Plan Sponsor Council of America : Serving retirement plan sponsors for over 60 years

According to the PSCA's 49th Annual Survey, the actual recordkeeping fees are paid as follows (by the percentage of plans responding):

fees paid by the plan, 34.6 percent
fees paid by the company, 55.7 percent
expenses shared, 9.7 percent

Obviously, in the case of a profit-sharing plan, if the employer pays for the recordkeeping expenses up front, the contribution allocation to participants may be reduced accordingly.

Some of the best marketing campaigns can be accomplished by getting your own employees involved. A few suggestions for you to try:

Hold a "rename the plan" contest.
Have locations or departments compete for the highest participation and deferral rates.
Have a BYOL (bring your own lunch) and learn series regarding saving and investments.
Use existing account statements showing "what-if" scenarios.
With each pay raise, encourage another percentage deferral into the plan.
Acknowledge savers with token prizes.

There are many different things you can do when you put your creative mind to work, and you don't have to spend thousands of dollars to keep your plan energized.

PSCA does have a list of considerations when choosing a service provider located on our Web site (www.psca.org). In addition, we strongly encourage you to utilize our fee comparison worksheet before you make your final decision with your new provider. The fee worksheet is also located on our Web site.

First of all, I would simplify the enrollment process and consider immediate eligibility and/or automatic enrollment. Another area to consider would be the company match, as it probably has the greatest impact on participation rates. If you haven't done a recent employee survey, you should survey your participants on your current investment options. You may need to increase the number of investment options or the types of investments that you currently offer. Take a look at your plan provisions, such as loans, withdrawal options and vesting schedule. Don't forget to offer employee assistance with concise communication tools and the available technology.

No, those IRS remedial programs are not available for correction of defects in SEPs, SARSEPs or SIMPLE IRA plans. These programs can only be used for qualified plans under IRC Section 401(a), and none of these arrangements are "qualified" plans.

Operational failures can be corrected without IRS supervision under the Administrative Policy Regarding Self-Correction (APRSC) or with IRS supervision under the Voluntary Compliance Resolution Program (VCR). With respect to the specific method of correction, the IRS does not provide a "safe-harbor" correction for this defect; however, it is likely the IRS would follow Rev. Proc. 2000-16 and require that the allocations made to the ineligible employees be taken back and reallocated to the eligible plan participants. The more conservative approach would be to file a VCR application with the IRS and pay a filing fee in exchange for having the method of correction specifically approved by the IRS.

This correction is based on the methodology described under the Reallocation Correction Method, which is an IRS-approved, safe-harbor correction method to be used in the case of a profit-sharing plan that improperly excludes an eligible employee. Essentially, the correction would be to "readminister" the plan so that the amount improperly allocated to the ineligible employees is taken back (including earnings accrued thereon) and reallocated, in accordance with the plan’s allocation formula (in proportion to compensation, in this case), to the accounts of the eligible participants.

Most 401(k) plan designs provide for full vesting in the event of a participant’s death, so you should start by referring to your plan document. Note that before August 20, 1996, a beneficiary was permitted to exclude $5,000 in employer-provided benefits from the gross income when the plan participant died. This exclusion was repealed by the Small Business Job Protection Act of 1996.

Since the plan participant died as an active employee, your plan may permit his spouse to leave the money in your plan. If so, she may delay any payments until the date on which the participant would have attained age 70½, at which time minimum distributions would begin. However, the surviving spouse may choose to roll over the account balance at an earlier date.

Since SIMPLE plans are available only to employers with no more than 100 employees, the size of the employer is the primary limitation. It is also important to consider the characteristics of employees you are trying to benefit; the benefits you want for the selected group of employees; and the administration costs you are willing to accept. The more flexible and complex your plan design, the more expensive its administration will be.

A standard 401(k) plan will provide you with more flexibility. You may be able to cover your employees under different plans or use different formulas under the same plan, and you can provide vesting schedules to encourage employee retention. No employer contributions are required, and your employees can contribute up to an annual maximum of $15,000 plus $5,000 catch-up contribution for eligible participants (for the 2006 plan year). On the other hand, your 401(k) plan is subject to many reporting obligations and tests, such as the average deferral percentage (ADP) test (comparing employee deferrals of highly compensated versus non-highly compensated employees), the average contribution percentage (ACP) test (comparing employer matching contributions and employee after-tax contributions), and the "top-heavy" test (addressing minimum benefits for lower-income employees for plans that are unevenly weighted in favor of higher-income employees). These tests are performed each year, which can add significant administrative costs. If you fail any of these tests, you may be required to adjust contributions or vesting schedules for your employees.

