible to include multiple changes into a single plan amendment. A Summary of Material Modifications (SMM) must be distributed to all plan participants detailing the changes made by the amendment. Uniglobal generally charges a fee of $250 to amend the plan.
“Restating” a plan document is the act of rewriting the adoption
agreement or plan document from scratch and incorporating all prior amendments
to date. Uniglobal will normally restate a plan document for a new client with
an existing plan to conform the plan to our administration requirements. From
time to time, Federal law requires that all plan documents be restated to incorporate
a large number of law changes that have made previous document language obsolete.
A plan sponsor may also request that the plan document be restated if so many
amendments have occurred as to make the existing plan document outdated. A new
Summary Plan Description (SPD) must be provided to all plan participants for
a plan restatement. The fee to restate the plan document is costly and can range
from $1,000 to $3,000 depending upon the type of plan and document used.
(Oct 2005)
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Is it necessary to amend the plan document if my company’s address changes?
Yes. The company (plan sponsor) address, along with the company name, phone
number, EIN, filing entity type, NAICS code, and plan trustees are all items
identified in the plan document. If any one of these pieces of information change,
a plan amendment is required. In addition, a Summary of Material Modifications
(SMM) must be distributed to all plan participants detailing these changes.
This is required by Federal law. (Jul 2005)
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Can a plan document be amended retroactive to the amendment effective date?
Yes, sometimes. While it is always in best practice to execute plan amendments prior to the amendment effective date, it is possible to change plan provisions retroactively. The general rule in allowing this is that no plan participant (or potential plan participant) loses any form of plan benefit from the change. The following are examples of amendments that cannot be done retroactively:
• Change the plan eligibility requirement from 3 months to 12 months.
• Change the requirement to share in a match contribution for the plan year from 1 hour to 1000 hours.
• Add a “last day” requirement to share in an employer contribution for the plan year.
• Remove provisions for Safe Harbor contributions.
Notice that in each example above, a participant could possibly lose a benefit from the plan that he/she was originally informed would be available. The amendment for any of the above examples must be executed prior to the effective date. The following are examples of amendments that may be done retroactively:
• Add or delete a trustee.
• Add a loan provision to the plan.
• Remove an hours requirement to share in an employer contribution for the plan year.
• Change the employer allocation method from a straight percentage formula to a class based formula.
Of course, every amendment must be reviewed by our Compliance Department for
viability prior to execution. Any amendment that is done retroactive to the
effective date must be dated no later than the corporate tax filing date following
the end of the plan year in which the amendment is to be effective. For calendar-year
plans, this would be March 15th. (Jan 2006)
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The common enrollment technique currently used by most 401(k) plans requires
the participant to complete some written form of election to begin payroll deductions
and to have these amounts deposited into the retirement plan. Automatic
enrollment requires participants to elect not to have their pay contributed
to their 401(k) plan. When using automatic enrollment as the plan’s default
feature, participants who fail to make an election would have a stated percentage
of pay automatically contributed to the plan (usually 1% to 3%) regardless of
their wishes. IRS Revenue Ruling 98-30 states that the employer must notify
its employees of the automatic enrollment feature of the plan by giving the
employee (1) the right to elect not to contribute to the plan; (2) the
right to contribute at a different rate other than the automatic enrollment
default deferral rate; and (3) written procedures for requesting a deferral
rate change (this notice must be distributed annually). The plan document must
be amended (not retroactively) to allow for automatic enrollment. (Jan
2006)
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