The Economic Growth and Tax Relief Reconciliation Act of 2001 authorized the establishment of Roth 401(k) accounts beginning January 1, 2006, which are post-tax retirement account. The next big thing to happen to Roth accounts was the American Taxpayer Relief Act of 2012, which opened the doors to in-plan Roth conversions. Effective immediately as of December 31, 2012, this act expanded Internal Revenue Code section 402A to allow vested amounts that are not otherwise distributable, meaning 401(k) deferrals, vested employer matching deferrals, etc., to be transferred to a designated Roth account maintained within a plan.
As an optional provision, Plan sponsors have the choice to add this provision to their plan document and allow participants to convert traditional 401(k) amounts in their accounts to Roth accounts. However, the Plan must already allow for Roth elective deferrals, and if it does not, that must be added to the plan document as well.
Brief Rules and FAQ
What plans are covered?
- Any 401(k), 403(b), or governmental 457(b) plan that has been amended to permit Roth elective deferrals.
Which participants are eligible
- Any participant, including an active or former participant, with an account balance in the plan.
Amounts eligible for conversion?
- Typically the following amounts are eligible for conversion:
- Pre-tax 401(k), 403(b) deferrals, & 457(b) deferrals, and earnings thereon
- Vested matching contributions and earnings thereon
- Vested profit sharing contributions and earnings thereon
When is the deadline for conversion?
- December 31 of each year. The conversion amount will be considered taxable income for that year.
Consider exploring if:
- You are in a low tax bracket this tax year.
- You have plenty of time until retirement age.
- Generally, the younger you are, the more you benefit.
- You have available resources to pay the tax created by the conversion.
- You are expecting to receive a tax refund.
- Use the refund to pay the tax on conversion.
- Example: Assume you are in the 25% tax bracket, and want to use $500 of your tax refund to pay for conversion tax; you could convert up to $2,000 ($500/25%).
- You are interested in an estate planning tool by the use of Roth savings.
- Roth accounts pass income tax free to your heirs.
Note: The purpose of providing this information is to inform participants in 401(k) plans that this option exists for them. I would advise anyone considering an in-plan Roth conversion to consult with a financial adviser to weigh the pros and cons of this decision and align this decision with future financial goals.
By Josh Mitchell, CPAPosted on December 16 2014 by admin
In a previously issued blog titled “Have lost Participants in your 401(k) Plan?”, the topic of missing participants was addressed prior to the Department of Labor (DOL) issuing any guidance on fiduciary responsibility of plan sponsors in that respect. The guidance issued by the DOL in Field Assistance Bulletin (FAB) No. 2014-01, outlines fiduciary duties and missing participants in terminated defined contribution plans.
When a defined contribution plan is terminated, a plan administrator is required to distribute all of a plan’s assets as soon as administratively feasible after plan termination. Prior to making a distribution, the plan administrator is responsible for contacting plan participants for directions on how to remit their account balances. In instances where the participants do not respond to the correspondence, the plan administrator is required to complete the following tasks outlined in the FAB:
- Use certified mail; it’s an easy and low cost method to find out if the participant can be located.
- Check related plan and employer records. The terminated plan records may not be up to date, but records from a group health plan or similar records may be more current.
- Check with the designated plan beneficiary. If the participant has designated a spouse or relative as a beneficiary, they may be able to assist in providing the updated contact information for the participant. If there are privacy concerns, it is recommended that the beneficiary forward a letter to the participant.
- Use free electronic search tools. Plan fiduciaries must make use of the search tools that do not charge a fee, for example; internet search engines, public record databases, obituaries, and social media.
If all attempts to locate the missing participant or beneficiary have failed, a plan administrator must evaluate and select an appropriate distribution option to complete the plan’s termination. The preferred distribution option per Section 404(a) of ERISA is to rollover the funds into an IRA, which is more likely to preserve funds for retirement and will avoid taxation. As alternative options, administrators may deposit the funds into federally insured bank accounts or escheat the funds to the state unclaimed property funds. One hundred percent income tax withholding for a missing participant’s benefits is an unacceptable distribution option and is in violation of ERISA’s fiduciary requirements.
By Sarah McFarlandPosted on December 2 2014 by admin
If your company has a 401(k) plan, one of the areas to understand is if your plan allows for different types of distributions, what they entail, and some key items to note regarding each type. The main types of distributions are hardships, termination/rollovers, and in-service.
