On October 31, 2013, the Internal Revenue Service (“IRS”) announced the cost-of-living adjustments (“COLA”) for the 2014 tax year. These COLA rates are used to adjust over 40 tax provisions from the standard deduction and personal exemption to retirement plan limits. Based on the changes in consumer price index, used by the IRS to determine the COLA rates, there are no increases in the 2014 elective deferral catch-up contributions for 401(k) plans but there are increases in the maximum defined contribution deferrals as well as compensation levels.
See the tables below, for a comparison of the 2013 and 2014 retirement plan limits:
For further information visit the following IRS website:
2014 Inflation Adjustments – http://www.irs.gov/uac/Newsroom/In-2014-Various-Tax-Benefits-Increase-Due-to-Inflation-Adjustments
COLA Increases for Dollar Limitations on Benefits and Contributions – http://www.irs.gov/Retirement-Plans/COLA-Increases-for-Dollar-Limitations-on-Benefits-and-Contributions
Kevin C. Bach, CPA, CVAPosted on October 29 2013 by admin
In today’s market the mergers and acquisitions of businesses are on the rise. If the company maintaining your 401(k) plan is purchased, or merges with another company, what issues should you be considering? There are risks associated with the accounting of plan transfers that the plan administrator should be aware of. Plan transfer risks include:
1. Mergers and spin-offs are not recorded in the proper period.
2. Appropriate assets and liabilities are not properly transferred.
3. The value of assets and liabilities transferred do not reconcile between plans.
4. Mergers and spin-offs are not fairly presented in the financial statements and not appropriately disclosed.
5. Plans have been merged or assets spun off without appropriate authorization.
It is important to take note of the above issues so that you not only avoid making the mistakes associated with them, but also so that you can ensure that your auditors are working to help verify that everything is accounted for properly. Here are some tips to help:
1. Determining the proper merger date will ensure that everything is recorded in the proper period. The effective date of the merger is when all plan assets were legally transferred to the control of another plan.
2. In order to make sure that the appropriate assets and liabilities are properly transferred, it is important for both trustees and third party administrator to meet and discuss the details of the transfer.
3. As stated above, the meeting of the trustees and third party administrator of both plans is essential to properly account for the transfer. Having communication between all parties involved with the plan will ensure that the proper value of the assets and liabilities is transferred to the new plan.
4. By working with your auditors on the disclosures, you can be certain that the merger will be fairly presented in the financial statements.
5. Lastly, it is important to have controls in place to make sure that the plan transfer is properly authorized and fully documented. In addition, all employees should be made aware of the transfer.
Hopefully bringing certain risks to your attention beforehand will help in the merger/acquisition process! If you have any questions or comments, please feel free to post them to the site!
Brittney BlaisPosted on October 16 2013 by admin
Have you recently restated or amended your plan document? If yes, are you confident that your plan is being administered in accordance with the updated sections? A common fallacy of the plan administrator is the sole reliance on the third party administrator (“recordkeeper”) to ensure that the plan is being properly administered, subsequent to the restatement/amendment date.
While it may be true that the recordkeeper is paid to recordkeep and to administer the plan in accordance with the plan document, the ultimate responsibility for plan compliance will lie with those considered plan fiduciaries. Furthermore, recordkeepers rarely act in the capacity of fiduciary. (See H&H blog dated August 11, 2009 written by Kim Lubbers, for further discussion of the responsibility of the plan fiduciary).
Plan compliance errors frequently occur when the plan has a restatement/amendment. The errors can result from the recordkeeper not updating their systems properly, or the plan administrator is not reviewing new reports, or providing new information, as required by the restatement/amendment. The following paragraphs are just a couple of examples of common errors that can occur.
Restatement/amendment – Plan restates to elect safe harbor status, whereby the employer safe harbor match is 100% vested upon deposit to the participant’s account. Previous employer matching contributions were subject to vesting.
Error – The recordkeeper did not properly code the safe harbor match after the restatement/amendment date. Accordingly, persons that received the safe harbor matching contribution would have that account improperly subjected to vesting. Furthermore, if any forfeitures were withheld from the safe harbor matching contribution due to the miscoding, that error would require corrective action.
Restatement/amendment – Plan administration updates the plan to allow for employer matching contributions, while the plan document did not previously allow for such contributions. Additionally, the update required participants to have worked for a specific number of hours to earn the employer match awarded for that year.
Error – The recordkeeper and plan administrator were not tracking the hours worked and some individuals who received the employer matching contribution, and terminated prior to meeting the requisite service hour requirement, were receiving all or a portion of the employer matching contribution. Accordingly, this would require a corrective action.
Restatement/Amendment – Plan initiates a restatement/amendment and the new plan document inadvertently does not exclude certain compensation that was previously excluded, such as commissions or bonuses.
