In May 2010 the IRS sent a questionnaire to 1200 randomly selected 401(k) plan sponsors who had filed a Form 5500 in 2007. The questionnaire is being used to:
- measure the health of 401(k) plans
- better understand compliance issues impacting 401(k) plans
- evaluate the effectiveness of voluntary compliance programs and tools
- determine how the IRS can best foster compliance
In February 2012 the IRS some of the preliminary findings of the questionnaire. Most of the questions asked in the survey were regarding the 2008 plan year. Here is a sampling of some of the data released:
- 43% of 401(k) plans are using a safe harbor contribution
- 5% of 401(k) plans are SIMPLE 401(k)s
- 85% of plans use a pre-approved plan document (such as a TPA provided volume submitter plan)
- 23% of plans filed for a Determination Letter for the plan document
- 96% of plans allow catch-up contributions for participants age 50 and older
- 22% of plans allow employee Roth contributions
- 68% of plans provide for matching contributions
- 58% of plans have an eligibility requirement of 1 year of service
- 14% of plans have an eligibility requirement of 6 months of service
- 13% of plans have no service requirement for eligibility
- 20% of plans are top-heavy
- 65% of plans allow loans
- 67% of plans allow hardship withdrawals
- 1% of plans have employer stock as an investment option
If you have any questions about how your plan compares to these findings please feel free to give us a call at 1-888-689-5530 or send an email to info@retirementplanners.com.
Although we continually remind everyone that employee withholdings need to be deposited to the plan in a timely manner, the number of instances of late deposits is still too high. Granted, many of these violations are isolated occurrences because someone was on vacation or it was just a innocent "oops I forgot" moment, however, the last thing you want to do is increase your chances of an audit by the Department of Labor. There should always be a back-up that puts in a reminder every payperiod to the person who regularly handles the contributions.
The Department of Labor provides a seven business day safe harbor for small employers to deposit employee withholdings after each pay cycle. Large employers, those with 100 or more employees, should have their employee withholdings deposited within two to four business days after each pay cycle.
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. Except for SIMPLE IRAs, 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.
Before a participant has the opportunity to decide if they should make traditional pre-tax deferrals or post-tax Roth contributions, the Plan Sponsor (typically the Employer) needs to make the decision to offer Roth to the participants. Offering participants the ability to make Roth contributions may sound harmless; however, there are 
several factors to take into consideration. The first is whether this added feature will bring an extra layer of complication and cause participants to view the plan as too confusing and reduce the plan’s, and the employer’s entire benefits package, overall appeal. Other complications can include additional payroll tracking and distribution education.
There are really two main reasons for a participant to consider investing current and future contributions in a Roth 401k. The first would be if you believe that your marginal income tax rates will be higher when you retire, compared to today. This might happen if federal and state governments raise income tax rates to meet their substantial deficits, and in fact, that's becoming the conventional wisdom for many financial writers and planners to recommend Roth 401ks or Roth IRAs.
Let's do some math to see how your marginal income tax rates now and in retirement can impact how much money you'll have to spend in retirement. For this example, I'll make some simple assumptions:
- You put $10,000 from your salary into your 401k plan in 2011.
- Your combined marginal federal and state income tax bracket is currently 35 percent.
- Your 401k accounts earn 5 percent per year.
- You'll retire in 10 years and withdraw the accumulated contribution that you made in 2011. At that time, your combined marginal income tax rate is still 35 percent.
How much money will you have to spend in 10 years, after paying income taxes, under the traditional 401k vs. the Roth 401k?
If you contribute to the traditional 401k: Since you aren't paying income taxes on the $10,000, you can invest the full amount. At 5 percent annual investment returns, your $10,000 will grow to $16,289 (if you're mathematically inclined, that's $10,000 times 1.05**10). You'll pay 35 percent of that amount in taxes ($5,701), leaving an after-tax amount of $10,588 to spend.
If you contribute to the Roth 401k: You'll pay 35 percent income taxes today on $10,000 -- $3,500 - so that money is gone. You'll have $6,500 left to invest in a Roth 401k. Your $6,500 will grow to $10,588 (that's $6,500 times 1.05**10). Since Roth accounts aren't taxed upon withdrawal, you'll have all this money to spend.