Not all plans allow for hardship distributions; however if they do, there is criteria that must be met. These will vary based on how they are outlined by each plan document, but in general, there are some basic rules that are typical for a hardship distribution:
- There needs to be a financial need for the distribution and proof of this should be kept on file.
- Most plans will not allow for the distribution to exceed the amount of employee deferrals made to the plan.
- The plan may also indicate that prior to taking this type of distribution that all other forms of distributions have been exhausted, such as an in-service distribution or a loan.
Termination distributions are probably the most common distribution you will see. When an employee is terminated from the employer they can request a distribution in cash or they can have their balance rolled over into another individual retirement account. Some of the key things to look for in a termination distribution are:
- Paperwork should be kept on file indicating the termination date of the employee.
- A calculation should be complete to ensure that the employee can only receive the amount that they are currently vested in. Therefore, having accurate participant information in the system (regarding hire date) is important.
- If this is a lump-sum cash distribution, a calculation should be complete to determine that taxes were properly withheld. No taxes are necessary on rollover distributions as they are being transferred to another plan typically.
- After the distribution occurs, you will want to ensure that their balance is at $0 and there isn’t a small amount remaining (typically will occur due to earnings, if it does occur).
- If the distribution were for a rollover, proper request forms should be obtained indicating where the funds should be rolled over.
In-service distributions allow you to take a distribution up to 100% of the employee’s elective deferral, matching contribution, and any qualified non-elective contributions at the attainment of a specified age, (determined by the plan), but typically at the age of 59 ½. Employees will be taxed if taking out this distribution. To avoid this some individuals choose to rollover their balance as opposed to taking a distribution. Some key items to be aware of include:
- Proper employee information to determine that they have reached the age of 59 ½.
- A request form (online or paper).
There are, of course, other types of distributions but those listed above are the most typical distributions you will see. In all distributions it is important to ensure that there is a proper process in place to verify that the distribution was 1) requested, 2) in compliance with the plan, and 3) to ensure documentation is retained to show proof of these items.
By Brie C. Keckler, CPAPosted on November 11 2014 by admin
To attract and retain talented employees, employers should be aware of how their retirement plan provisions compare to other employers. If you are an employer and have not benchmarked your retirement plan provisions, now is a good time to do so. Each year Deloitte publishes the results of its Annual 401(k) Benchmarking Survey. You can obtain a copy of the survey results by clicking this link (Deloitte Benchmarking Survey). The following are some highlights regarding competitive provisions in 401(k) plans:
- 58% of respondents have no waiting period for eligibility and less than 15% have waiting periods longer than 3 months.
- 53% of respondents have a Roth 401(k) feature and 15% more are considering it.
- 67% of respondents made some sort of matching contribution, 4% made some sort of profit sharing contribution, and 23% made both. Only 6% of respondents made neither matching contributions nor profit sharing contributions.
- 56% of respondents have no waiting period for eligibility for matching contributions.
- The most popular matching formula (21% of respondents) is 50% of the first 6% of employee contributions. The second most popular (10% of respondents) is 100% of the first 6% of employee contributions.
- 59% of respondents increased their matching contribution formula.
- 81% of respondents that have a profit sharing provision made a profit sharing contribution.
- 93% of respondents let employees direct the investment of profit sharing contributions.
By Rex Platt, CPAPosted on October 28 2014 by admin
On October 23, 2014, the Internal Revenue Service (“IRS”) announced the cost-of-living adjustments (“COLA”) for the 2015 tax year. These COLA rates are used to adjust over 40 tax provisions from the standard deduction and personal exemption to retirement plan limits. Many of the pension plan limitations will change for 2015 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged because the increase in the index did not meet the statutory thresholds that trigger their adjustment.
See the tables below, for a comparison of the 2014 and 2015 retirement plan limits:
For more information on the 2015 contribution limits for various types of plans, visit the following IRS website:
Ryan G. Wojdacz, CPAPosted on October 15 2014 by admin
Ever since Congress changed the rules to allow plan hardship withdrawals, hardship distributions have been continually increasing among plan participants. There are six safe harbor expenses which the IRS deems to be an immediate and heavy financial need:
- Purchase of a principal residence
- College tuition
- Funeral expenses
- Eviction from principal residence
- Medical expenses
- Repair expenses of principal residence
Other purposes may also qualify if an immediate and financial need can be substantiated.
