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Answers to 401k Plan Documentation, Design & Setup
Q: Who should serve as trustee of a 401(k) plan's assets?
A: A trustee's job is to accept funds, manage them prudently and
distribute them to beneficiaries. A plan sponsor can either choose individual trustees - usually
the owners or officers of the business - or a single institutional trustee, such as an affiliate
of a bank, insurance company or other financial institution.
Q: May a 401(k) plan exclude
part-time employees from plan participation? -TOP
A: No. In a field directive issued in November 1994, the IRS take
the position that the exclusion of part-time employees is, in effect, service requirement that is subject to the limitations. According to the field directive, it does not matter that a
401(k) plan will satisfy the minimum coverage requirements after excluding part-time employees.
Example. GHI Company sponsors a 401(k) plan that require one year of service (1,000 or more hours of service in an
eligibility computation period) and excludes any employee who is
regularly scheduled to work fewer than 30 hours per week. Bob has been
a part-time employee (fewer than 30 hours per week) for five years but has completed more than 1,000 hours during each
eligibility computation period (see Q 2:89). The 401(k) plan's exclusion
of
part-time employees has prevented Bob from becoming a plan participant even though he has completed five years of service. Because the part-time employee exclusion is treated as an
indirect service requirement, GHI Company's 401(k) plan is subject to
disqualification since it contains a length of service requirement in excess of that permitted under Code Section 410 (a) (1).
401(k) Facts:
According to HR Investment consultants in Towson, MD, publisher of the "401k Provider Directory, "the cost of running a 401k plan with 25 participants and $750,000 in assets can range from as little as $6,750 per year to as much as $20,000, depending on which 401k vendor you select. (Sources: Nation's Business, September 1998, Myers, Randy "Your 401k Plan May Cost You Too Much." Business Week Online, July 2000, Brenner, Lynn " A Wealth of Choices."). By comparison, a 401(k) Easy or Easy Online system costs only $995 per year for a 25-person plan--a savings of between 60% and 80% in plan administration fees.. The employees of Target Laboratories
(www.targetlab.com) a small company, are maximizing the benefits of the company’s 401k, by saving for retirement in tax-advantaged accounts.
Q: How do maternity or paternity leaves of absence affect the determination of whether an
employee incurs a one-year break in service for purposes of eligibility?
-TOP
A: Solely for the purpose of determining whether an employee has incurred a one-year break in service, an employee absent from work on account of a maternity or paternity leave of absence must be credited with up to 500 hours of service.
The number of hours of service credited during the absence will be the number of hours of service that otherwise would normally have been credited or, if that number cannot be determined, eight hours of service per day.
The hours will be credited to the computation period in
which the absence begins if an employee would be prevented from incurring a
one-year break in service: otherwise, they will be credited to the
immediately following computation period.
A maternity or paternity leave of
absence is an absence from work as a result of the pregnancy of the
employee, the birth of the employee's child, the placement of the employee's
adopted child, or the caring for the child after its birth or placement.
Additional hours are not explicitly required for unpaid leave under the
Family and Medical leave Act of 1993 (FMLA). However, the FMLA regulations
do state that any period of unpaid FMLA purposes of eligibility to
participate in a retirement plan.
In addition to maternity and paternity
leave, FMLA leave can include up to 12 weeks during the course of a serious
health condition affecting the employee or a family member.
Q: What
is a year of service?
-TOP
A: A year of
service means any vesting computation period during which an employee
completes the number of hours of service specified in the plan. Not
more than 1,000 hours may be specified for this purpose.
Q: Is a 401(k) plan permitted to disregard
any years of service when calculating a participant's vested percentage?
-TOP
A: A 401(k) plan may disregard any years of service completed with
respect to vesting computation periods ending before a participant's
eighteenth birthday. Years of service completed
before an employer maintained a 401(k) plan or any predecessor plan may also be disregarded.
Q: What are the available document options for master and prototype plans?
-TOP
A: Most master and prototype plan sponsors offer both standardized
and nonstandardized plans. The standardized document offers very limited design options. For example, a standardized document must grant a participant employed on the last day of the year an allocation of the employer's contribution without regard to the number of hours completed. Also, a standardized document must
provide a terminated participant who works more than 500 hour in a
plan year an allocation of the employer's contribution.