This example shows the following:
- If you're in the same marginal income tax bracket now and in retirement, there's no difference in the after-tax amount you have to spend in your retirement between a traditional and Roth 401k.
- If you're in a higher tax bracket in retirement compared to now, you'll have more money to spend in retirement if you contribute to a Roth 401k.
- If you're in a lower tax bracket in retirement compared to now, you'll have more money to spend in retirement if you contribute to a traditional 401k.
While many people expect that income tax rates will increase, it's highly possible you'll still be in a lower tax bracket when you retire, even if income taxes are raised. In that case, a traditional 401k will still result in you paying lower income taxes and having more money to spend in retirement.
One other note: In the above example, I assumed that if you contribute to the Roth 401k, you'll pay for the income taxes from the amount of salary that you have to invest (from the $10,000). If instead you invest all of the $10,000 in the Roth and pay the $3,500 of income taxes from other sources, in effect that's some extra savings you're forcing yourself to make that is growing in your 401k account. In fact, for this reason, if you can afford to contribute the maximum amount -- $16,500 -- to a Roth and pay the income taxes from other sources, you'll maximize the value of your tax-advantaged savings. This could be a reason to use the Roth 401k.
Now for the second reason to consider a Roth 401k: You can avoid the required minimum distributions (RMD) at age 70-1/2 with Roth 401k accounts, while RMDs apply to traditional 401ks. Technically the RMD applies to Roth 401k accounts, but you can get around this by rolling your Roth 401k to a Roth IRA which doesn't have the RMD.
-From CBS Money Watch, October 8, 2010
Other considerations:
The 5-year clock. If you take a withdrawal before 5 years has elapsed then the earnings will be taxable. You can avoid the taxes by rolling over to a Roth IRA. If you open a new Roth IRA the 5 year clock starts again.
An investment policy statement is a record of the steps taken by the plan’s fiduciaries in selecting and monitoring the investment options in the plan. It can also document the steps taken in the selection of an investment advisor who is hired to select and monitor the investment options in the plan. Although an investment policy statement is not required under ERISA, the Department of Labor “believes that such statements serve a legitimate purpose in many plans by helping to assure that investments are made in a rational manner and are designed to further the purposes of the plan and its funding policy”.
An investment policy statement is also another layer of protection against litigation from a participant who claims the funds in the plan were inappropriate or not adequate. In this type of situation it would be the fiduciaries who would need to prove that their decision making process was sound and in the interest of the participants. A copy of the investment policy statement should be provided to participants.
If you do decide to use an investment policy statement you will need to make sure you follow through on the committments you make in it, such as annual meetings or performance reviews. Your plan's investment advisor can guide you through drafting your investment policy statement and scheduling regular meeting.
Click HERE to go to our checklist page, complete the form on the right, and you will be able to immediately download the checklist.
The costs associated with starting a retirement plan for small employers are not as high as you first thought. Under Section 45E of the Internal Revenue Code, an employer that adopts a new plan covering at least one non-highly compensated employee can take up to a $500 credit (50% of first $1,000) for each of the retirement plan’s first three years of operation for startup and administration costs of the plan.
Eligible Employers:
1. You are an eligible employer if, during the preceding year, you had 100 or fewer employees who received at least $5,000 of compensation.
2. The employer must not have established or maintained any employer plan during the three tax-year period immediately preceding the first tax year in which the new plan is effective.
3. The plan must cover at least one non-highly compensated employee.
Qualified startup costs are expenses paid or incurred in connection with: (a) establishing or administering an eligible employer plan; or (b) the retirement-related education of employees about the plan.
The credit is part of the general business credit, which can be carried back or forward to other tax years if it cannot be used in the current year. You cannot deduct the part of the startup costs equal to the credit claimed for a tax year, but you can choose not to claim the allowable credit for a tax year.To take the credit, use IRS Form 8881, Credit for Small Employer Pension Plan Startup Costs.
If you are not sure who will receive your retirement plan account in the event of your death, don't ask your HR department or retirement plan administrator, just fill out a new form. It is a good idea to review your beneficiaries every couple of years to ensure they are in line with your current living situation, and it doesn't hurt to complete a new beneficiary designation form just in case the last one got misplaced.
