Category: Articles

The Internal Revenue Service publishes, on a yearly basis, certain Pension Plan Limitations for the coming year.  We have outlined the most commonly applied limits for your reference.

 

Maximum Defined Contribution Annual Additions Limit: 

 

In a Defined Contribution Plan, which includes Profit Sharing and 401(k) Plans, the Internal Revenue Code sets limits on contributions made to a participant’s account.  The Code uses the term “annual additions” which represents both employee and employer contributions as well as reallocated forfeitures.  Effective January 1, 2020, the annual dollar limit for defined contribution plans increases to the lesser of 100% of compensation or $57,000.

 

Maximum Defined Benefit Limit:

 

Ultimate benefit that may be funded for at retirement.  Effective January 1, 2020, the annual dollar benefit under a defined benefit pension plan increases to the lesser of 100% of compensation or $230,000.

Annual Compensation Limit:

Effective January 1, 2020, the annual compensation limit increases to $285,000.

Compensation in excess of the limit will be disregarded for all computation purposes.

Key Employee defined for Top Heavy determination:

1. A 5% owner, without regard to compensation, or
2. 1% owner whose annual compensation is over $150,000, or
3. Officers with annual compensation in excess of $185,000.

Highly Compensated Employee (HCE) defined for 401(k) / 401(m) testing:

1. A 5% owner of an Employer or an Affiliate in the current or the immediately preceding plan year, or
2. Any employee earning more than $125,000 in 2019 ($130,000 for 2020)
3. Constructive ownership rules apply attributing ownership to spouses and lineal ascendants and descendants (parents, grandparents, children and grandchildren) of the owner in both of the above employee definitions.

Maximum Limit on 401(k) Elective Deferral Contributions:

A participant’s elective deferral contributions under all 401(k) plans in which he or she participates during any taxable year increases to $19,500 for the 2020 Calendar Year. 401(k) plans may permit participants who have reached age 50 by the end of the plan year to make annual catch-up contributions once the annual dollar limit or a plan-imposed limit on elective deferrals has been reached.  For calendar year 2020, the limit increases to $6,500.

Maximum Limit on SIMPLE 401(k) or SIMPLE IRA Deferral Contributions:

A participant’s elective deferral contributions under a SIMPLE 401(k) plan or SIMPLE IRA account in which he or she participates during the year is increased to $13,500 for the 2020 Calendar Year. Participants who have reached age 50 by the end of the plan year to make annual catch-up contributions once the annual dollar limit or a plan-imposed limit on elective deferrals has been reached.  For calendar year 2020, the limit remains at $3,000.

Taxable Wage Base:

The Taxable Wage Base for 2020 increases to $137,700.

Please call us with any questions you may have. To print out the 2019 plan limit EJReynolds report, click here.

Hiring the right advisor for your company’s 401(k) retirement plan is one of the most critical decisions you will ever make as a Plan Sponsor.

 

Contrary to popular view, the main purpose for hiring a retirement Plan Advisor is not to pick stocks and funds or chase the highest rate of returns. It is the knowledge of process by which investments are selected and fiduciary standards are put into practice that makes good 401(k) advisors indispensable.

 

You will be choosing your closest and most trusted ally to protect the best interests of your plan’s participants, and therefore, to manage your monumental fiduciary liability as a Plan Sponsor.

 

Minimize your risk

 

The right Plan Advisor candidate has the comprehensive background and team to minimize the risk of huge losses, including individual out-of-pocket penalties, arising from:

• Lawsuits.
• Accusations of mishandling.
• ERISA and Department of Labor audits and investigations.
• Penalties for noncompliance.

 

The top five reasons Plan Sponsors hire 401(k) Advisors

 

At the end of the day, what you want to assess is how well your advisor will help you:

• Offload or limit your fiduciary liabilities.
• Understand your fiduciary responsibilities.
• Help your plan participants understand their options, benefits and how to make changes.
• Help your plan stay updated and comply with government regulations
• Help you structure a solid plan and adhere to it, as mandated by law.

 

Highest fiduciary comfort zone – ERISA 3(38)

 

Your 401(k) Plan Advisor can be a broker or a registered investment adviser, but brokers are not on the hook to be a fiduciary to you unless their boss (the broker-dealer) allows them to accept that liability. The safest comfort zone for a Plan Sponsor is to bring in a registered investment manager qualified under ERISA regulations 3(38). Because 3(38) investment managers assume discretion and control of plan investments, they will assume nearly all fiduciary liability in this regard.

 

Get it in writing

 

In either case, you will want your potential advisors to spell out exactly their fiduciary levels, whether they will assume a 3(38) role, a co-fiduciary role, a fiduciary role under 3(21), either full-scope or limited-scope, or any combination, under an ERISA benefits plan.

