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Understanding Retirement Plan Fees and Expenses

The DOL has issued a publication to help you better understand the fees and expenses associated with your retirement plan:

As the sponsor of a retirement plan, you are helping your employees achieve a secure financial future. Sponsoring a plan, however, also means that you, or someone you appoint, will be responsible for making important decisions about the plan’s management. Your decisionmaking will include selecting plan investments or investment options and plan service providers. Many of your decisions will require you to understand and evaluate the costs to the plan. The Federal law governing private-sector retirement plans, the Employee Retirement Income Security Act (ERISA), requires that those responsible for managing retirement plans -- referred to as fiduciaries -- carry out their responsibilities prudently and solely in the interest of the plan’s participants and beneficiaries. Among other duties, fiduciaries have a responsibility to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable. This booklet will help you better understand and evaluate your plan’s fees and expenses. While the focus is on fees and expenses involved with 401(k) plans, many of the principles discussed in the booklet also will have application to all types of retirement plans. Remember, however, that this booklet provides a simplified explanation of plan and investment fees. It is not a legal interpretation of ERISA or other laws, nor is it intended to be a substitute for the advice of a retirement plan or investment professional. (Read More)


The DOL provides guidance on the timing of deferral contributions

On January 14, 2010, the Department of Labor published final regulations that define a “timely” deposit of employee contributions to a 401(k) plan. This guidance applies to plans that are “small plans”, meaning they have less than 100 participants on the first day of the plan year. The definition of a timely deposit for these plans is when 401(k) deferrals (and loan payments if the plan allows) are deposited to the plan no later than the 7th business day following the date the contributions are received by the employer, or would otherwise have been paid to the employee as compensation.

If 401(k) deferrals (and loan payments if applicable) are not deposited to the plan in a timely manner as defined above, the contribution will be deemed a prohibited transaction. The employer must submit lost earnings and pay an excise tax in order to correct the prohibited transaction.

Plans that have more that 100 participants were not addressed in the DOL regulations referenced above so the previous contribution guidelines continue to be used for these plans. Those guidelines state that contributions should be deposited to the plan as soon as they can reasonably be segregated from the assets of the employer.

We strongly recommend that you review your current method of making these deposits to ensure that you are in compliance with the DOL guidelines.



Retirement Plan Limits:

The following chart illustrates the cost of living adjustments to dollar limits under Employee Benefit Plans:

 

Type of Limitation

2018

2017

2016

Defined Contribution
Annual Additions Limit

$55,000

$54,000

$53,000

Defined Benefit Plan Limit

$220,000

$215,000

$210,000

Annual Compensation Limit

$275,000

$270,000

$265,000

Elective Deferrals
(401(k), 403(b), etc.) / Catch-Up Contributions

$18,500 / $6,000

$18,000 / $6,000

$18,000 / $6,000

457 Plan Limits / Catch-Up Contributions

$18,500 / $6,000

$18,000 / $6,000

$18,000 / $6,000

SIMPLE Retirement Accounts / Catch-Up Contributions

$12,500 / $3,000

$12,500 / $3,000

$12,500 / $3,000

Highly Compensated

$120,000

$120,000

$120,000

Social Security
Taxable Wage Base

$128,400

$127,200

$118,500

IRA Contribution / Catch-Up

$5,500 / $1,000

$5,500 / $1,000

$5,500 / $1,000

Important Dates for 401(k) Plans:

Transaction

Date

Remittance of 401(k) deferrals

 

Corrective distributions for failed ADP/ACP test (to avoid 10% excise tax)

Correction by 2 ½ months after plan year end.

Corrective distributions of excess deferrals

April 15th

Annual 5500 filing

Last day of 7th month beginning after plan year end

Request for extension of 5500 filing

Last day of 7th month beginning after plan year end

Extended 5500 filing

2 ½ months after original filing deadline

Distribution of Summary Annual Report

Last day of 9th month beginning after plan year end (including extensions)

Distribution of Summary Plan Description

Within 90 days after becoming a plan participant

Distribution of annual Safe Harbor Notice

30-90 days prior to the first day of the plan year using the Safe Harbor provision

Distribution of 2nd required notice for plan using the “Flexible” Safe Harbor design

30 days before the end of the plan year

Amendment to remove Safe Harbor provision for following plan year

December 31 of current plan year


Top-Heavy Determination:

Definitions – A plan is top-heavy for the current year if, as of the last day of the preceding plan year, the total account balances of all key employees is greater than 60% of the total account balances of all employees. In determining these account balances, for participants that earned an hour of service during the year, any distributions made during the plan year, due to termination of employment and any in-service distributions made within 5 years, are included.