Error – The plan administrator does not update their payroll system to include commission or bonus as compensation subject to employee or employer deferrals. Accordingly, this would cause a plan compliance failure, requiring corrective action.
Our general recommendation is to actively communicate with your recordkeeper regarding the changes to administration of the plan due to the restatement/amendment. We also recommend, the plan administrator sample test transactions subject to the new changes of the restatement/amendment, to ensure proper administration and accounting of the transactions. Any identified errors should be addressed immediately to correct the compliance issue.
The plan administrator should also communicate any identified issues with their plan auditors, so the plan auditor can properly assess the situation and what supporting documentation may be needed to support the corrective actions, for audit purposes. If you have any questions on the above issues, or other similar issues, please contact us using the contact information displayed on this page.
Victor FuentesPosted on October 1 2013 by admin
Over the last few years, the benefits of participant friendly features have become apparent to many employers. Studies have shown that there is a direct relationship between participant friendly features and increased plan participation. However, many employers have yet to realize the numerous benefits of offering a more competitive Retirement Savings Plan integrated with participant friendly features.
The advances in technology over the past five years have opened new doors for Retirement companies, Third Party Administrators, and Recordkeepers that allow them to more efficiently accommodate plan sponsors and participants. Two main features that have been trending over recent years are Automatic Enrollment & Automatic Escalation.
Automatic Enrollment, also known as auto enroll, serves to enroll each newly hired employee that do not decline participation in the plan. The deferral percentage for participants being auto enrolled into the plan is up to the discretion of the Plan Sponsor, within limits set by the Department of Labor. Historically, the most common deferral percentage is three percent. Automatic Escalation, also known as auto increase, is a secondary feature that increases the automatically enrolled participant’s deferral percentage each plan year. If you choose to implement this feature in your plan, be sure you have good processes and controls to ensure the employees are enrolled when they are eligible. Lack of good processes and controls could result in employers having to make contributions to the plan to correct for missed deferrals as a result of not enrolling the participant timely.
According to a recent benchmarking report performed by Fidelity Investments, a leading provider of not-for-profit healthcare retirement savings plans, there was a substantial increase in employee participation in Plan’s that offered the automatic features. The report was targeted at Not for Profit Healthcare Plans. However, outlined in the body of the report is an excellent five step table showing objectives, actions, and outcomes of implementing five features. This outlined plan of action would benefit any Retirement Savings Plan, regardless of operating for profit or not-for-profit.
See the outline below and check out the many benefits that could support your company’s retirement plan. For those companies already implementing these best practices, let me say well done. As an employee, I want control of my retirement plan, but I would also appreciate guidance. Like many others, my profession doesn’t spare 40 hours a week to research retirement investment strategy. I also, don’t enjoy filling out paper forms to change simple things, such as an address, instead of fixing it online in one minute. Technology has turned paper into paperless, and that is true across the business world these days.
As the job market becomes increasingly competitive for skilled, experienced, and productive employees, a strong retirement plan becomes even more important. When decision time comes around for a future employee, a retirement plan offering more enticing savings and benefits could close the deal. Competitive employer deferral matching, profit sharing, personalized investment guidance, simple enrollment periods, automatic programs, and proper oversight are amongst the many things that separate a good plan from a great plan. Follow the link below to Fidelity Investments Benchmarking Report outline.
Josh MitchellPosted on September 18 2013 by admin
I have had a few clients that have recently elected to offer hardship distributions to their employees in the past few years. Anytime I see this new election, I like to sit down and go over expectations with the plan fiduciary. There are a few major questions I like to throw out to my client:
• Do you understand what qualifications to look for when a participant turns in a hardship distribution request? What does your plan document state the reasons for a hardship distribution are? What are the regulations set forth by the government for a hardship distribution?
• Do you know what documentation to receive from the employee when they elect to take a hardship distribution? What will your procedures be for obtaining the adequate documentation to show an employee hardship?
• Do you have procedures in place to stop the employee’s elective deferral for 6 months (or to do whatever it states should be done after a hardship distribution in the plan document)?
• What is the procedure after the 6 month suspension? Will you automatically restart the deferrals at their prior elections or will it be up to the participant to sign up to defer again? Has this been communicated to the participant?
Hardship distributions have a few more requirements for the plan fiduciary to look out for than a normal distribution might have and it is important that they understand each of my bullet point questions above in order to properly follow the requirements that are in place.
For more information on hardship withdrawals, visit the IRS website’s FAQs regarding hardship distributions.
Shelby WilliamsPosted on May 7 2013 by admin
According to the IRS website, a retirement plan may, but is not required to, provide for hardship distributions. If a 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship. For example, a plan may provide that a distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses. In determining the existence of a need and of the amount necessary to meet the need, the plan must specify and apply nondiscriminatory and objective standards.