 

Interview questions for potential 401(k) Retirement Advisors

 

Here is a checklist of some interview questions you might want to ask:

• How often do you hold regular meetings with Plan Sponsors?
• How would you help develop or review our Investment Policy Statement (IPS)?
• How often would you check that our investment options line up with our IPS?
• How will you provide investment education for plan participants?
• How would you help us meet new 408(b)(2) fee disclosure rules?
• How often do you review fees of the Plan’s fund managers?
• What process do you have for disclosing management fees to participants?
• What is your process for ensuring investment fees are “reasonable” as mandated?
• Who are your other service providers that would work with us?
• What would be the exact level of the provider fiduciary responsibilities/liabilities?
• What are your policies for handling rollovers brought by previous plan participants?
• What expertise do you or your providers have on ERISA and plan administration?
• There are so many fund share classes, how do you evaluate them for different plans?
• Would you bring in a Third Party Administrator (TPA)?
• Would the TPA provide mostly basic administrative services, or do they possess

more specific expertise, such as analyzing plan designs to save taxes for highly

compensated employees?

• Would the fees for the TPA’s services be fair and reasonable per mandates?

 

Evaluate your Advisor’s resources

 

The field of investments is full of licenses and certifications. Some advisors are simply insurance licensed, and some have passed the “Series 6” exam that is administered by FINRA (Financial Industry Regulatory Authority), which allows the individual to register as a limited representative, and sell mutual funds and variable annuities. Still others have passed FINRA’s “Series 7” exam for general securities, stocks and bonds. More experience financial advisors may obtain the CFP or Certified Financial Planner designation, the AIF, or Accredited Investment Fiduciary designation, or the QPFC, or Qualified Plan Financial Consultant designation. It is a rare and valuable asset to have financial expertise and knowledge of ERISA in the same advisor. That said, a good advisor does not have to be an expert in all things ERISA, as long as they are professionally respected by their peers and consulting long enough to have built relationships with or employ providers who are qualified experts.

 

It is invaluable when a conversation arises about how to handle your unique, more complex situations and your advisor can quickly and confidentially call on a trusted ERISA attorney, TPA or Auditor to weigh in for informed decision making.

 

Summary: Hiring the right 401(k) Plan Advisor helps plan sponsors sleep at night

 

Picking stocks is a valuable skill, but not the most crucial area for Plan Sponsors to evaluate a candidate for Advisor. There are many good tools and guides for prudent investing, and most employees today opt to choose their own investment mix within your plan’s options. It is the protection of all involved from potentially catastrophic fiduciary liability that should be the guiding light for finding the best 401(k) advisor for your company’s retirement plan.

 

For more information on how the right advisor will benefit you as a fiduciary and your responsibilities as a fiduciary of a retirement plan, read our recent articles, Are you a Fiduciary, (https://ejreynoldsinc.com/are-you-a-fiduciary/) Fiduciary Responsibilities for Benefit Plans Under ERISA (https://ejreynoldsinc.com/?s=Fiduciary+Responsibilities+for+Benefit+Plans+under+ERISA), and Types of ERISA Fiduciaries (https://ejreynoldsinc.com/types-of-erisa-fiduciaries/).

Missing participants in retirement plans can be a burden for plan sponsors. If actions are not taken to locate the participants and payout the benefits, potential (unintended) consequences can include:

• Increased plan administration costs
• Plan compliance issues, e.g. failure to follow the terms of the plan for mandatory distributions, required minimum distributions, death benefits, etc.
• Potential for small plan filers (generally, plans with less than 100 participants) to become large plan filers (generally, plans with 100 or more participants), subject to a costly annual plan audit requirement
• Complications with winding down a plan upon plan termination
• Potential fiduciary risks

What steps should plan sponsors follow to locate missing participants?

DOL guidance outlines the steps plan sponsors should take to locate missing participants. The guidance is specifically for terminating defined contribution plans; however, it would be reasonable to apply this guidance for active plans as well.

1. Certified Mail. Send notification to the participant or beneficiary via certified mail to the last known address.
2. Other Employer Records. Review other employer records, such as group health plans, for current contact information.
3. Participant’s Plan Beneficiary. Contact the participant’s beneficiary to request updated contact information (if there are privacy concerns, the DOL suggests the plan sponsor ask the beneficiary to forward a letter to the participant).
4. Free Electronic Search Tools. Use free electronic search tools to attempt to locate the participant such as those for public records (e.g. licenses, mortgages, real estate taxes), obituaries, and social media platforms (e.g. Facebook, Twitter, etc.).

