Frequently Asked Questions
Clients asked, we answered
Who is a plan fiduciary?
A person or party that exercises any discretionary authority or control with respect to the management of the plan, its assets, or administration. Someone who renders investment advice for a fee or other compensation whether direct or indirectly with respect to plan assets or plan property.
What is the Summary Plan Description (SPD)?
This is a condensed version of the plan document written in laymen's terms that explains the rights and obligations to participants. This must be distributed to plan participants and beneficiaries on or before 90 days after the employee becomes a participant (or 90 days after the beneficiary begins to receive benefits). The Plan Administrator must provide an updated SPD every fifth year to reflect plan amendments made during the preceding 5-year period unless no amendments have been made then plan participants must be given an updated SPD at least every tenth year.
What is a Safe Harbor Plan?
Within a 401(k) Plan, Safe Harbor requires an employer to make either an eligible matching or nonelective contribution to satisfy the non-discrimination rules for elective deferrals and employer matching contributions. Employers are required to satisfy certain contribution, vesting and notice requirements. This allows owners, key employees and highly compensated employees to defer up to the IRS maximum.
- Basic Match is 100% match on the 1st 3% of deferred compensation plus 50% on the next 2% of deferred compensation (equals 4% of compensation)
- Non-Elective Contribution is a 3% employer contribution applied to at least all eligible non-highly compensated employees
- All Safe Harbor contributions are 100% vested
Which employees should be reported to your TPA on the annual employee census?
Every individual employed by the employer during the plan year, whether or not they are eligible for the plan, must be reported on the Employee Data form or Census.
What is an ERISA fidelity bond?
This is a type of insurance that protects the plan against losses caused by acts of fraud or dishonesty. Deductibles or other similar features are prohibited for coverage of losses within the maximum amount for which the person causing the loss is required to be bonded. It is important that the plan is named as an insured party on the bond so that the plan can recover losses covered by the bond. The minimum amount of the bond is the greater of $1,000 or 10% of the plan assets at the beginning of the plan year, and the maximum required bond is $500,000. The assets of more than one plan of the employer may be added together to determine the amount of required coverage.
If the trust holds "non-qualifying" plan assets (i.e. investments not held by a bank or similar financial institution, an insurance company, a registered broker-dealer or other organization authorized to act as trustee for individual retirement accounts), a bond covering the persons handling such assets must be acquired in order for a plan to be exempt from the Small Plan Audit Requirement. The minimum amount of this bond is the greater of 10% of the total plan assets or 100% of the value of the "non-qualifying" plan assets at the beginning of the plan year.
Plans covering only an owner (or owner and spouse) are not required to be bonded.
How soon must 401(k) salary deferrals be deposited in the trust?
Department of Labor rules require that the employer deposit deferrals to the trust as soon as the employer can. DOL provides a 7-business day safe harbor rule for employee contributions to plans with fewer than 100 participants.
What are the requirements for and limitations on participant loans?
Restrictions may apply depending on the loan provisions set forth in the plan document. Participant loans must be made in accordance with specific plan provisions. Generally, participant loans are secured by the Plan participant's account balance , and must satisfy the following limitations:
• Participant loans must be paid back to the trust, with interest, within 5 years. This period can be extended when the purpose of the loan is to acquire the participant's principal residence if the plan so allows,
• Loan payments are commonly made through payroll deduction, but they must be made at least quarterly with principal and interest amortized over the life of the loan.
• Participant loans must be evidenced by a legally enforceable agreement (such as, a promissory note).
• Participant loans are limited to the lesser of:
a) $50,000; or
b) One-half (1/2) of the participant's vested account balance.
What happens if a participant's loan is not made on schedule?
Failure to make loan payments on schedule results in the default of the remaining amount of the loan. A defaulted participant loan is treated as a distribution to the participant, which means it must be included in the participant's taxable income.
There is a period in which missed loan payment(s) can be made up to avoid a loan default. If the missed payment is made by the end of the calendar quarter following the calendar quarter in which the missed payment was due, a default will not occur.
What is IRS Form 1099-R?
Form 1099-R, "Distributions from Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc.," is used to report a distribution from a qualified plan, whether or not the distribution is taxable. Any distribution over $10, including a direct rollover, must be reported on Form 1099-R. Deemed distributions, such as defaulted participant loans, are also reported on Form 1099-R.
Form 1099-R must be given to the participant by January 31 of the calendar year following the calendar year of distribution. The penalty for failure to file Form 1099-R on a timely basis is $25 per day, up to a maximum of $15,000.
What is an RMD?
A Required Minimum Distribution is the minimum amount you must withdraw from your account each year. Generally, the latest beginning date is April 1st of the calendar year following the calendar year in which the participant reaches age 70½ prior to December 31, 2019; if turning age 70½ after December 31, 2019, then age 72 is the effective age for an RMD.
A special rule is in place for a participant who is not a 5% owner (meaning he does not own more than 5% of the stock in the employer corporation, is not a sole proprietor, or a greater than 5% partner), as long as the participant continues to work for the employer/plan sponsor RMD's can be delayed until April 1st of the calendar year following the calendar year in which the participant separates from service with the employer/plan sponsor. Need help calculating your RMD? Try this website https://www.calcxml.com/do/qua06?skn=75&r=1 .
Would you like your question posted here? Email VBuckels@RSGplans.com.
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