Although there are limited expenses under which a hardship distribution is allowed, these situations are becoming more prevalent in the current state of the economy.
Plans that allow for these require the participant to first exhaust all other types of withdrawals available. This is to save costs to the participant, as well as hopefully discourage the participant from using the funds for a non-necessity and regretting it in the future when retirement is upon them. A few things to consider prior to taking a hardship distribution are as follows:
- Hardship distributions are not loans; you are not required to pay them back.
- There is a 10 percent early withdrawal penalty if you are under the age of 59 ½.
- Financial proof must be provided to your employer.
- You cannot make contributions to the plan for a period of 6 months after the hardship withdrawal.
- The withdrawal must not exceed the amount necessary to support the need.
So before you consider taking a hardship withdrawal, talk to your accountant, financial planner or another trusted adviser.
By Leslie A. Lee, CPAPosted on September 16 2014 by admin
When 401(k) Plan Sponsors end up in trouble, it is often due to small things that were neglected or not given proper attention. Small mistakes can lead to big problems when it comes to the breaching of fiduciary duty. Below is a summary of mistakes made by Plan Sponsors that can lead to future problems and the breaching of fiduciary duty.
Mistake: Not Having Fiduciary Liability Insurance
- Every plan subject to ERISA is required to have a fiduciary bond. A bond is used to protect plan assets from theft. However, it is often assumed that a bond will serve as overall liability insurance for the Fiduciary. This is not true.
- Every plan sponsor should consider purchasing Fiduciary liability insurance. The cost to benefit ratio provided by liability insurance may be worth the investment.
Mistake: Not Hiring an Independent Financial Adviser
- It may seem obvious, but when this is not done, there is a lot of risk on the table for the Plan Sponsor. Fiduciary duty requires the highest duty of care in equity and law. The lack of a financial adviser for a retirement plan may signal a lack of duty of care by the Plan Sponsor.
Mistake: Not Having an Investment Policy Statement
- Just because your retirement plan has a financial adviser, doesn’t mean your retirement plan has a good investment policy statement.
- One of the most important tasks of a financial adviser is to develop an investment policy statement that serves to protect plan sponsors from lawsuits regarding investment losses.
- Any individual auditing the plan – from your 401(k) auditor to DOL to IRS auditor – will generally ask for the investment policy statement.
Mistake: Not Providing Investment Education to Plan Participants
- The more education provided to Plan Participants, the less liability Plan Sponsors may be subjected to. Under section 404(c) of ERISA, Plan Sponsors may be granted relief for the losses incurred by plan participants if the plan has provided adequate education to those participants.
Mistake: Not Reviewing Plan Expenses
- As a plan sponsor, you have a fiduciary duty to pay reasonable expenses, especially if your participants are responsible for supporting the bill. As the transparency of plan expenses has increased over the years, it has become more important for plan sponsors to review plan expenses and limit their liability.
- Reviewing means benchmarking, not just reading the expenses to make sure they sound reasonable with what you were told the charge would be. Benchmarking involves comparing the services you receive with similar services offered by other retirement plan service providers and determining if the cost you pay is reasonable based on available alternatives. Make sure to document this review.
By Josh Mitchell, CPAPosted on September 2 2014 by admin
As a plan sponsor, chances are that at some point throughout the course of business, the employee benefit plan that you manage has encountered plan forfeitures. Forfeitures typically result from the termination of service by an employee who was not fully vested in his or her employer contributions. The confusion related to forfeitures doesn’t revolve around how they came about, but more so how to handle them when they occur.
There are multiple options for the allocation of forfeitures per Internal Revenue Guidance (“IRS”) guidance, which include: they may be used to pay a portion of the plan’s administrative fees, provide additional contributions to participants (with the exception of safe harbor matches), or reduce the funds allocated to employer contributions. One common mistake that plan sponsors make is to post the funds to a suspense account, and let them build for multiple years without any utilization. The IRS and Department of Labor both recommend that forfeitures should be utilized in the year of generation or as soon as feasibly possible.