If the plan sponsor follows the steps outlined above but is still unsuccessful in locating the missing participant, the plan sponsor must consider whether additional steps are necessary after considering the cost of the search option (if being paid from the participant’s account) as well as the size of the participant’s account balance. The DOL states further search efforts may include commercial locater services, credit reporting agencies, information brokers, investigation databases and similar services that involve a fee.

IMPORTANT: The DOL notes failure to take such steps would be a violation of the plan sponsor’s obligation of prudence and loyalty to plan participants and beneficiaries. Strictly speaking, the plan sponsor must follow these steps to locate missing participants – it is mandatory

What if the participant cannot be found after using all available search options?

For active plans, it may be possible to rollover the missing participant’s balance to an IRA if (1) provided for under the terms of the plan, (2) the participant’s balance is less than $5,000, and (3) the plan sponsor has sufficient information regarding the participant to be able to facilitate the rollover. If the participant’s balance is $5,000 or more, this generally is not an option.

Alternatively, if provided for under the terms of the plan document, it is permissible to forfeit a missing participant’s (or beneficiary’s) balance provided the balance will be restored in the event the participant (or beneficiary) is later located.

Both options discussed above are optional provisions, so it is important to review the terms of the plan document. If the plan doesn’t include either (or both) provisions, it generally would be permissible to amend the plan to include such features.

Note: Different rules apply to terminating plans since all plan assets must be distributed within a reasonable period following plan termination. For example, one of the available options is to roll the balance of a missing (or unresponsive) participant to an IRA, even if their balance exceeds $5,000.

Can’t we just withhold 100% in taxes and submit to the IRS?

No. The DOL specifically points out that, although this is a practice used by some plan sponsors, this is not acceptable because there is no guarantee the participant will receive their benefits.

To learn more about how to deal with missing participants in your retirement plan, let the experts at EJReynolds help you understand all of the options available to you or your company. For more information, please contact us today.

In general, the fees associated with on-going administration of a retirement plan may be paid from plan assets provided they are necessary and reasonable. Certain expenses known as “settlor” expenses, however, cannot be paid for from plan assets.

What is considered to be reasonable?

The Department of Labor (DOL) requires (1) the expense is reasonable in light of the services provided; (2) the service is necessary; (3) the arrangement can be terminated without penalty (this doesn’t mean there can be a termination fee, though); and (4) the service provider has provided certain required disclosures regarding their fees and services prior to entering into the arrangement.

What are “settlor” expenses?

These are expenses that must be paid for by the employer because they are associated with the employer’s functions as a settlor of the plan trust.

Is there a simple way to determine whether a particular expense is a settlor expense?

Not really. Unfortunately, the DOL has not issued comprehensive guidance on this front, but they have issued some guidance. That said, there are two basic questions that should be considered:

1. Is the expense necessary for the on-going administration of the plan?
2. Is the expense discretionary and who does it primarily benefit?

In other words, if the expense is reasonable and relates to the normal operation of the plan, the expense may be paid for by the plan. If, on the other hand, the expense is discretionary and primarily benefits the employer, it would generally be considered a settlor expense.

What are examples of expenses that can be paid for by a plan?

• Annual administration, recordkeeping, compliance testing, and Form 5500 preparation
• Annual plan audit fees (large plan filers)
• Investment management, advisory, trustee and custodial fees
• Participant education, enrollment materials and required notices and disclosures
• Required plan amendments and restatements
• Fidelity bond
• IRS determination letter filing fee
• Participant distribution and loan fees
• QDRO review

What are examples of expenses that cannot be paid for by a plan?

• Plan design studies and projections (these primarily benefit the employer and are viewed as a settlor expense by the DOL)
• Initial plan document, discretionary amendments and discretionary restatements (the DOL appears to view these as settlor expenses, even though the plan document is required as a matter of plan qualification)
• Fees associated with the decision by an employer to terminate a plan
• Fees and expenses related to plan corrections made under available IRS and DOL programs
• Fees and expenses related to filing a late Form 5500 under the delinquent filer program

Are the rules different if the fee will be paid from the forfeiture account?

No. Amounts held in a plan forfeiture account are plan assets; the same rules apply.

Note: Some plans use “ERISA budget accounts” or “revenue holding accounts” to accept revenue sharing payments from plan investment providers and pay plan expenses. It is our view that these accounts generally should be treated in the same manner as any other plan asset.

How can eligible expenses be charged to plan participants?

Plan-level expenses may be charged (1) in proportion to participant account balances, (2) as a flat fee to participant accounts, or (3) some combination of both methods. In addition, certain plan fees may be paid for by the plan through the plan’s investment vehicles and are reflected as a reduction in investment returns.