SIMPLE plans are designed for businesses of 100 employees or less (counting employees who earn $5,000 or more per year). You can choose a SIMPLE IRA or SIMPLE 401(k).

Under a SIMPLE IRA, the IRS exempts you from all of the above-named tests, and you do not need to make the Form 5500 annual filing, which substantially reduces administrative costs. In exchange, your plan design flexibility is limited. All employees who made $5,000 or more per year during the past two years or who are expected to earn such amounts in the current year must be included in the plan. Employees can contribute only $10,000 (for year 2006) annually to their accounts, plus up to a $2,500 catch-up contribution for eligible participants. Employers generally must either match 3 percent of an employee’s salary deferrals or make an across-the-board non-elective contribution of 2 percent of each employee’s salary. Provided adequate notice is given to employees, employers may occasionally elect to match less than 3 percent, but not less than 1 percent, of employee income. All contributions to a SIMPLE IRA are fully vested upon deposit.

The code also provides for a SIMPLE 401(k) that is similar to a SIMPLE IRA. The SIMPLE 401(k) is exempt from the top-heavy testing and ADP/ACP testing. However, employers using a SIMPLE 401(k) plan must still file an annual 5500 report with the IRS. Further, unlike a SIMPLE IRA, employers using a SIMPLE 401(k) do not have the option to match less than 3 percent of employee income. One advantage of the SIMPLE 401(k) over the SIMPLE IRA may be the ability to provide participants with loans.

Another option that works for any size company is the "safe harbor" 401(k). With this plan, you also must provide minimum matching or across-the-board contributions, 100 percent vesting, and sacrifice some plan design flexibility. You also must provide employees with 30 days’ annual notice of the provisions of the plan. However, you are permitted to make additional contributions, and employees can also defer up to $15,000 (plus $5,000 catch-up contribution for eligible participants). In addition, you are exempt from ADP and ACP testing.

There is no such specific rule in the Tax Code or other IRS pronouncement, but the answer to your question should be defined in your 401(k) plan document.

Most 401(k) plans will provide for salary-deferral deductions to be taken from the "compensation" of an eligible employee. Vacation payout amounts will normally fall within the definition of compensation that we regularly see in 401(k) plans, so a salary-deferral deduction would be required. However, we have seen plans that specifically exclude items such as "vacation cashout amounts," in which case a salary-deferral deduction would not be appropriate.

Tinkering with the definition of compensation in this way might be discriminatory. For example, if as a practical matter only non-highly compensated employees received payouts of vacation pay, then excluding that item of income from the definition of compensation might have a disproportionate adverse impact on non-highly compensated employees and therefore be discriminatory under code section 401(a)(4).

Under the IRS-approved or safe-harbor method of correction for this operational failure you are required to take these steps:

notify the former employee that he received an overpayment from the plan;
request that it be returned (e.g., send him a "bill" from the plan in the amount of the overpayment, plus earnings); and
take "reasonable steps" to have the overpayment, plus earnings from the date of distribution. The IRS officials have indicated that this requirement does not obligate the plan fiduciaries to file a lawsuit.

If the former employee does not return the overpayment or returns less than the overpayment amount, adjusted for earnings, the employer or another person (for example, the responsible fiduciary) must contribute the difference. The overpayment returned to the plan should be used in accordance with the plan’s forfeiture provisions. If the former employee retains any of the overpayment, the employer must notify him that the amount is not eligible for favorable tax treatment accorded to distributions from qualified plans and, specifically, that the amount is not eligible for a tax-free rollover. If the defect is corrected in this manner, this operational failure can be resolved without IRS supervision under the Administrative Policy Regarding Self-Correction.

Please note that "appropriate interest" should ultimately be judged on the basis of the plan’s earnings rate during the period from the distribution date through the repayment date.

I hope that you have secured an engagement letter with the plan sponsor stating that you are responsible only for work provided on a going-forward basis, and not accountable for retroactive checks and balances. Consult with your professional liability broker and legal counsel prior to discussing the situation with your client. Even though the error occurred before your takeover, how you respond to the situation today can affect your relationship with your client.

