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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