Participant-level fees (e.g. distribution and loan fees) are typically charged directly to participant accounts.

Does the plan document need to provide that expenses can be paid for from the plan?

Generally, yes, and most plans do allow for eligible expenses to be paid for from plan assets. The plan should also state that fees may be paid for from the forfeiture account, if desired.

Does it make sense to charge eligible expenses to a plan?

It really depends on the plan and the goals and objectives of the plan sponsor. If the plan pays (whether directly or indirectly through plan investments), overall investment performance is reduced, and this can make a big difference over time. For plans of closely-held businesses, it often makes more sense for the employer to pay the expenses (they are deductible). It is much more common in large plans for the plan participants to bear most (if not all) of the related costs.

If eligible expenses are paid for by the plan, are there any required disclosures?

Yes. There are disclosure rules that apply for both plan service providers and plan participants (in participant-directed plans).

Note: Whether a particular fee or expense may be paid for by a plan is a fiduciary decision. Plan fiduciaries are charged to act prudently and in the best interest of plan participants. If a fee is charged improperly, the fiduciary(s) may be held liable so plan sponsors should exercise due care when determining whether it is appropriate for a plan to pay for a given expense.

 

For many years the IRS did not permit mid-year changes to Safe Harbor 401(k) plans except under very limited circumstances. In 2016, the IRS issued Notice 2016-16 relaxing the rules providing sponsors of Safe Harbor 401(k) plans with much greater flexibility throughout the year. The guidance does contain a short list of changes that are specifically prohibited, but many changes are permissible provided certain conditions are satisfied.

Which changes are permissible?

In general, most changes that would be permissible mid-year in a traditional 401(k) plan can be made in a Safe Harbor plan as long as the necessary requirements are met.

What are the requirements for amending a Safe Harbor plan mid-year?

If a permissible amendment results in a change to the information provided in the Safe Harbor notice, an updated notice must be provided within a reasonable period prior to the effective date of the change. For this purpose, the IRS considers the timing requirement to be satisfied if the updated notice is provided at least 30 (but no more than 90) days prior to the change.

In situations where it is not practical to provide the notice prior to effective date of the change (e.g. the plan is being amended retroactively as the first day of the plan year to provide for an additional match), the updated Safe Harbor notice must be provided as soon as possible but no later than 30 days after the date the amendment is adopted.

In either case, participants must also be provided the opportunity to change their deferral elections for a reasonable period of time following receipt of the updated Safe Harbor notice.

What if the change does not impact the information provided in the Safe Harbor notice?

If the change does not impact the information required to be provided in the Safe Harbor notice, there is no requirement to provide an updated notice or to provide participants with an opportunity to make changes to their deferral elections.

Keep in mind, however, the plan would generally be required to provide participants with either a Summary of Material Modifications or an updated Summary Plan Description.

Which changes are specifically prohibited mid-year?

• Any change that would reduce the number of participants who are currently eligible to receive Safe Harbor contributions
• Changing the type of Safe Harbor plan (e.g. changing from a traditional Safe Harbor plan to a qualified automatic contribution arrangement)
• Increasing the number of years required to become vested in Safe Harbor contributions under a qualified automatic contribution arrangement
• A mid-year change to add or modify the formula used to calculate matching contributions (or related plan compensation) or a mid-year change to permit discretionary matching contributions, unless certain additional conditions are satisfied

 

What are the conditions for making changes to matching contributions?

In order to increase Safe Harbor matching contributions (or to add or modify a fixed or discretionary matching contribution), the amendment must be adopted at least 3 months prior to the plan year, must be retroactive as of the first day of the plan year, and, the necessary notice and deferral opportunity requirements must be met.

Can a plan change from a Safe Harbor match to a 3% Safe Harbor nonelective contribution mid-year?

No. This is not permissible under the notice or regulations. This type of change could only be made as of the first day of the following plan year.

Did the IRS provide any example of permissible amendments?

Yes. IRS Notice 2016-16 provides several examples of permissible amendments including the following:

• An amendment to increase the Safe Harbor nonelective contribution from 3% to 4% for future contributions
• An amendment made prior to 3 months before the end of the plan year to increase the Safe Harbor matching contribution from 4% to 5% and to change the period for calculating match from a payroll period to plan year basis retroactively
• An amendment to add an age 59 ½ in-service distribution feature

Can a plan be amended to reduce or suspend Safe Harbor contributions mid-year?