Some of the most common reasons that forfeitures are not properly allocated may be due to simple oversight, a plan sponsor may lack knowledge with IRS and DOL regulations, the assumption may be made that the TPA will handle it, or the plan document may not be clear in its guidance. The most important takeaway is to review the plan document in detail regarding forfeitures to ensure that the plan is utilizing forfeitures as allowed and within the appropriate timing, to ensure that there are no errors made. Improper plan and forfeiture management could potentially impact the tax status of the plan.
It is crucial to communicate with the TPA and plan auditors, if applicable, to fully understand plan guidance, and to periodically monitor forfeiture activity for a successful plan year.
By Sarah McFarlandPosted on August 19 2014 by admin
Most companies implement a 401K Plan in order to assist employees in planning for their future; in doing so, they wish to have high participation. If the current plan an employer has in place is not providing high participation, it may be worth considering amending the plan to adopt auto enrollment. Additionally, they may want to even include an auto escalation feature along with this amendment to increase employees’ contributions on an ongoing basis.
Why Auto Enrollment?
The main reason to have auto enrollment in a plan is to of course, assist employees in planning for their future and increasing plan participation. Additionally, auto enrollment assists employees in selecting investments, as well as if they choose to not select their own investments; then a default will be chosen for them. Most employees who choose not enroll into a plan choose to do so primarily because they are not aware of how these deductions will impact them and they feel that they do not know enough to select these investments.
When a plan makes the decision to implement auto enrollment, they may choose to consult with a professional in order to ensure that it is the best move for the plan, as well as to help make sure the participants have thoroughly reviewed their options. The plan will need to amend the plan document to ensure that it properly states that the plan is set up for auto enrollment. If this is a new plan, they will also want to ensure the plan has a trust as well as a recordkeeping system. Once these plans are in place, it is extremely important to follow the plan document as well as ensure that participants are notified of auto enrollment in advance.
Why Auto Escalation?
Auto escalation in a 401K plan is the option to have a participant’s contribution percentage increase annually by a certain percentage. Implementing this will help participants increase their savings year after year without feeling a large impact on their paycheck. Like auto enrollment, the plan needs to ensure that they have properly updated their plan document to allow for this implementation. It is important also to properly inform participants of this implementation, not to mention to continuously remind participants of these increases as they come around.
Although there is some work on the front end to implementing auto enrollment and auto escalation, if your plan is experiencing low participation, it may be something to consider in order to increase plan participation.
By Brie Keckler, CPAPosted on August 5 2014 by admin
What is Form 5500?
Form 5500 is the annual tax return for your retirement plan that must be filed with the Employee Benefit Security Administration (EBSA), a division of the Department of Labor (DOL). It is required by the Employee Retirement Income Security Act of 1974 (ERISA) to ensure employee benefit plans are operated and managed correctly. ERISA requires the plan administrator of certain ERISA plans to file an “annual report” with the DOL containing specified plan information.
Who is required to file Form 5500?
Every pension and group welfare benefit plan that is subject to ERISA is required to file a Form 5500.
When is Form 5500 due?
The plan must file the Form 5500 and any accompanying schedules by the last day of the seventh month following the close of the plan year. This means that the deadline is July 31st if your plan operates on a calendar year. You can get a one-time extension for two and a half months by filing Form 5558 with the IRS, but you must file this extension before your Form 5500 due date. This means that if your plan operates on a calendar year and you file an extension on Form 5558, then the extended deadline is October 15th.
How do I file Form 5500?
Beginning Jan. 1, 2010, all plans must file Form 5500s electronically for all plan years through EFAST2 (ERISA Filing Acceptance System, second generation). For more information on how to file Form 5500 see How to File- Electronic Filing Requirement instructions and the EFAST2 website at www.efast.dol.gov.
By Ryan Wojdacz, CPA-- Older Entries »
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- Exploring Roth In-Plan Conversions
- Different Types of Distributions on a 401(k) Plan
- Benchmarking Your 401(k) Plan Provisions
- 2015 Retirement Plan Limits
- Do You Have a Hardship?
- Fiduciary Duty Advice for 401(k) Plan Sponsors: The Small Things Matter
- How to Handle Forfeitures
- Benefits and Preparation for Auto Enrollment and Auto Escalate in a Benefit Plan
- What You Need to Know When Filing Form 5500
- Determination Letters Will Not be Issued for 403(b) Plans