Generally, if a plan is top-heavy, it must provide a minimum allocation amount to eligible employees. Top-heavy plans must also use an accelerated vesting schedule on employer contributions. If a plan is top-heavy, IRS law will supersede certain plan provisions.

A key employee is an employee who, at any time during the preceding plan year, was:

  • a more than 5% owner,
  • a more than 1% owner and earning over $150,000 (as indexed),
  • an officer with compensation is excess of $160,000 (as indexed).

Top-Heavy Consequences – Each eligible nonkey employee is required to receive a minimum allocation of employer contributions for each year that the plan is top-heavy. The minimum allocation must equal the lesser of 3% of compensation for the entire plan year or the percentage allocated to the key employee receiving the largest allocation percentage for the plan year.

Employer matching has been able to satisfy top-heavy minimum contribution requirements since plan years beginning January 1, 2002.

Special Note – In a 401(k) plan, elective deferral contributions count as contributions for key employees. The plan may be required to allocate an additional top-heavy minimum employer contribution even though only 401(k) deferrals were contributed to the plan.


When Must 401(k) Deferrals be Submitted to the Plan?:

When a 401(k) deferral is deducted from a participant’s paycheck, the employer is required to transmit that contribution as soon as possible to the trust. The regulations require that participant deferrals be deposited to the plan “as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets”. In the past, the Department of Labor (DOL) seemed to suggest that these contributions were deposited on time if the deposit was made no later than the 15th business day of the month following the date the contributions were withheld from the employees’ paychecks. This is no longer true.

Recent DOL plan audits indicate that the DOL expects employers to deposit employee 401(k) deferrals no later than the earliest reasonable segregation date following each pay period. For example, if the employer could have segregated the funds within five days of withholding, then the maximum time period would be five days. Additionally, if your plan allows for loans and repayments made through payroll withholding, the loan repayments should also be deposited as frequently as 401(k) deferral contributions are deposited.

It is important to note that “batch” contributions are not permitted. Making only one deposit per month would be an example of batching. In other words, if your company has a weekly pay schedule, then contributions should also be remitted weekly.

We strongly recommend that you review your current method of making these deposits to ensure that you are in compliance with the DOL guidelines.

ERISA/Pension Fidelity Bonds:

Regulations state that all 401K plans require an ERISA/Fidelity bond in order to maintain compliance under ERISA. Use this link to make sure your plans are in compliance with the law! http://www.colonialdirect.com/fidelity_main.shtml



2018 Compliance Reminders:

Click here to read the 2018 Retirement Plan Year-end Compliance Worksheet



2017 Compliance Reminders:

Click here to read the 2017 Retirement Plan Year-end Compliance Worksheet



Required Minimum Distributions:

If you are age 70½ or older and maintain money in a qualified retirement plan, you may be required to take a distribution from the plan. There are certain plan provisions that may apply to your plan specifically, and government regulations that apply to everyone. If you are age 70½ and have a question on a minimum required distribution, please contact us.


Safe-Harbor 401(k) Plans:

Who Should Consider a Safe-Harbor 401(k) Plan?

  • Plans that repeatedly fail ADP or ACP tests and end up returning salary deferrals or employer matching contributions.
  • Plans that have a history of making a 3% top-heavy minimum contribution to non-key employees.
  • Plans having highly compensated employees who are limited in their salary deferral amounts because of a lower average deferral percentage of the non-highly compensated employees.

What the Safe-Harbor Requires:

  • A fully vested non-elective contribution of 3% of compensation to all eligible employees.

OR

  • A fully vested matching contribution of 100% match on the first 3% of compensation deferred and 50% match on the next 2% of compensation deferred, not to exceed a match of 6% of compensation.
  • A Safe Harbor Notice” detailing the safe-harbor contribution must be provided to all eligible plan participants no later than 30 days prior to the beginning of the plan year.