It depends. This is addressed under the Safe Harbor regulations. A Safe Harbor plan may only be amended mid-year to reduce or suspend Safe Harbor contributions if (1) the employer is operating at an “economic loss”, or (2) the annual Safe Harbor notice included a statement indicating that the plan could be amended to remove or suspend Safe Harbor contributions during the plan year. Additional procedural requirements must also be satisfied, and the plan essentially reverts to a traditional 401(k) plan for the plan year.

Can a Safe Harbor plan be terminated mid-year?

Yes. This is also addressed under the regulations. In general, Safe Harbor contributions must be made through the date the plan is terminated, and other conditions must be satisfied. Unless the plan termination is due to a “substantial business hardship”, or as a result of a company merger or acquisition transaction, the plan would lose its Safe Harbor status for the final plan year (i.e. the plan would be subject to ADP/ACP testing, top heavy requirements, etc.)

What changes can only be made as of the beginning of a plan year?

While many changes can be made mid-year, certain changes can only be made as of the first day of the following plan year, and the amendment must be adopted prior to the first day of the plan year. Examples of such amendments include:

• Adding a Safe Harbor provision to an existing traditional 401(k) plan
• Changing the plan’s Safe Harbor formula from a Safe Harbor nonelective contribution to a Safe Harbor match

How can I learn more?

Please call EJReynolds at 954.431.1774 or visit ejreynoldsinc.com

Have you been talking with prospective clients about adopting a new 401(k) plan? Even in today’s  environment, many businesses are thriving and want to secure deductions for the 2019 Tax Year. If so, the deadline for adopting a safe harbor 401(k) plan for 2019 is fast approaching, so it would be a great time to schedule a follow-up conversation!

Safe harbor 401(k) plans are attractive for many employers (especially small employers) because they provide relief from certain plan testing requirements. Specifically, a safe harbor plan is generally exempt from ADP/ACP testing enabling the plan’s highly compensated employees to maximize elective deferrals, i.e. 401(k) deferrals/Roth contributions, without limitation. Safe harbor plans may also be exempt from the top-heavy requirements if certain conditions are met.

What is the deadline for adopting a safe harbor 401(k) plan?

No. There are no restrictions (other than the normal limits) placed on the amounts that can be deferred during this three-month period. As a result, owners, key employees and any other participants would still have time to make elective deferrals of $19,000 (plus $6,000 for participants age 50 or older). This, of course, assumes they will have enough compensation to do so within this time period.

Are there limits on the amounts that can be deferred?

No. There are no restrictions (other than the normal limits) placed on the amounts that can be deferred during this three-month period. As a result, owners, key employees and any other participants would still have time to make elective deferrals of $19,000 (plus $6,000 for participants age 50 or older). This, of course, assumes they will have enough compensation to do so within this time period.

What are the contribution requirements?

The plan must make either a safe harbor matching or safe harbor nonelective contribution.

The basic safe harbor matching contribution formula is 100% on the first 3% of deferrals, plus 50% on the next 2% (maximum of 4% match). Alternatively, an enhanced safe harbor matching formula can be used, which is most commonly 100% on the first 4% of deferrals.

Safe harbor nonelective contributions must be at least 3% of each participant’s compensation, regardless of whether they elect to make deferrals.

Note that safe harbor contributions (match or nonelective) must be 100% vested, subject to the same distribution restrictions as elective deferrals, and cannot be subject to any allocation conditions, e.g. employment on the last day of the plan year.

Tax credit available for Small Employers

As an incentive to establish a new 401(k) plan, small employers (generally, businesses with no more than 100 employees) may be eligible to receive a tax credit of up to $500 (per year, for the first three years) to help defray the costs associated with establishing and maintaining a plan.

Which design is best?

One-size does not fit all. It really depends on the goals of the employer and demographics of the workforce. The good news is that we can assist you in determining what will work best for your clients after considering their unique needs! Please contact us to learn more.

If you would like to learn more about these rules, please contact us and we will be happy to assist you.

Since the Pension Protection Act of 2006 (PPA), Automatic Enrollment features in 401(k) and 403(b) plans have increased in popularity for large and small employers alike. PPA added fiduciary protection for Plan Sponsors, as well as safeguards for employees with requirements for advanced notices and default investments. But what exactly is an Automatic Enrollment feature? Is it appropriate for your plan design? First, let’s look at the requirements, then we’ll look at the pros and cons. With the right knowledge and information, you can determine if the Automatic Enrollment feature is right for you.

Educating Participants and Auto-Enrollment Options

The basic tenet of an Automatic Enrollment feature is this; Employees do not participant in the 401(k) plan mainly because of apathy and lack of education. They don’t know how much to contribute, and they don’t know where to invest their funds. An Automatic Enrollment feature takes that decision away from the employee; the employee is automatically enrolled in the 401(k) or 403(b) plan at a default level and their contributions are invested in a default investment fund unless the employee proactively says no.

