are special rules for 401(k) Plans of which Plan Trustees/Sponsors
should be aware. Here are a few of the most important ones.
must employee monies deducted from the paycheck be deposited?
The Department of Labor requires that you deposit employee monies within 7 business days after each pay period. Any late deposits must be reported on the Plan’s 5500 each year and will subject your plan to audit, interest and penalties. See the attached for more details.
Note that if you intend to make or maximize your deferrals, you must do so by no later than the last paycheck of the plan year.
(Your plan document can permit you to deposit matching or profit sharing contributions as late as the due date of your company’s income tax return, plus extension.)
do 401(k) contributions deducted from the participant's paycheck
affect tax withholding?
Pre-tax (i.e. non-Roth) 401(k) deferrals reduce the participant’s wages for purposes of federal tax withholding. They do not reduce a participant’s social security or unemployment wages.
What is the maximum compensation that is recognized for plan purposes?
Compensation (or earned income for the self employed) in excess of $280,000 during 2019 or $275,000 during 2018 is not taken into account for plan purposes.
much can a participant receive each year in a 401(k) profit sharing plan?
In most cases, 100% of compensation up to $55,000 in 2019 ($55,000 in 2018) may be added to a participant’s account from all sources (employee and employer contributions). This excludes catch-up contributions for participants 50 and older. See below.
this amount, how much may the employee contribute from pay?
The employee may contribute up to $19,000 in 2019 or $18,500 in 2018. In addition, any employee who will attain age 50 may contribute an additional $6,000 in 2019 and 2018 limits known as a “catch-up contribution.” These are calendar year rather than plan year limits and includes any amounts deferred under any other retirement plan (other than a Section 457 Plan).
this mean if a plan only provides for deferrals (no employer
contributions are made), every participant may defer the lesser
of their net check after FICA/Medicare or $19,000?
Yes, and to encourage lower paid workers to defer, there is a new Saver’s Tax Credit available that allows employees a credit in addition to the deduction from federal taxes.
However, “highly compensated” participants (“HCE’s”) in a traditional 401(k) Plan are still limited by the amount that the non-highly compensated participants defer.
A highly compensated participant for 2019 testing is anyone who earned more than $120,000 in 2018 or who owns more than 5% of the entity that sponsors the Plan. Also, certain family members (a spouse, lineal ascendants and descendants) of more than 5% owners are deemed owners, and therefore, highly compensated participants, as well.
happens if a highly compensated participant defers more than
In general, there are two options:
1. Once we receive your census data, we will calculate the amount that has to be distributed to your HCE’s by no later than the end of the current plan year. If this money is distributed within 2 1/2 months after the plan year, the Plan Sponsor will avoid a 10% IRS excise tax on the excess. Regardless, the employee will include any excess contributions received for 2017 on the 2017 1040 no matter when received. Note: refunds will be made first to those HCE’s who defer the largest dollar amount, not the largest percentage.
2. Alternatively, the employer may choose to contribute, on behalf of the non-HCE’s, an amount that will enable the test to pass. This is known as a “QNEC.” PIC will advise you of the feasibility of this option.
may I do to anticipate a failed test in the first place?
You may have PIC run an estimated test before your plan year ends.
Fortunately, the testing rules have been simplified, so that you will have the option to utilize prior year results to determine the amount your highly compensated participants may defer. Once you elect to utilize prior year test results, you must continue with this method unless you amend your plan. And if this is the first year of your 401(k) Plan, you may allow the HCE’s to defer an average of 5%.
else may I do to avoid this "discrimination issue?"
You may implement a “safe harbor” 401(k) plan effective at the beginning of any year. Each highly compensated participant may defer the full dollar limit no matter how much the non-highly compensated participants defer. To do this you must make either a fully vested match to those who defer, up to a maximum of 4% of compensation or
a 3% contribution to all eligible participants. Speak to your consultant or administrator at Pension Investors to see if this would be cost effective for you.
Also, you may wish to consider adding an automatic enrollment feature to your plan. This would most likely increase your plan participation because the employee would have to opt out to avoid making contributions. If you have a safe harbor plan that doesn’t require testing, it may still be advantageous because it will reduce your required matching contribution to a maximum of 3.5%.
is a top-heavy 401(k) Plan?
A 401(k) Plan is top heavy when 60% of more of the plan assets are allocated to key employees. In general, key employees are owners and/or officers and include employees who are spouses, children, grandchildren, and parents.
When your plan is top heavy, no key participant may defer into the plan without creating an obligation for the employer to make contributions (usually 3%) to non-key participants. However, this obligation may be offset by matching contributions to a traditional 401(k) Plan or eliminated in a Safe Harbor (k) Plan.
a person who makes salary deferrals still make tax-deductible
Perhaps. The participant (and spouse) would have to earn less than a designated dollar amount. A participant’s tax advisor can provide specific information.
can I reduce liability with respect to the investment results
in the Plan?