You can download a form HERE.
Here are some common questions about retirement plan beneficiaries:
If I get divorced who becomes my beneficiary? The answer can depend on two factors: 1) Did you complete a form designating your former spouse, and 2) Does your retirement plan automatically revoke a spousal beneficiary designation upon divorce or legal separation. The only way to know with absolute certainty who your beneficiary is is to complete a new beneficiary designation form once your divorce is final.
If I don't designate a beneficiary who will get my account balance if I die? Your retirement plan will have procedures to determine who will receive your account balance. In RPA's plan document the account will be paid in the following order of priority: 1) Spouse; 2) Children, including adopted children, per stripes; 3) Surviving parents, in equal shares; 4) the estate.
I previously named my children as beneficiaries and I am getting married again. Do I need to have my new spouse consent to my children as the beneficiaries of my account? Yes, getting married nullifies all prior beneficiary designations.
Hardship Withdrawals - The Basics:
A retirement plan may, but is not required to, allow hardship distributions, and the plan can be amended at any time to add or remove the feature.
For a distribution to be on account of hardship it must be made due to an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need. The need of the employee includes the need of the employee's spouse or dependent.
Whether a need is immediate and heavy depends on the facts and circumstances. Certain expenses are deemed to be immediate and heavy, including: (1) certain medical expenses; (2) purchase of the primary residence; (3) tuition and related expenses; (4) payments to prevent eviction or foreclosure of the primary residence; (5) funeral expenses; and (6) certain expenses for the repair of damage to the employee's primary residence. A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee. A plan may permit a hardship withdrawal under other circumstances; however, the IRS could take a different view on other reasons and find your plan is out of compliance.
Regardless of the reason for the Hardship distribution, it is the Plan Sponsor’s responsibility to have proof that the participant qualified for the hardship withdrawal. This responsibility is normally satisfied by obtaining copies of statements, notices or invoices related to the reason for the hardship withdrawal.
After an employee receives a hardship distribution, generally the employee will be prohibited from making employee contributions to the plan for at least 6 months after receipt of the hardship distribution. Safe harbor and qnec contributions, and earnings on employee deferrals, are not eligible for hardship withdrawal.
Hardship distributions are includible in gross income, with the exception of any designated Roth Contributions distributed. Also, the distribution may be subject to an additional 10% penalty for early withdrawal.
Hardship Withdrawals - Some Common Issues:
Situation 1:
A participant had a $10,000 vested balance in the plan. Several months ago the participant took out a loan for $5,000. The participant is now requesting a $5,000 hardship withdrawal to prevent foreclosure. The hardship withdrawal would pull all the remaining money in the account and leave only the $5,000 loan balance, which is a concern to the Plan Sponsor because the security for the loan will be gone. The concerns of the Plan Sponsor are commendable but the security requirement for the loan only applies when the loan is made and does not need to be maintained thereafter.
Situation 2:
The opportunity to obtain funds that would otherwise not be available until a later date can be tempting to some less than honest employees. A Plan Sponsor noticed that after approving a hardship withdrawal to pay back rent owed to prevent eviction there was a spike in similar requests. The Plan Sponsor attempted to call the landlord listed on several requests and found the phone numbers were not in service. Further review of eviction notices revealed similarities in landlord signatures and other questionable items. Although the Plan Sponsor is sympathetic to employees who are possibly in a dire situation, hardship withdrawals should not be approved if there is knowledge that the proof is not valid.
Situation 3:
Medical or tuition expense invoices, eviction or foreclosure notices, and other paperwork is missing dates, has inconsistent addresses, or is too generic. Similar to Situation 2, a less-than-honest participant could try to submit paperwork that is purposely incomplete or outright forged, in order to get at their retirement account funds. Although the money in the account is ultimately theirs, and no one wants to see a person go through a financial rough spot, the fiduciaries of the plan must follow the regulations and protect themselves from IRS and DOL scrutiny.