There are three types of automatic options to consider: Automatic Contribution Arrangement (ACA), Eligible Automatic Contribution Arrangement (EACA), and Qualified Automatic Contribution Arrangement (QACA).

Here’s a quick overview of each:

ACA – The most flexible design, where there is no minimum contribution rate or required auto-escalation. There is also no required employer contribution.  This design can be added to a plan at any time.

EACA – This design is like an ACA where there is no minimum contribution rate or required auto-escalation. There is also no required employer contribution.  However, an EACA must be in place as of the first day of a Plan year. Also, employees may have up to 90 days to request to receive the return of their employee deferrals, without incurring the tax penalty.

QACA – The least flexible design, where there is a minimum contribution rate, the employer must provide a specific matching contribution, and participants must be fully vested in this match within two years of service.  The QACA generally must be in place the entire year.  If done correctly, this design will automatically satisfy certain non-discrimination testing.  Also, employees may have up to 90 days to request to receive the return of their employee deferrals, without incurring the tax penalty.

Benefits and Drawbacks of Auto-Enrollment

The automatic enrollment feature isn’t a one size fits all and it isn’t the best choice for all companies and organizations, so look at these pros and cons before moving forward.

Benefits of auto-enrollment:

• Employees will be more likely to participate, and contributions will increase – This can help when it is hard to get employees to take part in the enrollment process.
• Employers may provide an automatic escalation feature where employees increase their contribution rate each year.
• Employees will defer paying income tax on their contributions.
• Employees are more likely to meet their retirement goals by participating immediately when they become eligible, rather than potentially waiting until later in their career.
• Auto-enrollment may help the nondiscrimination testing results, while the QACA plan will exempt a plan from certain nondiscrimination testing requirements.

Possible drawbacks of auto-enrollment:

• Setting the auto-enrollment contribution rate lower than a participant would have elected may negatively impact employee retirement savings goals, while setting it too high may cause employees to fully opt-out of the plan, negatively impacting both employee savings and overall participation.
• Employees may become disengaged and wrongly believe their needed retirement savings will be taken care of with auto-enrollment. The defaulted investment option may not be appropriate for the employee based on their specific situation. As Plan Sponsors, companies should continue to provide retirement education programs to their employees through their plan’s investment advisor to address this potential pitfall.
• There may be some added administrative time to incorporate and explain the automatic enrollment feature to employees, including the notice requirements for both the default or increasing deferral rate and the default investment option chosen by the employer.
• Employer matching contributions may increase with increased employee participation.
• Payroll integration is a must! Missing the first deduction for a newly eligible employee or missing the automatic increase deadline for a plan offering auto-increase features, can result in penalties to the employer, and a required contribution equal to 25% of the missed deferral plus the full match that should have been contributed.
• Small balances – since newly eligible participants are default enrolled, their initial account balances may reduce the average account balance of the plan overall. Some investment platforms may charge higher fees for plans with lower average account balances, so make sure to check with yours.

Still not sure if auto-enrollment is right for your organization?

While there is no blanket answer, we can help you understand how implementing an auto-enrollment feature might affect your company or organization – Contact us today!

1. What is a fidelity bond?

A fidelity bond is a special type of insurance that protects plan participants from the risk of loss due to acts of fraud or dishonesty by plan officials.

2. Is a fidelity bond required for my plan?

Generally, yes. With limited exceptions, all qualified plans (i.e. 401(k) plans, profit sharing plans, ESOPs, certain 403(b) plans, etc.) are required by law to be covered by a fidelity bond.

 

3. Which types of plans are not required to have a fidelity bond?

Plans that are exempt from certain provisions of ERISA are not required to be covered by a fidelity bond. These plans include “one-participant” plans (i.e. plans that only cover the owner of a business (or the owner and his or her spouse), or only the partners of a partnership (or the partners and their spouses)), governmental plans, most plans sponsored by churches, and 403(b) plans that meet certain requirements.

 

4. Who must be covered by the fidelity bond?

The plan must be the named insured; however, each person who “handles” plan assets must be covered by the bond. A person is considered to “handle” plan assets if his or her responsibilities are such that plan participants could incur a loss if he or she were to commit an act of fraud or dishonesty with respect to the plan.

 

5. How is the amount of required coverage determined?

In general, the fidelity bond must be equal to at least 10% of plan assets as the beginning of each plan year, subject to a minimum bond amount of $1,000 and a maximum of $500,000 ($1,000,000 for plans that hold employer securities).