By allowing your participants to choose their own investments following specific guidelines issued by the Department of Labor, you may lessen your liability as a trustee. There are also new options that reduce your liability for participants who fail to choose their investment mix. To find out whether your current investment structure satisfies that criteria, please contact your consultant and/or broker.
I have to give a Summary Plan Description to employees even
if they do not sign up for the plan?
Yes, you must give every employee a copy of the SPD at the time the employee meets the eligibility requirements. If you don’t have a copy of the current SPD, please contact PIC immediately.
How does Severance Pay come into play with my Plan?
There are new and complicated regulations regarding the inclusion of compensation an employee receives post-termination for purposes of a qualified plan. When you report census to us every year, please be sure to contact us if anyone received compensation after termination that was not due to accrued benefits such as vacation pay or unpaid wages.
See Item 6 under ADDITIONAL CAVEATS below.
plan allows for hardship withdrawals. If a participant makes
a hardship withdrawal, how long must he or she be kept out
of the Plan?
The employee must discontinue deferrals for 6 months following the withdrawal.
What is a Roth 401(k)?
It is a feature you may add to your existing 401(k) Plan that permits your participants to make after-tax contributions.
Who may be interested in a Roth 401(k)?
1) Participants who like the features of a Roth IRA and would like to contribute more, or those who are ineligible for a Roth IRA because their incomes are too high.
2) Participants who expect to be in a higher tax bracket at retirement than at the time they are working and contributing.
What are the basic advantages of a Roth 401(k) over a pre-tax 401(k)?
1) All earnings are tax-exempt when withdrawn as long as they are qualified distributions.
2) Minimum distributions may be avoided by rolling the Roth contributions to a Roth IRA before attaining age 70½.
How much may be contributed to a Roth 401(k)?
1) If you have a safe harbor 401(k) Plan, anyone may contribute up to $19,000 in 2019 or $18,500 in 2018 (plus $6,000 in 2019 and 2018 if age 50 or older). Note that Roth contribution limits are not in addition to pre-tax amounts, but are in place of those amounts.
2) If you do not have a safe harbor 401(k) Plan so that contributions must be tested for discrimination each year, the highly compensated participants are subject to the same limitations as they are with pre-tax contributions.]
What do I have to do to add the Roth 401(k) feature to my Plan?
- Notify Pension Investors – we will prepare an amendment at our normal amendment fee of $350. Additional administration fees will not be charged; however, we will assess additional fees in addition to our normal distribution charges in the event of withdrawals.
- Notify your payroll provider to make sure they are prepared to deduct these contributions after-tax.
- If your plan permits participants to direct the investments of their accounts, instruct your investment provider to set up a separate account with your Plan. Deposits you make from Roth deductions may not be commingled with the pre-tax deposits.
- Provide your eligible employees with a revised Summary Plan Description and enrollment form. (You may require that the participant make a choice between Roth and pre-tax deductions for the year, or alternatively, allow them to contribute to both.)
1) Call us before any changes are made in your business structure, such as the sale of all or a part of your business, a merger, or an acquisition, so that we can advise you of the impact on your 401(k) Plan.
2) Any type of withdrawal from the Plan is subject to stringent regulations and requires very specific paperwork. (The most common type of withdrawal is one made to a terminated participant.) Therefore, no monies should be taken out of your Plan without advising us first, so that we can make sure that the withdrawal is allowable, that the amount is correct, and that the necessary forms are properly executed.
3) BLACKOUT NOTICES
Plans must now comply with stringent notice if certain rights are going to be temporarily suspended or impaired for 3 or more consecutive business days during what is known as a “black out period.”
For example, if your plan permits participants to direct the investment of their accounts and there is going to be a temporary suspension in their ability to do so, an advance 30 to 60 day notice must be given.
Changing investment providers usually involves such a temporary suspension.
Additionally, any impairment of the ability to obtain loans or distributions would also give rise to the notice requirement. In addition to changing investment providers, this could occur if the only person who can process loans or distributions is going to be away on vacation.
Please call us well before any of these events occur so that we can prepare a timely notice in compliance with these new Department of Labor regulations.
4) SMALL PLAN (less than 100 participants) AUDIT REQUIREMENT
A reminder that if your plan holds assets that are not held by a regulated financial institution, you may need to increase your fidelity bond in order to avoid the need for an independent audit.
5) TAX CREDIT FOR SMALL PLANS
Small plans implemented in 2002 or later may qualify for a tax credit for administrative and employee education expenses. If you haven’t yet received the details on this program from us, please call.
6) Severance Pay is compensation included on the W-2 that is not attributable to services rendered. Since such pay was not for services, it can NOT be used for retirement plans. Payments for service rendered which you would have paid had employment continued or unused paid time off (PTO) is not considered severance pay as long as it is paid within the plan year of termination or within 2-1/2 months after.