A nonstandardized plan allows
the employer to vary the plan design to suit its needs more closely. For example, a nonstandardized document may require a participant to be employed on the last day of the year and/or to complete year of service (1,000 or more hours of service in a plan year) in order to receive an allocation.
Q: What are the advantages and disadvantages of standardized non-standardized plans?
-TOP
A: The basic advantage of a standardized plan is that it is designed to satisfy automatically the Internal Revenue Code's minimum
coverage and nondiscrimination requirements. It is an ideal choice, therefore, for employers who have few employees and who, consequently, cannot take advantage of the last day and year of service design options available to
non-standardized plans (see here). Because it is designed to satisfy the minimum
coverage and nondiscrimination requirements, the standardized plan
must cover all employees except for collective bargaining employees and nonresident aliens. This requirement is of little concern
to an employer with few employees, but to an employer with a large multi-location workforce, requiring all employees to
participate in a single plan would usually not meet the employer's needs.
Q: Would a plan sponsor use a master or prototype plan?
-TOP
A: The advantages to a plan sponsor's using a master or prototype document
will include minimal expenses for adoption and IRS review of the plan (if
deemed necessary), and the ability to rely on the master or prototype plan
sponsor for plan amendments to comply with legislative and regulatory
changes. In addition, the master or prototype sponsor generally provides a
summary plan description to be distributed to the participants, so that the
adopting employer does not have to bear the expense of drafting this
document.
The disadvantages are the loss of design flexibility and the inability to
make changes not available on the adoption agreement. If a master or
prototype plan is amended to use provisions not contained in the adoption
agreement, the plan is considered individually designed, with the
consequences. Also, the terms of the basic plan
document may limit the use of funding vehicles to products offered by the
master or prototype plan sponsor. A plan sponsor looking for funding
flexibility should choose another document type, or at least recognize the
need to change documents when funding vehicles are changed.
Q: What should a 401(k) plan investment policy cover?
-TOP
A: Investment policies need to be flexible enough to adapt to an employer's specific situation and reflect the fiduciaries' attitudes and philosophies. For a typical 401(k) plan that allows participants a
choice among investment funds, the policy should also recognize the participants' needs and goals. Further, the policy should deal with the number and types of funds to be made available. How many choices are enough? How many choices are too many?
The policy should also cover how any loan program will affect investments and whether the withdrawal program is consistent with the types of funds selected. For example, if participants are expected to access funds through loans or withdrawals, do the investment funds allow for such withdrawals without penalty?
Finally, the policy should deal with the regulatory issues, specifically the requirements of ERISA Section
404(c).
Q: Can an employer reduce or eliminate its fiduciary liability for investment decision making by
giving participants investment control?
-TOP
A: ERISA Section 404(c) says that if a participant is given control
over the investment of his or her account, plan fiduciaries will not
be held responsible for investment losses resulting from that exercise of control. There are very specific requirements, discussed
more fully in chapter 6, that must be met before Section 404(c) can
be claimed as a defense.
Even if a plan satisfies the requirements of Section 404(c), plan fiduciaries cannot completely eliminate liability for investment
decision making. Plan fiduciaries in a Section 404(c) plan typically remain responsible for the selection and monitoring of funds available for investment, for prompt and accurate execution of transactions, and for providing adequate disclosure.
Q: Who is an officer?
-TOP
A: An officer is an individual who serves in any one of the following
capacities for the parent organization: president, vice president, general manager, treasurer, secretary, comptroller, or any other
individual who performs duties corresponding to those performed by individuals in those capacities.
Q:
What are the basic limits for a 401(k) plan?
-TOP
A:
The amount of annual additions allocated to a participant cannot exceed the lesser of $30,000 or
25 percent of the participant's compensation.
Q:
Are there special limits that apply to elective contributions?
-TOP
A:
There is an annual limit on the amount of elective contributions that may be made by an individual to
the 401 (k) plan. The 1998 limit is $10,000, and it will be adjusted for inflation in $500 increments.