What the Safe-Harbor Provides:

  • Elimination of ADP test, which then allows all highly compensated employees to defer up to the IRS limit ($18,500 for 2018).
  • Employer contribution satisfies the top-heavy requirements.

Possible “Negatives” of Safe-Harbor Plans:

  • Employer Safe-Harbor Contributions are automatically 100% vested.
  • Safe-Harbor contribution requirement may increase contribution cost for the employer.

When can a plan amend to a Safe-Harbor Provision:

  • Existing 401(k) plans can not amend to add the Safe-Harbor Provision during the current plan year. The amendment must be completed 45 days prior to the first day of the plan year that the Safe-Harbor Provision is effective.
  • Start-up 401(k) plans can add the Safe-Harbor Provision when the 401(k) plan is started, even if it is in the middle of a plan year. However, the plan must be in place for at least 3 months to use the Safe-Harbor Provision.

Automatic Enrollment Rules for Pension Protection Act of 2006:

The Pension Protection Act (PPA) of 2006 contains automatic enrollment rules that are applicable to plan years beginning on or after January 1, 2008. The PPA provides several incentives for employers to adopt automatic enrollment in their 401(k) plans. Automatic enrollment allows an employer to enroll employees in a 401(k) plan without the employees’ affirmative election, as long as the employees have the right to “opt out” of contributing or change the amount of automatic deferral.

Two Exceptions – Automatic enrollment rules apply to all employees eligible to defer with two exceptions. The first exception is for those employees who are already deferring. The second exception is for those who have filed an election not to have deferrals. All other employees, eligible to defer, is eligible to be automatically enrolled. The employer may choose to bring all eligible employees deferring under the minimum amounts under the program.

Employee Notice Requirements Apply – The automatic enrollment procedure requires that the notice be provided to employees at three points in time: upon hire, just before eligibility requirements are satisfied and once per year. The notice must explain the employee’s right to decline automatic enrollment and to make changes to the election amount, including ceasing deferrals.

Automatic Enrollment Safe Harbor Rules – The new rules contain safe-harbor rules relieving a “Qualified Automatic Contribution Arrangement” (QACA) from nondiscrimination testing. A qualified arrangement must contain the following provisions:

  • Minimum Deferral Percentage Each Year. A qualified arrangement will have an automatic contribution percentage of a minimum specified percentage that initially escalates each year. The minimum deferral in the first year is at least 3%, but no more than 10%; in the second year the minimum increases to 4%; in the third year 5% and in the fourth year 6%.
  • Minimum Employer Contribution Requirements. The plan sponsor is required to make either matching contributions at a rate of 100% of the first 1% of compensation deferred, plus 50% of the next 5% deferred, or nonelective contributions of at least 3% of compensation to all eligible non-highly compensated employees, whether the employees make deferrals or not.
  • Pre-59-1/2 Distributions Restrictions Apply.
  • 100% Vesting With 2 Years of Service.
  • Notice Requirement. Within a reasonable time before the beginning of the plan year, employees eligible to participate in the qualified arrangement must receive written notice.

Relief from Fiduciary Liability with Respect to Default Investments – PPA amends ERISA §404c, which addresses fiduciary liability with respect to participant-directed plan investments. A participant failing to exercise an investment election will be considered to have exercised control over a “default” investment if the participant receives a notice that explains his or her right under the plan to designate how contributions are invested and, in the absence of an investment election, describes the default investment into which those contributions will be invested. The notice must be provided within a reasonable period before the beginning of each plan year, and the participant must be given a reasonable amount of time to make an investment designation.

The above procedures will enable the plan fiduciaries to assert the protections of ERISA §404c.

The Treasury, IRS and DOL are expected to release regulations clarifying the application of the new automatic enrollment rules.


Beneficiary Forms:

Every plan participant should have an updated Beneficiary Form on file with the employer. It is a good idea to occasionally remind all participants to update their Beneficiary Form for occurrences such as a change in marital status, name change, etc. Should a participant pass away, their account balance will be distributed to the beneficiary listed on the most recent Beneficiary Form on file with the employer.

 

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