Situation 4:
A participant requests a hardship distribution to pay their mortgage payment that was due 10 days ago. Although the participant may be late in paying a mortgage payment, and may have even received a reminder from the mortgage company, a late payment does not equate to an immediate and heavy financial need to prevent foreclosure. An acceptable communication from the mortgage company to warrant an immediate and heavy need would be a letter or notice stating that if $x.xx in back mortgage payments are not made by a certain date foreclosure proceedings could begin.
Are you complying with IRS annual testing and recordkeeping requirements? Whether you use Retirement Planners, or another TPA, with our retirement plan administration checklist you will be able to monitor your plan's annual compliance work from start to finish.
Our checklist gives you 19 items that you need to make sure are being completed:
- Each item has a description so you know why it is important
- This checklist was generated from our own internal audit list
- There are no sales pitches on the list and all 19 items are 100% valid
This checklist will give you the information to be able to review the compliance reports you are receiving from your TPA, and gives you the knowledge to know if something is missing or incomplete.
Click HERE to go to our checklist page, complete the form on the right, and you will be able to immediatly download the checklist.
T
he Employee Retirement Income Security Act requires that persons handling plan funds or other plan property generally must be covered by a fidelity bond to protect the plan against fraud and dishonesty. A fidelity bond is also known as an ERISA Bond, ERISA Fidelity Bond, or Surety Bond.
Not having an ERISA Fidelity Bond can subject even the smallest of plans to a costly annual audit. The bond must be no less than 10% of assets or a minimum of $1,000. The maximum required bond amount is $500,000, although there are some exceptions where the maximum may be higher when employer stock or non-qualifying assets are held.
Where can I get an ERISA Fidelity Bond? Click here for our page on ERISA Fidelity Bonds.
Must service providers to the plan be bonded? Advisors, TPAs, CPAs, or other providers only need to be bonded if they "handle plan assets".
Are any plans exempt from the Bonding requirements? Yes, unfunded plans and plans not subject to Title I of ERISA are exempt. The most common example is a 1-participant plan covering the owner (or owner and spouse).
Must the bond state a specific dollar amount of coverage? No, the bond could be written to provide a percent of assets coverage so long as the bond provides the statutory minimum amounts.
Can the bond have a deductible? No.
What are the consequences for not having a bond? Since bond information is required to be reported on the IRS Form 5500 your plan may have a greater probability of an IRS or DOL audit. Trustees may be liable for losses that would have been covered by the bond, and plan fiduciaries may be liable for not ensuring the plan was covered.
Is a Fidelity Bond the same as a Fiduciary Bond? No, review our Fidelity and Fiduciary Bond page for more information.
Retirement Plan Administration is the term that Third Party Administrators (TPAs) use to describe all of the work we do during the year. This work is typically comprised of the following:
- Answering client questions during the year regarding loans, hardships, withdrawals, contributions, testing, rehires, etc...
- Providing annual safe harbor and automatic enrollment notices
- Reviewing and processing loans, hardship withdrawals, and other distributions
- Reviewing the plan document
- Gathering census data and asset information
- Compliance testing
- Correcting compliance testing issues
- Calculating employer matching and/or profit sharing contributions
- Asset reconciliation (trust accounting)
- Tracking receivables (usually the last payroll contribution of the year that is not deposited until the first week of the following plan year)
- Vesting updates
- Forfeiture accounting
- IRS Form 5500 and related schedules
- IRS Form 8955-SSA
- Summary Annual Report and other participant notices
- Audit support for large plans (over 100 participants)
If you are looking for a TPA to handle your retirement plan administration, or if you want to do a review of your current TPA, here are a few items to check that we have seen deficient when taking over a plan:
- TPA is not incorporating receivables into the testing and asset reconciliation and claims to be "doing things on a cash basis"
- TPA is not providing annual vesting information or statements
- The TPA does not provide a comprehensive year-end administration package, or valuation package, of all testing, accounting, and participant detail
- Your emails or calls are not being returned promptly or the people you talk to are never sure of their answers. These are signs that the TPA is understaffed and is hiring less than qualified staff to handle your plan
If you have a question about some of the work your current TPA is providing we will be glad to provide 10 minutes of free, no-obligation, consultation with direct answers and no sales pitches. Call us at 1-888-565-4772 or email info@retirementplanners.com.