A hardship distribution from a 401(k) plan must be made on the account of an immediate and heavy financial need of the employee, the employee’s spouse, or the employee’s dependent. The maximum distributable amount of hardship distributions should typically not be more than the amount of the employee’s total elective contributions, although certain exceptions to this rule may apply. When deciding how much of a hardship distribution the employee can take, the amount must be necessary to satisfy the financial need of the employee and should not exceed the amount of employee’s need. However, the amount required to satisfy the financial need may include amounts necessary to pay any taxes or penalties that may result from the distribution.
Generally, if a 401(k) plan provides for hardship distributions, the plan will specify what information must be provided to the employer to demonstrate a hardship. In many cases, an employer may generally rely on the employee’s representation that he or she is experiencing an immediate and heavy financial need that cannot be relieved from other resources. Obtaining additional information relating to the hardship may not be required.
After an employee receives a hardship distribution of elective contributions from his or her 401(k) plan, generally the employee will be prohibited from making elective contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution.
For more information and guidelines on hardship distributions, go to http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Hardship-Distributions.
Ryan WojdaczPosted on April 16 2013 by admin
If your company offers its employees a 401(k) or 403(b) plan then it is your fiduciary responsibility to ensure those salary reductions are paid into the plan assets in a timely manner. If money taken out of your employees’ paychecks is paid late, then you, the employer, may owe excise tax and be subject to penalties.
When is it considered late? Technically, the legal definition states that the salary reductions should be paid into the plan, “…as soon as it is reasonably possible to segregate them from the company assets, but no later than the fifteenth day of the month following the payday.” While this rule seemingly appears to define a grace period (i.e., no later than the fifteenth business day of the month following the payday) it was written years ago when most transactions were still recorded with a pen and paper and payments were made on a check through snail mail. Times have changed and technology has made it easier for employers to forward money to the plan quickly – in many cases as soon as the day of payroll. That being said, the IRS and Department of Labor (DOL) have been strict in recent years in enforcing the rule that the money reach the plan “…as soon as it is reasonably possible.”
How will I know what is “reasonable” for my business? You know your business and you know your business administration team. You probably have a pretty good idea just how quickly you can pull the payroll information to compile the employees’ individual data, and, if you have access to the internet you can probably work with your bank to arrange for same-day payments. But, every business is different and depending on variables such as payroll providers and your own business internal controls, you are in the best position to come up with the best definition of what is “reasonable.” After you reach your determination, it never hurts to run it by your plan administrator, plan advisor, or yes, even your plan auditor to gather feedback and establish agreement on what is reasonable.
I was late on sending in the payments, what do I do now? At first glance it can be a little scary. The IRS states that an employer holding on to these assets past the reasonable date, “…will have engaged in a prohibited transaction… and will attach Form 5330 to the Form 5500 and will pay applicable excise tax.” But, if you catch your mistake early, you can correct this violation using the DOL Voluntary Fiduciary Correction Program (VFCP), avoid excise taxes, and keep your plan in compliance. Correcting mistakes on your own accord also looks better than when formally requested by DOL or the IRS. Keep in mind that late payments, even those corrected under the VFCP, need to be reported on the Form 5330 when filing your annual Form 5500.
The Department of Labor has informative resources available on the subject in its Compliance Assistance section at www.dol.gov/ebsa
There are also safe harbor rules specific to small plans (less than 100 participants) that can also be found at the website.
Kevin E. Brown, CPAPosted on March 12 2013 by admin
One of the benefits to establishing a qualified retirement plan is that they are subject to favorable tax treatment. Did you know that failing to timely amend your plan document for changes in Federal tax laws can affect your plan’s status as a tax-qualified plan? Companies often engage third party service providers to ensure that these amendments are made in a timely fashion, but this is not always the case. The information below is intended to provide helpful tips on how to stay current with the applicable tax codes that might affect your plan, but also what to do if you find you have failed to amend your plan in a timely manner.
How Often Do I need to Update My Plan Document?
Our nation’s tax code is constantly changing, and the laws Congress passes can often times impact our 401(k) plans. The Internal Revenue Service (IRS) establishes deadlines that govern when a written plan document must be amended to reflect tax law changes, and this applies to all 401(k) plans with participant balances. Generally 401(k) plans are to be amended and restated every five years for individually designed plans (or six years if a pre-approved plan document is used). The following suggestions should help your Company’s plan maintain its tax qualified status:
- Set up a reminder to review your plan document at least annually
- Maintain contact with your third party service provider or the entity that sold you your plan
- At least annually, review the IRS website for enacted tax code changes that might impact your plan.
- Maintain the following documents in a central location
o Original plan document
o All subsequent amendments and restatements
o IRS determination and opinion letters
o The plan’s adoption agreement
What Should I Do If I Know I Haven’t Amended Timely?