Let’s assume that Joe is laid off and his last day of work is 12/15/16. He is entitled to two weeks of compensation for unused PTO which is paid to him on January 31, 2017. That is includable in his compensation for plan purposes even though it was paid after the year in which he terminated. In fact, he may defer from that amount in 2017. However, if you also gave him a severance benefit of 8 weeks pay, that is not includable in his plan compensation no matter whether it was paid to him in 2016 or 2017.
Therefore, when you complete the census, you will still continue to report total gross compensation. If you have true severance compensation included in total gross, please break it out separately. We will then reduce the gross compensation by that amount for purposes of plan administration.
Kiplinger Business Forecasts
Kiplinger Business Forecasts, Vol 3, week of Apr 5, 2002
STEPPED-UP LABOR DEPARTMENT EXAMINATIONS OF THE TIME IT TAKES TO DEPOSIT 401(K) CONTRIBUTIONS AND LOAN REPAYMENTS CONTRIBUTIONS SPELL TROUBLE FOR SMALL-BUSINESS OWNERS.
Department of Labor (DOL) investigators are redoubling efforts to ferret out and punish employers that they believe are taking too long to transfer employees' 401(k) contributions AND loan repayments into intended investments. The dragnet being cast by the feds likely will snare many small-business owners who mistakenly believe the 401(k) deposit rules give them considerable leeway.
With routine audits indicating a lot of violations among plan sponsors, DOL is expected to step up examinations of 401(k) plans in the coming year to get a better handle on how long employers are sitting on workers' contributions before actually investing them. Many small-business owners who think the rules allow them to wait six weeks or more to make such transfers could be in for a shock if they're singled out for an audit by DOL examiners, who insist that they normally should take no more than a week. So far, increased audits are being undertaken mainly in the Northeast and Midwest, but pension law attorneys expect them to spread to the rest of the country before too long.
Employers found to be in violation of the deposit rules will face fairly stiff penalties. First, they will have to calculate the amount of investment income that participants lost as a result of the foot-dragging and credit participants' accounts accordingly. The department has the discretion also to levy a fine equal to 20% of the lost earnings. Some employers that check their systems before the DOL comes calling and find they haven't been moving fast enough to make transfers may choose to wait to see whether the agency finds them out. But, they may want to consider using the DOL's Voluntary Fiduciary Correction Program (VFCP) to own up to prior mistakes and reimburse 401(k) plan participants. Using VFCP virtually guarantees that DOL will waive the extra 20% penalty.
For many small businesses, toeing the DOL line on transfers will be an administrative hardship. Many smalls that pay employees weekly or biweekly prefer to "batch" such 401(k) contributions, transferring them only once a month to ease administrative hassles and to please plan providers that discourage them from sending in smaller amounts more frequently. "We've definitely had people call and complain [about the stepped-up audits]," says David Wray, president of the Profit Sharing/401(k) Council of America, who adds that the DOL appears unwilling to make allowances for businesses that want to continue to use batching.
The deposit problem has arisen because of some vague wording in the agency's regulations. The rules say that employers have to transfer 401(k) funds as soon as possible, which is on the "earliest date that they can reasonably be segregated from the employer's general assets," but no later than the 15th business day of the month after the payroll date, a period that could stretch up to 45 days or more.
Some employers have been assuming that 45 days is a kind of safe harbor window and that all plan sponsors are entitled to wait that long. But attorneys versed in pension law advise that that's not the case and that few employers actually need that much time. These experts say the agency is willing to grant some latitude to large companies with multiple payroll centers. But the DOL believes small businesses, those with fewer than, say, 100 employees and with just one payroll system generally should be able to make their transfers within a week or so after the payroll date.
Employers can take longer than seven days if they can show that they need the extra time for processing. Thus, businesses that want to avoid penalties should carefully document their payroll procedures, says Pamela Perdue, an attorney with Summers, Compton, Wells & Hamburg in St. Louis.
There's also an alternative course of action that employers can take, but that, too, can create problems. DOL regulations talk about "segregating" funds, as opposed to "investing" them, so an employer could set up a separate account for 401(k) employee contributions, deposit the funds into that account after each payday and then make the investment later on. But there's a catch: The employer can't pocket any interest earned on the account, which means a plan must be devised for allocating interest fairly among all plan participants. And employers must be able to show that any funds spent from such accounts went only for plan-related activities, such as paying the plan's administrator or financial adviser.
NEW !If you have less than 100 participants, you will never have to worry about what is “administratively feasible” anymore as long as you make sure that all 401k deferrals and loan repayments are deposited into the plan’s trust account no later than 7 business days following the date they are withheld from the employees’ paychecks. Note that the contributions must physically be in the investment account within 7 business days– it is not sufficient for you to mail or postmark the contributions by the 7th business day.
A lot of new things happened this year. Please see our attachment call "More New Stuff" regarding more about the quarterly disclosure requirement, default investment funds & required changes in vesting schedules.