Q:
What length of service requirement may a 401(k) plan impose?
-TOP
A:
A 401(k) plan may require up to one year of service before allowing employees to make elective contributions.
If a 401(k) plan also provides for employer contributions,
employees can be required to complete up to two years of service before becoming entitled to receive those
contributions. In that case, however, the law requires employees to be 100 percent vested in their accounts
attributable to employer contributions.
Q:
What is regional prototype plan?
-TOP
A:
A regional prototype plan is a relatively new type of plan with features quite similar to prototype plans
approved by the National Office of the IRS. It differs from a master or prototype plan since it is approved
in the Cincinnati, Ohio key district office. A regional prototype plan generally provides greater design and
investment flexibility to the plan sponsor than a master or prototype document.
Q: What
are the requirements for regional prototype sponsors?
-TOP
A: The
requirements are far less stringent than for master or prototype plans
as the sponsor may be any individual, partnership, or corporation that
has an established place of business and at least 30 clients within
two regions of the IRS.
Q:
How does the format of a regional prototype plan differ from that of a master or prototype plan?-TOP
A:
Regional prototype plans are similar in form to prototype plans, consisting of a basic plan document and an
adoption agreement. Both standardized and nonstandardized adoption agreements are available. As with the
National Office master and prototype plans, summary plan descriptions are provided by the regional prototype
sponsor. The basic difference is the investment flexibility gained by the individual plan sponsor; most
regional prototypes allow a wide range of investments. However, like the National Office prototypes, an
amendment to a regional prototype plan that elects options not available in the adoption agreement causes the
plan to be treated as individually designed.
Q:
What is a mass submitter regional prototype?
-TOP
A:
If the sponsor itself does not have at least 30 clients, the sponsor can use the mass submitter form of a
regional prototype. This is a regional prototype, which is approved by the National Office of the IRS and
must be used by at least 50 unaffiliated sponsors.
Regional prototypes are available to most third-party administrative firms, using either their own plan or
the plan of a mass submitter.
Q:
What is the extent of 401(k) Pro's obligations to clients with respect to plan documentation consulting services?
-TOP
A:
401(k) Pro, Inc. provides limited plan document consulting services to clientele at no cost. These limited plan consulting services are specifically meant to answer questions relating to any aspects of the 401(k) Pro prototype plan document, SPD or form language for prototype plans. Consulting services include assisting the client in completing a 401(k) Pro prototype plan adoption agreement and/or SPD, and lay interpretations and explanations of language in these 401(k) Pro prototype plan documents. 401(k) Pro, Inc. does not provide consulting services that will address generalized ERISA issues or completion of IRS forms.
Q:
What is a "document-related question" vs. a "non-document question" ? -TOP
A:
The following examples may be helpful in understanding the difference:
Sample "Document-Related" Questions:
* How do I modify a 401(k) Pro prototype plan adoption agreement to provide for different benefit structures for different groups of employees?
* Can an employer select a normal retirement age of 55 for purposes of taking advantage of the in-service distribution option and not jeopardize the qualification of the plan?
* I received an inquiry from the IRS about my 401(k) Pro prototype plan. Can 401(k) Pro assist me in responding?
Sample "Non-Document Related" Questions:
* How do I use the cross-testing technique to test our plan for non-discrimination?
* What codes go on the IRS Form 1099?
* Can 401(k) Pro assist with the completion of IRS Form 5500?
* Can you assist me in determining whether two employees are members of a controlled group or an affiliated service group?
* How do I calculate earned income?
Q:
Where does 401(k) Pro personnel go for information about our Corbel prototype documents? -TOP
A:
Telephone Corbel/Relius Document Consulting and Tech Support
(800) 326-7235 X4 (Tech Support)
(904) 399-5551 fax
Account # 039027
Robert Richter: Lead tech support person
Wendy Huber, Sales Rep X1140
Leslie Smith, Sr. Sales Rep X 1174
Kevin Merrill, attny and tech support X1785
Cathy Kramer: Manager, Call Ctr. X1324
E-Mail Corbel/Relius Document Consulting and Tech Support
401(k) Pro personnel can go to the link below and provide as much information as possible so that Corbel can route your question to the appropriate person or team member thus decreasing response times.
