A qualified retirement
plan can provide many benefits for an employer and its employees. In
order for the plan to run smoothly so that its usefulness can be
maximized, the employer should be aware of the ongoing
responsibilities related to the administration of the plan.
Once procedures have been established, the plan can function to
its potential and remain within the qualification guidelines of the
Internal Revenue Code ("IRC") and the fiduciary requirements of the
Employee Retirement Income Security Act ("ERISA"). This newsletter
will examine the basic responsibilities of the plan sponsor of a
qualified plan.
Allocation of Duties
The plan and trust documents establishing the plan name a plan
administrator and plan trustee(s). The plan administrator has the
legal responsibility for running the plan and is often the employer
sponsoring the plan. More often than not, an outside third party
administrator ("TPA") will be hired to perform many of the
administrative tasks required under the plan document, though the
plan administrator remains legally responsible for all plan
activities.
The plan’s trustee, appointed by the employer, can be a corporate
trustee or one or more individuals. The trustee has a fiduciary
responsibility to manage and invest the trust fund in a prudent
manner in accordance with the plan’s investment policy.
Many 401(k) plans allow participants to direct the investments of
their accounts, which can alleviate some of the investment liability
from the trustee if participants are given sufficient information
and control over their investments. However, where investment
alternatives provided to participants are limited, as with a list of
mutual funds within a fund group, the trustee is still responsible
for monitoring the appropriateness of such alternatives.
Employee Notifications
Plan Summaries
After a plan is established, each eligible employee should be
given a copy of the summary plan description ("SPD") which explains
the basic provisions of the plan. The deadline is the later of 120
days from the plan adoption date or 90 days after an employee
becomes a participant. Upon amendment of a significant plan
provision, participants must be given a summary of material
modifications explaining the change(s) within 210 days after the
close of the plan year in which the change is made.
An updated SPD must be provided at least every five years if one
or more amendments have been adopted, or every ten years if no
changes have taken place.
Beneficiary Forms
Every new participant should complete a beneficiary designation
form which the plan administrator should keep with its permanent
records. In general, the death benefit is required to be paid to a
married participant’s spouse unless the spouse has consented in
writing, witnessed by a notary or a plan representative, to another
beneficiary. Plans that provide an annuity benefit option require
additional notices and waiver forms.
Deferral Elections
Salary deferral plans require participants to complete deferral
election forms. If the investments are to be self-directed, they
also must complete investment election forms and be given sufficient
information about the investment options from which to make an
informed decision. All of the forms and information are usually
distributed as part of an "enrollment kit."
Safe Harbor Notices
In a safe harbor 401(k) plan, certain nondiscrimination tests can
be eliminated by providing safe harbor contributions. A notice
explaining the contributions as well as other plan provisions must
be given out generally between 30 and 90 days before the plan year
begins. If the safe harbor notice states that a 3% nonelective
contribution might be made, then a follow-up notice must be
distributed before the last month of the plan year, confirming
whether or not the contribution will be made.
Plan Contributions
Salary Deferrals
The Department of Labor ("DOL") has stated that once withheld
from participants’ wages, deferrals must be remitted to the plan as
soon as the funds can reasonably be segregated from the employer’s
general assets. In no event can this be beyond the fifteenth
business day of the following month, but this is not a safe harbor
deadline. Depending on the employer’s payroll system, the deadline
could be within a day or two.
Failure to make timely deferral deposits results in prohibited
transaction excise taxes and restoration of lost earnings.
Profit Sharing Plans
The due date for making employer profit sharing plan
contributions is the plan sponsor’s due date for filing the
corporate tax return, including extensions. Safe harbor nonelective
contributions and required top heavy minimum contributions are due
the last day of the following plan year.
Pension Plans
For defined benefit and defined contribution pension plans, such
as money purchase plans, the deadline for employer contributions is
eight and one-half months after the close of the plan year. Certain
defined benefit plans are required to fund on a quarterly basis.
Participant Statements
At least once a year, participants are generally given a benefit
statement showing their account activity or vested accrued benefits
as of the valuation date. In plans where participants direct their
own investments, statements must be provided at least quarterly if
the plan elects to limit fiduciary liability in accordance with
ERISA regulations.