 

Note: Plans that hold more than 5% of Plan assets in “non-qualifying assets” (e.g. limited partnerships, third-party notes, collectables, real estate, mortgages, etc.) are subject to additional requirements.

 

6. Can the plan be covered under the company’s general policy?

Yes; this is permissible provided that all of the necessary conditions are satisfied. For example, the plan must be a named insured, and the policy may not have a deductible (at least with respect to the portion of the policy covering the plan).

 

7. Can a fidelity bond cover more than one plan?

Yes; each plan must be a named insured and assets under each plan as of the beginning of the plan year must be considered when determining the required coverage amount.

 

8. Is a fidelity bond the same thing as fiduciary insurance?

No; fiduciary insurance provides protection for fiduciaries individually (rather than plan participants) in the event a legal claim is made against a plan fiduciary for a breach (or alleged breach) of their fiduciary responsibilities.

 

9. Can the cost for the fidelity bond be paid for from plan assets?

Yes; the plan can pay for the fidelity bond assuming the plan permits for payment of plan expenses (which most do).

 

10. Is there a penalty or fine if a plan doesn’t have coverage?

There isn’t a specific penalty or fine under the regulations; however, the amount of the bond must be reported on the plan’s Form 5500 each year which is filed with the Department of Labor (DOL).

 

If the plan is not covered by a fidelity bond, or if coverage not sufficient, this could certainly raise a “red-flag” and prompt an unwanted plan audit by the DOL or Internal Revenue Service.

 

If you would like to learn more about these rules, please contact us and we will be happy to assist you.

 

 

An in-service withdrawal occurs when an employee takes a distribution from a qualified, employer-sponsored retirement plan, such as a 401(k) account, without leaving the employ of their company.  Read the 11 FAQs below to ensure you are informed on these distributions next time you are asked.

1. When can a participant receive a distribution from a retirement plan while still working?

It depends. A plan may (but is not required to) allow participants to receive in-service distributions. In addition, certain conditions must be satisfied which are set forth under the Internal Revenue Code and regulations.

2. Are the rules different depending upon the type of contributions?

Yes. Elective deferrals (i.e. 401(k) and Roth contributions) can only be distributed while a participant is still working under limited circumstances. The following in-service distributions are permissible, if provided for under the plan document:

• Hardship distributions
• Distributions on or after the date a participant has attained age 59 ½
• Qualified reservist distributions
• Distributions after a participant has become disabled (as defined under the terms of the plan)

Safe harbor nonelective and matching contributions may only be distributed upon reaching age 59 ½, hardship or disability. This also holds true for QNEC and QMAC account balances.

Profit sharing and employer matching contribution account balances may be distributed upon attainment of a stated aged (which may be less than age 59 ½), after the contributions have accumulated (or “aged”) in the plan for at least 2 years, after an employee has been a plan participant for at least 5 years, or upon a stated event.

Rollover and voluntary after-tax (non-Roth) contribution account balances may be distributed at any time.

Different rules apply to pension plan balances, which generally may not be distributed to an active employee prior to attainment of age 62.

3. Are in-service distributions eligible for rollover?

Generally, yes. With the exception of hardship distributions, any of the in-service distributions described above are eligible for rollover.

4. Are in-service distributions subject to the additional 10% income tax for early withdrawals?

Yes. Unless the participant has attained age 59 ½, the taxable portion of the distribution is generally subject to the additional 10% income tax. There are exceptions to this rule if the participant is disabled (as defined under the Internal Revenue Code) or if the distribution is a qualified reservist distribution.

5. What qualifies as a “hardship” distribution?

The regulations provide “safe harbor” rules, which most plans follow. Under these rules, hardship distributions may be made for the following reasons:

• To prevent foreclosure or eviction from a participant’s principle residence
• To purchase a participant’s principal residence (excluding mortgage payments)
• To pay for post-secondary education for a participant, his spouse, children or dependents for the next 12 months
• To pay for unreimbursed medical expenses that would otherwise be deductible (without consideration to the deduction limit) for a participant, his spouse, children or dependents
• To pay for funeral expenses for a participant’s deceased parent, spouse, child or dependent
• To pay for expenses necessary to repair a participant’s principle residence as a result of a casualty
• Expenses incurred as a result of a natural disaster in a federally declared disaster area
• Medical, post-secondary educational, and funeral expenses for a participant’s primary beneficiary

6. Are in-service distributions from Roth accounts taxable?

It depends. Roth contributions are not taxed when distributed, but the related earnings may be unless the distribution is a “qualified distribution”. In general, a distribution is a qualified distribution only if the distribution is being made on account of death, disability or attainment of age 59 ½ and the participant has had a Roth account under the plan for at least 5 years.