The Document Consulting Department's priority is responding to inquiries relating to the preparation (e.g., completing a Checklist or Adoption Agreement) or filing of Plans with the IRS. Responses to non-document related questions may be significantly delayed (one week or longer) and we will be charged additional as well.
http://www.corbel.com/support/dc_questions.asp
Q:
What is Social Security Integration and do we recommend it? -TOP
A:
Social Security Integration is a way by which the upper-paid people can put slightly more money into their 401(k) plan accounts. Integration must still be within ADP compliance limits, and it is basically a big pain to calculate, so we don't let Easy clients use it.
Additional non-profit websites
that include relevant unbiased information about 401k plans
include: www.401k-comparisons.com
Q:
Does selecting the Early Retirement option in the Adoption Agreement create a potential problem for our clients? -TOP
A:
Yes. Early retirement before 59 1/2 subjects the retiree to a 10% federal pre-mature withdrawal penalty. Federal law is not superseded by an employer's election in the Adoption Agreement, and an employer that selects early retirement before 59 1/2 is subjecting the employees who retire to IRS problems.
Q:
Beginning in 2002 can small companies (less than 100 employees) get a 50% tax credit (up to $500) on fees paid to set up a 401(k)? How many years is the credit deductible from taxes? -TOP
A:
Yes. The credit can extend to the first three years of a new plan, $500 per year maximum, for a total potential credit of $1500 over three years. There must not have been a plan in existence for 3 years prior to set-up of new plan. In addition, the employer must have had no more than 100 employees who received at least $5,000 of compensation from the employer for the
preceding year. (TAG)
Q:
What are the guidelines for the $500 to $1500 tax credit for new small plans? -TOP
A:
The credit can extend for the first three years of a new plan, $500 per year
max., for a total potential credit of $1500 over three years. There must
not have been a plan in existence for 3 years prior to set-up of new plan.
In addition, the employer must have had no more than 100 employees who
received at least $5,000 of compensation from the employer for the
preceding year, and there must be at least one non-highly compensated person in the plan.
Q:
What are the procedures for changing a "fiscal year" plan prototype to a "calendar year" plan
prototype? -TOP
A: Procedures:
1. The plan number remains the same.
2. In the new plan adoption agreement we check (c1) b., (effective date) which indicates that it is a "restatement" of an existing plan. We write in the effective date of the original plan, and the restatement date as of the beginning of the new plan. (For example, if the old effective
date was 9/1/96, and the "Easy" plan takes over on 9/1/01, then the
"restatement" date is 9/1/01.
3. In the plan info on our adoption agreement (plan year), (c2), we
indicate that it is a 12 month period commencing on Jan. 1 and ending on
Dec. 31. Under the question, "is it a short plan year?", we check
"yes"....beginning on the date of the "restatement" (for the example above
it would be 9/1/01) and ending on 12/31/01. This way, the year of the
"restatement" will be a short year, and the following years will be 12
months on a calendar year.
Q:
What person's name should appear as "Plan Administrator" in our software
AND in the registration section of our generic mutual fund applications? -TOP
A: Only a genuine trustee of the plan. The client decides which trustee is
most available for signing mutual fund applications, and liquidation and
rollover authorizations. For simplicity we utilize only one named trustee
for our software, even if there are several named trustees within the company. If
the business owner does not want the Plan Administrator to also be a named trustee, and able to sign applications, liquidations, etc. then the employer must select a bone fide
named trustee for these functions, and this trustee's name shall be programmed
within the software and pre-printed on all generic mutual fund applications.
Some mutual fund companies will not accept our generic mutual fund applications, and require their own applications be submitted along with our generics. On these mutual fund applications, there is often space for several named trustees to be listed. If the employer chooses he/she may list several named trustees in these mutual fund applications, and this will allow any of the named trustees to liquidate the account, not just the trustee whose name appears in the registration
Q:
If a 401(k) plan does not exclude non resident aliens in their plan, can a
student with a visa participate in the plan? -TOP
A: Yes, if the student meets all other eligibility requirements of the plan.
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