Annual Plan Limits
Plan sponsors should keep up to date with annual limits that are
subject to cost-of-living adjustments. The 2006 annual limitations
include:
- $220,000 compensation cap;
- $44,000 annual additions limit;
- $15,000 401(k), 403(b) and 457 plan deferral limit (plus
$5,000 catch up);
- $100,000 highly compensated employee threshold; and
- $140,000 key employee threshold.
Compliance Testing
Once a year every retirement plan has to be tested to insure that
it satisfies certain nondiscrimination requirements under the IRC.
There are coverage and participation tests, employee and matching
contribution nondiscrimination tests, annual additions tests and top
heavy tests.
These tests require that census information for all employees be
reviewed at the end of each plan year, including dates of hire,
birth and termination, hours worked, compensation, contributions and
account balances. Complete employee data is required to avoid
inaccurate test results.
The annual testing requires the classification of employees as
key vs. non-key and highly compensated vs. non-highly compensated.
These determinations are based on employer ownership, officer status
and compensation. Since the ownership determination includes family
attribution rules, it is important to note on the census if any
employees are related to any of the owners of the business.
Employees who worked for a "related" company may also have to be
considered. Related companies are either part of a "controlled group
of corporations" or an "affiliated service group." Whenever an
individual who owns any portion of the sponsoring employer (or the
owner’s spouse) buys into another business, the TPA should be
notified so a controlled group determination can be made. The same
applies if another company works together with the employer to
provide services to each other or to third persons which could
constitute an affiliated service group. These circumstances create
important issues that could affect the qualification of the plan.
Participant Loans
Plans that offer participant loans must inform participants of
the plan’s loan procedures which are often contained in the SPD.
Loan repayments, which are usually made through payroll deduction,
must be monitored. Missed payments require employee notification
that the loan will be in default at the end of the "cure period" if
the payments are not caught up. The entire outstanding loan balance
of the defaulted loan is taxable to the participant for the year of
the default.
Participant loan repayments should be remitted to the plan in the
same timely manner as salary deferrals (described above).
Distributions
Many 401(k) plans allow hardship withdrawals. This requires the
plan administrator to obtain verification that the hardship meets
the statutory requirements spelled out in the plan document. Salary
deferrals must be suspended for six months after receipt of a
hardship distribution.
Other circumstances that may allow for benefit distributions are
retirement, death, disability, termination of employment or the
attainment of a specified age. Whenever a participant becomes
entitled to a distribution, election forms and tax information must
be provided. Also, a participant involved in a divorce or separation
may present a domestic relations order to the plan administrator
which transfers a portion of the participant’s benefits to an
alternate payee such as an ex-spouse or a child. The order must be
reviewed and responded to in accordance with the plan’s qualified
domestic relations order procedures before any benefits can be
segregated or distributed.
Bonding
The trustees of every qualified plan subject to ERISA must be
covered by a surety bond for at least 10% of the value of plan
assets but not more than $500,000. Certain types of plan
investments, such as limited partnerships, may increase the bonding
requirement.
Annual Government Reporting
Form 5500
Each year the plan sponsor must file an annual report, Form 5500,
with the DOL. This report contains various schedules and is due by
the last day of the seventh month following the close of the plan
year. A two and one-half month extension is available by filing Form
5558. Generally, plans with 100 or more participants must have the
plan audited each year by an independent accountant. The audit
report is attached to the Form 5500.
A summary of Form 5500, called the summary annual report, must be
provided to each plan participant and beneficiary each year within
nine months (or eleven and one-half months with filed extension)
from the end of the plan year.
Form 1099-R
Form 1099-R must be provided by January 31 to each participant
and beneficiary who received a plan distribution, including a
rollover or defaulted loan, during the previous plan year.
Summary
A plan sponsor has numerous responsibilities concerning the
ongoing administration of the plan. While many of these duties are
often contracted out to a TPA, the sponsor must provide the TPA with
complete and accurate census, contribution and asset information. In
addition, the sponsor must distribute employee notifications and
make timely contribution deposits, to facilitate the smooth
operation and maximum utility of the plan.
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