As far as the responsible party, the plan sponsor is the fiduciary of the 401(k) plan, but there needs to be some fiduciary accountability between plan sponsors and TPAs.

The regulations do not state whether a plan can choose the facts-and-circumstances test for one requirement and the safe-harbor test for the second requirement. Regulations do not prohibit combining requirements. The hardship withdrawal requirements are as follows:

Hardship withdrawal must be on account of immediate and heavy financial need; and
The amount withdrawn must be necessary to satisfy the financial need.

In practice, combining the requirements is permissible. A conservative approach would be to obtain a determination letter on the plan that specifically highlights the mixing of the standards in the plan’s hardship withdrawal sections.

The PWBA recently issued a news release to clarify its position on the payment of expenses by a plan (Advisory Opinion 2001 – 01A). In summary, expenses relating to the maintenance of plan qualification are payable by the plan and do not have to be allocated between the plan and the employer, even though the employer derives an incidental benefit from the plan’s tax qualification; expenses relating to choices the employer has as a plan sponsor, even if related to law changes that affect the qualification requirements, are settlor expenses. The Department of Labor also noted that if a plan is silent on the payment of administrative costs, a sponsor may elect to pay these costs with plan assets. Plan sponsors may amend a plan document prospectively to remove existing provisions that require employer payment of administrative costs.

In your example, the loan, which has a two-year term and is not a principal residence plan loan, must be repaid within one year after the leave of absence (the "LOA") ends. Section 1.72(p)-1, Q&A 9(a) of the Final Regulations under section 72(p) of the Internal Revenue Code of 1986, as amended, provides that the amount of installments due under a plan loan after a participant returns from a bona fide LOA must not be less than the amount required under the terms of the original loan.

Therefore, the loan recipient in your example does not have three years to pay off the loan once he or she returns from the LOA. If the plan administrator allowed this loan to be paid off in the three-year period after the LOA, the dollar amount of the installments under the loan would be less in years three, four and five than they were in the first year of the loan, which would run afoul of the regulation.

Yes, you will need to file separate 5500s for each employer. Yes, each employer will have to pass non-discrimination and top-heavy tests. With a multiple-employer plan there is only one plan document. Therefore, employer match and plan provisions must be consistent.

If your plan document defines eligibility as only service with the employer and affiliates, then you would use the date of hire as the date she went on your company’s payroll as long as the temporary staffing company was not an affiliate of the plan sponsor. If the plan document states otherwise, then you would be required to provide service credit from the original date. In addition, I would advise you to look at your plan document for how to define a plan participant. Make sure that the definition of a participant doesn’t include leased employees.

You should continue payroll deduction plan loan repayment until either the debtor- employee or a court order directs you to stop. You may get a letter from a bankruptcy trustee directing you to stop the payroll deduction repayment. You should ask that the bankruptcy trustee attach a copy of the court order empowering the trustee to give such a directive to the letter.

If the bankruptcy case is not dismissed or resolved prior to the expiration date of the loan, then the loan will go into default as of the last day of the grace period (if any) provided by the plan. This results in a taxable event to the debtor-employee.

Please note that there is a bankruptcy reform bill currently in Congress. This legislation would specifically prevent a bankruptcy proceeding from interrupting the periodic repayment of a plan loan by a debtor-employee.

The regulations provide that unpaid time on FMLA leave is not required to be treated as credited service for "purposes of benefit accrual, vesting and eligibility to participate" (DOL Reg. 825.215(d)(4)). Even though an employee on FMLA leave cannot incur a break in service with regard to vesting and eligibility to participate because of the leave, the employee is not required to receive credited service for the leave period for purposes of benefit accrual, vesting and eligibility to participate.

Code section 401(a)(9) minimum distribution requirements state that the plan "may" distribute in the form of a qualified joint and survivor annuity "if the plan has made reasonable efforts to obtain consent from the participant and the spouse." This implies that the participant (and spouse) might be entitled at that time to alternative forms of distribution under the plan that might also satisfy section 401(a)(9), such as the regularly calculated minimum distribution amount. Remember, however, that you must follow the requirements of your plan, which may still require spousal consent.

