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The DOL provides guidance on the timing of deferral contributions
On January 14, 2010, the Department of Labor published final regulations that define what is 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 corredt 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.
Required Minimum Distributions are Suspended for 2009:
(important information for employees over age 70½)
History – Retired employees are generally required to begin Required Minimum Distributions (RMDs) from their employer’s qualified retirement plan beginning in the calendar year in which they turn 70½. Employees who continue to work past age 70½ are able to defer their RMD until they retire (this deferral is not available to 5% owners of the company that sponsor the retirement plan).
New Law – The Worker, Retiree, and Employer Recovery ACT of 2008 has suspended the requirement for RMDs in 2009.
The reason for the suspension is due to the decline in the market value of most retirement accounts over the past year. The suspension allows retirees the option to leave their assets in the retirement accounts, hopefully providing time for the investments to recover.
Special Note – In the first year only, an employee has the option to defer his/her very first RMD to April 1 of the year following the year in which he/she turns 70½. If an employee turned 70½ in 2008 and deferred his/her RMD to 2009, the suspension does not apply and the employee must still take the RMD by April 1, 2009.
What This Means to Employees Taking RMDs – The suspension is optional, so employees may take their RMD if they wish. RMDs are not normally eligible for rollover. However, since they are not required for 2009, distributions will be eligible for rollover, but not subject to the 20% mandatory withholding.
TVC will not process any RMD distributions unless we are contacted by an employee who specifically requests a distribution. TVC will continue normal processing of RMDs for 2010 for all participants who currently have RMD Distribution Forms on file with us.
If you have any questions or need additional information, please contact your TVC plan administrator.
Retirement
Plan Limits:
The following chart illustrates the cost of living adjustments to dollar
limits under Employee Benefit Plans:
| Type
of Limitation |
2010 |
2009 |
2008 |
Defined
Contribution
Annual Additions Limit |
$49,000 |
$49,000 |
$46,000 |
| Defined
Benefit Plan Limit |
$195,000 |
$195,000 |
$185,000 |
| Annual
Compensation Limit |
$245,000
|
$245,000 |
$230,000 |
Elective
Deferrals
(401(k), 403(b), etc.) / Catch-Up Contributions |
$16,500
/ $5,500 |
$16,500 / $5,500 |
$15,500 / $5,000 |
| 457
Plan Limits / Catch-Up Contributions |
$16,500
/ $5,500 |
$16,500 / $5,500 |
$15,500 / $5,000 |
| SIMPLE
Retirement Accounts / Catch-Up Contributions |
$11,500
/ $2,500 |
$11,500 / $2,500 |
$10,500 / $2,500 |
| Highly
Compensated |
$110,000
|
$110,000 |
$105,000 |
Social
Security
Taxable Wage Base |
$106,800
|
$106,800 |
$102,000 |
| IRA Contribution / Catch-Up
|
$5,000 / $1,000
|
$5,000 / $1,000 |
$5,000 / $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 $145,000 (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
2008
Compliance Reminders:
Click here to read the 2008
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 ($15,000 for 2006).
- 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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