If it comes to your attention that you either haven’t amended your plan for recent tax legislation changes or haven’t amended your plan within the required time period, there are certain corrective actions that can be taken to preserve your plan’s favorable tax status. The first thing that should be done is to ensure that the necessary amendments are made, and the documentation is maintained. Typically these adjustments are to be made retroactively to conform to the provisions of the legislation. Once the amendments and corrections have been made, you must make a Voluntary Corrective Program submission with the IRS (if the plan is not currently under audit or examination). There is a fee associated with this submission, which can range from a few hundred dollars to a few thousand dollars, depending on the nature of the correction. The IRS will review the submission, and the process is finished when the IRS approves the correction. Although the fees associated with the correction seem large, the costs associated with losing favorable tax status or potential fines and penalties if discovered during an audit or examination are much greater.
Hopefully this information sheds light on the importance of keeping abreast of current tax code changes that could impact your company’s 401(k) plan as well as the importance of amending and restating your plan document in a timely manner. Doing so can save your company a lot of time, money, and headaches in the long run.
Evan Powell, CPA
One of the key reasons to hire an Employee Retirement Income Security Act (“ERISA”) attorney is to complete a plan document that will be in compliance with all ERISA regulations. The plan document should be reviewed every two years by your attorney for any amendments that need to be made in order to stay in compliance with current ERISA laws. An ERISA attorney will also be able to help avoid any potential fiduciary problems that may arise.
ERISA attorneys typically work for either law firms or third-party administrators (“TPA”). When deciding what type of attorney to hire it is important to keep in mind that attorneys working for TPAs are loyal to the TPA. If there is a compliance issue the focus will be correcting the problem for the TPA and not necessarily for their client. The service from an attorney working for the TPA will for the most part be ancillary. However, an attorney working at a law firm will not treat the hiring company as secondary clients.
Many employers will not use an ERISA attorney due to the additional costs. Although the cost may be more than an employer is willing to spend, ERISA attorneys will help keep the plan in compliance with the ERISA laws. An employer can save on costs by carefully researching for an attorney that will fit the size of the plan.
Christina DyciewskiPosted on February 13 2013 by admin
Did you know that one of the most common errors found in a 401K audit is due to a lack of proper documentation of enrollment?
When a company is required to have their 401K plan audited it is a good idea to make sure that there are proper procedures as well as documentation in place to ensure that the audit can move along as quickly and smoothly as possible.
Procedures: Whether notification about 401K information is given to the employee upon hiring, notified by e-mail at the time they become eligible, or by attending a meeting it is always a good idea to evaluate the procedures you have in place to ensure that they are effective. In some cases a company may think that they have a good set of procedures in place, but how are they working? For instance, if the information is given to them when they are hired, how is the employee reminded once they become eligible?
Documentation: It is always good to ensure that there is good documentation for this process in place. This helps the audit move along quickly and can also assist to resolve any discrepancies that might arise. Proper documentation would include an enrollment form that is signed by not only the participant but by the required HR representative. In addition, if the employee is selecting not to participate this should be included on the form as well. There are a number of companies that do not have the individual sign a form indicating that do not wish to participate. This can slow down an audit as the auditor will have to look for additional means to confirm that the employee truly did not wish to participate and it creates a lack of documentation for the file’s purpose. In addition to the enrollment form, an election form should not only be complete but properly signed.
With the vast amount of companies that are moving all of their forms electronically this can create a barrier to a good paper trail. In some situations, this can be viewed online but it is always a good idea to keep a good paper trail when it comes to the beginning enrollment documentation.
Hopefully this information was helpful and answered your questions; however, if you have specific questions/examples regarding enrollment forms or any other questions about employee benefit plans please feel free to post your questions and/or comments.
Brie Keckler-- Older Entries »
Finding information on employee benefit plans can be difficult and time consuming. As a service to our clients, and other interested parties who are involved in or in need of employee benefit services, we'll gather all of the information for you. We'll keep you up-to-date on the latest laws and regulations and we will even add our own personal insight into what else is occurring in the employee benefits world. We will provide these posts weekly and hope to get your input and feedback on the various topics. We will also share that feedback with others, as we find appropriate.
Before posting a comment on a blog post please be aware that we do not give free advice to non-clients by email, comment response, or phone. Thank you!
- 2014 Retirement Plan Limits
- Plan Transfers
- Plan Restatements and Amendments
- Make Your Retirement Savings Plan More Competitive, Effective, and Enjoyable for Your Employees
- Employee Stock Ownership Plans
- Hardship Distributions – IRS Guidelines
- Business Owners – Are You Paying Your Employees’ 401(k) or 403(b) Contributions on Time?
- What Happens If I Don’t Update My Plan Document?
- ERISA Attorneys – Why Have One?
- Enrollment Documentation