With respect to your current participants, you will need to refund the elective deferrals made in error plus earnings and forfeit any applicable matching contributions plus earnings. With respect to your former participants, I believe Rev. Proc. 2001-17, Section 6.05 would apply, as they are no longer in the plan and therefore need not be distributed going forward to maintain plan qualification. Section 6.05 states that when an excess amount has been incorrectly distributed, the plan sponsor must notify the recipient that the excess amount was distributed and was not eligible for tax-free rollover. Rev. Proc. 2001-17 defines excess amounts as: overpayments, elective deferral or employee after-tax contribution returned to satisfy 415 limits, an elective deferral in excess of the 402(g) limit that is distributed, an excess contribution or excess aggregate contribution that is distributed to satisfy 401(k) or 401(m), an amount contributed on behalf of an employee that is in excess of the employee’s benefit provided under a SEP, an excess contribution that is distributed to satisfy 408(k)(6)(A)(iii), an elective deferral that is distributed to satisfy the limitation of 401(a)(17), or any similar amount that is required to be distributed in order to maintain plan qualification.

I would also like to point out that effective January 1, 2002, EGTTRA reduces the hardship withdrawal suspension period to six months rather than 12.

I am aware of the following SPD requirement under DOL Reg. S. 2520.102-2(c): If a certain percentage of your participants are literate only in the same non-English language, the plan’s SPD must include a prominent notice stating in those participants’ own language that they can receive assistance to explain the SPD. For plans that cover fewer than 100 participants at the beginning of the plan year, this requirement applies if at least 25 percent of the plan participants are literate only in the same non-English language. For plans that cover 100 or more participants at the beginning of the plan year, the plan sponsor must provide a foreign-language notice offering assistance if the lesser of either: (i) 10 percent or more of the plan participants or (ii) 500 plan participants or more are literate only in the same non-English language.

Once re-employed, she would need a second triggering event in order to be able to receive a distribution from her 401(k) account balance. The plan should state that the distribution is not available while the plan sponsor currently employs the individual. If the plan is not clear, the plan administrator would be responsible for the interpretation of the plan.

I encourage our plan sponsor members to use our sample investment policy statement in developing their own statement for their plan. We have received many comments that our investment policy statement is concise yet complete in establishing criteria and benchmarks for your plan. PSCA believes that adoption of a formal investment policy process, and documenting that process, will help sponsors manage their fiduciary liability and ease the Department of Labor plan audit process. Once the written statement is developed, it is just as vital to monitor and evaluate the investment performance according to your policy. Members can access the sample investment policy statement from our website, www.psca.org, in the Resources section.

You are referring to IRS Technical Advice Memorandum 9635002 where the employer maintained a use-it-or lose-it vacation policy (i.e. employees forfeited an accrued but unused vacation time at the end of the calendar year). The employer proposed a procedure to the IRS whereby employees with more than two weeks of unused vacation could elect to have the dollar value of any excess vacation time contributed to their 401(k) plan. The IRS ruled that such a procedure would not trigger a taxable event to the employees at the time of contribution, although their elections did not constitute cash or deferred arrangements under the 401(k) plan. Instead, the IRS characterized the contribution as a non-elective employer contribution. In addition, the IRS confirmed that these contributions were not constructively received by employees or subject to FICA taxes at the time of contribution. Personally, I would caution implementing this strategy if you ever have issues with your nondiscrimination tests. It is fair to assume that highly compensated employees would take advantage of this procedure more than non-highly compensated employees. These contributions would be treated as employer contributions. I would advise that you or your service provider has thoroughly analyzed the applicable nondiscrimination tests before implementing this procedure.

ERISA Sections 107 and 209 address record retention. It requires the plan to keep records to verify, explain, or clarify the accuracy and completeness of reports that have to be filed with the government for six years after the filing date. The provision specifically mentions "vouchers, worksheets, receipts, and applicable resolutions." It is very important to be able to keep anything and everything that shows the plan was properly administered.

Assuming your plan document allows you to do so, I would agree that the administrative expenses are authorized under ERISA. The Department of Labor issued Advisory Opinion 2001-01A clarifying its position on plan expense allocations. Since paying for a TPA to monitor and help the plan maintain its tax-qualified status is necessary for the ongoing operation of the plan, as long as the expenses are not unreasonable, I don’t see where you would have a problem offsetting with forfeitures.

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