Distributions that are rolled over to a Roth IRA are not taxable.

7. What are “Qualified Reservist” distributions?

A plan can allow participants who have been called to active duty for a period of more than 179 days (or indefinitely) to receive a distribution of their elective deferrals.

8. Are distributions from voluntary after-tax accounts taxable?

Like Roth contribution account balances, the after-tax contribution portion of the account is not taxable but the related earnings are unless the distribution is rolled over to a traditional IRA. If rolled over to a Roth IRA, the related earnings are taxed.

9. If a plan allows in-service distributions, can the provisions be removed?

A plan can remove a hardship distribution feature at any time; it is not a protected benefit. The other types of in-service distribution options discussed above are protected under the law. What this means is that any of these provisions may be removed prospectively; however, the participant account balances as of the effective date of the change must continue to be eligible for in-service distribution under the plan’s prior provisions.

10. If an employee terminates and then is rehired, can he still receive a “termination” distribution?

No. After an employee has been rehired, he or she is no longer eligible to receive a termination distribution and would have to qualify for an in-service distribution under the terms of the plan.

11. What happens if a plan issues an in-service distribution to a participant who doesn’t qualify to receive one under the terms of the plan?

The bottom line is that the plan sponsor must take corrective actions; this is plan qualification issue. The good news is the IRS provides methods for correcting such mistakes under their Employee Plans Compliance Resolution System (EPCRS). Generally, the employer must take steps to have the participant return the funds to the plan, along with related earnings, but there are other options as well.

To learn more about in-service distributions, please contact us and we will be happy to assist you.

In general, a plan is considered to be top-heavy when more than 60% of plan assets are attributable to “key employees” as of the “determination date”. Top-heavy plans are subject to certain minimum contribution and vesting requirements.

Who is a key employee?

A key employee is an employee who at any time during the plan year: (1) owned more than 5% of the company, (2) owned more than 1% of the company and had compensation in excess of $150,000, or (3) was an officer of the company with compensation in excess of a specified dollar amount ($180,000 for 2019). Note that stock attribution rules apply when determining ownership for this purpose.

What is the determination date?

For the first plan year, the determination date is the last day of the plan year. For subsequent years, the determination date is the last day of the prior plan year. Note that top-heavy status is measured annually and may change from year to year.

How is top-heavy status calculated?

The top-heavy ratio is calculated by comparing the account balances of key employees to non-key employees, after making certain adjustments. First, certain participant balances are excluded (i.e. rollover account balances from unrelated employers; account balances of terminated participants who did not work for the company during the year; and account balances of former key employees). Next, certain amounts are added back (i.e. distributions made on account of termination, death or retirement if the participant worked for the company during the year; and in-service distributions made within the 5-year period ending on the last day of the plan year).

 What are the minimum contribution requirements for top-heavy plans?

Generally, the employer must make a contribution on behalf of all non-key participants who were employed on the last day of the plan year equal to the lesser of 3% or the highest contribution rate of any key employee. Certain contributions count towards satisfying the top-heavy minimum requirement (e.g. employer matching contributions, profit sharing contributions, and forfeiture allocations). If a participant has already received an amount sufficient to satisfy the top-heavy minimum, no additional contributions must be made on their behalf.

Caution: Plans that allow for immediate entry for 401(k)/Roth purposes but have a longer eligibility period for employer contributions are still required to make top-heavy minimums for non-key participants who were only eligible for the 401(k)/Roth portion of the plan.

How is the highest contribution rate for key employees determined?

All contributions (other than rollover contributions) are considered when calculating the contribution rates for key employees. This means that 401(k) deferrals and Roth contributions are included.

What are the minimum vesting requirements?

Top-heavy plans must use either a 3-year cliff or 6-year graded vesting schedule. This requirement has little impact since most plans use vesting schedules that meet or exceed these standards.

Are safe harbor 401(k) plans exempt?

Safe harbor plans are generally not required to make top-heavy minimums if all non-highly compensated employees are eligible for the safe harbor contribution, and the employer makes no contributions to the plan other than (1) safe harbor matching contributions, (2) additional matching contributions that satisfy the safe harbor rules, or (3) safe harbor nonelective contributions.

Caution: Forfeiture allocations can trigger top-heavy minimums in safe harbor plans.

What happens if the employer doesn’t fund top-heavy minimums?

Failure to make top-heavy minimums is an operational failure that can jeopardize the qualified status of the plan. As a result, any “missed” top-heavy minimums must be funded along with related earnings.

If you have any questions regarding the top-heavy rules or would like to learn more, please contact us.