FAQ

Reporting Forms

Which form 5500 do I need to file?
Qualified retirement plans must file either Form 5500-EZ, 5500-SF or 5500.

 

 

Form 5500-EZ is for a one-participant plan, which is defined as a qualified retirement plan that covers only:

1. The owner of a business or both the owner and spouse; and the business whether incorporated or not, which is wholly owned by the owner, or both the owner and spouse; or

2. Partners (or partners and their spouses) in a business partnership.

Employers with one or more one-participant plans that have total assets of $250,000 or less at the end of the plan year do not have to file Form 5500-EZ.

Form 5500-SF is for plans with fewer than 100 participants at the beginning of the plan year. The form and accompanying schedules are required to be filed electronically to the Department of Labor through an all electronic system called ERISA Filing Acceptance System 2 (EFAST2).

Form 5500 is for qualified retirement plans with 100 or more participants. This filing consists of the main form 5500, which includes the plan’s identifying information, and one or more schedules. In addition, a certified or licensed public accountant must conduct an audit of the plan’s books and records and issue an opinion, which must be included in the filing. This form and attachments must be filed electronically to the DOL through EFAST2.

Where to locate your EFAST User ID, password or PIN?
Retrieving your User ID

 

 

From the EFAST2 Web site select “Login” on the Welcome screen. Then select “Forgot User ID” and enter the email address that you provided during registration. You will need to provide the answer to your challenge question to view your User ID. If you have not fully completed the registration process, you will see an option to “Complete Registration” after answering your challenge question.

Retrieving your Password

If you have forgotten your password, or if your password is locked, from the EFAST2 Web site select “Login” on the Welcome screen, then select “Forgot Password” on the Login page. To use the “Forgot Password” option, you must enter a valid User ID or registered email address. You will also be prompted to enter the answer to your challenge question. If done successfully, you will be allowed to create a new password.

Retrieving your PIN

After successfully logging in to the EFAST2 Web site (www.efast.dol.gov), you may view your EFAST2 PIN and other registration information by selecting “User Profile.” The User Profile page will display your credentials and provide options to “Change Profile,” “Change Password,” and “Change PIN.”

Last updated on March 21, 2012 by Samantha Nethington

Do I need an independent CPA audit?
The 2012, 5500, Large Plans must have an independent accountants opinion attached. The instructions state:

 

 

“Generally, a return/report filed for a pension benefit plan or welfare benefit plan that covered fewer than 100 participants as of the beginning of the plan year should be completed following the requirements below for a “small plan,” and a return/report filed for a plan that covered 100 or more
participants as of the beginning of the plan year should be completed following the requirements below for a “large plan.” Use the number of participants required to be entered in line 5 of the Form 5500 to determine whether a plan is a “small plan” or “large plan.”

Exceptions:
(1) 80-120 Participant Rule: If the number of participants reported on line 5 is between 80 and 120, and a Form 5500 annual return/report was filed for the prior plan year, you may elect to complete the return/report in the same category (‘‘large plan’’ or ‘‘small plan’’) as was filed for the prior return/report. Thus, if a Form 5500 annual return/report was filed for the 2011 plan year as a small plan, including the Schedule I if applicable, and the number entered on line 5 of the 2012 Form 5500 is 120 or less, you may elect to complete the 2012 Form 5500 and schedules in accordance with the instructions for a small plan, including for eligible filers, filing the Form 5500-SF instead of the Form 5500. (2) Short Plan Year Rule: If the plan had a short plan year of seven (7) months or less for either the prior plan year or the plan year being reported on the 2012 Form 5500, an election can be made to defer filing the accountant’s report in accordance with 29 CFR 2520.104-50. If such an election was made for the prior plan year, the 2012 Form 5500 must be completed following the requirements for a large plan, including the attachment of the Schedule H and the accountant’s reports, regardless of the number of participants entered in Part II, line 5.”

For Accountants who can help with this requirement, please see the contacts below.

Megan Doherty
Crawford Pimentel Corporation
2150 Trade Zone Blvd., Ste 299
San Jose, CA 95131
(408) 942-6888
mdoherty@cpconet.com

David Cormia
5669 Snell Ave #111
San Jose, CA 95123
(408) 365-0202
dave@401k-cpa.com

Amy Coy, CPA
Farber Hass Hurley LLP
28494 Westinghouse Place, Suite 102
Valencia, CA 91355
(661) 257-6671
amy.coy@fhhcpas.com
www.myEBPlanAuditor.com

Bradley J. Bartells
Mann, Urrutia, Nelson CPAS
2515 Venture Oaks Way, Ste 135
Sacramento, CA95833
(916) 609-7115
bjb@muncpas.com

401(K)

When are 401(k) deposits due?
Regulation requires an employer to deposit 401(k) elective deferrals:

– As of the earliest date on which elective deferrals withheld from payroll can reasonably be segregated from Employer assets,

– But not later than the 15th business day of the month following the month in which the amounts would have been payable to the participant in cash.

It appears the employer has until the “15th business day” of the month following the month that the elective deferrals were withheld from the payroll, but the DOL treats this as the exception. The normal deadline for each employer is based on how quickly they make the deposit of elective deferrals on a regular basis. This is used as a benchmark for that employer. Thus, if an employer normally takes 5 business days to make the deposit of elective deferrals, that employer may not suddenly start waiting until the 15th of the month following the month deferrals were withheld.

Last updated on March 21, 2012 by Samantha Nethington

Mid Year Changes to Safe Harbor Plans
New guidance helps plan sponsors comply with the safe harbor plan and notice rules when making mid-year changes (Notice 2016-16). The new guidance generally provides that a mid-year change to a safe harbor plan or to a plan’s safe harbor notice doesn’t violate the safe harbor rules merely because it’s a mid-year change if: (see more)
Is there a Safe Harbor for depositing 401(k)?
The DOL released a safe harbor for the deposit of deferrals to a plan with fewer than 100 participants (as of the beginning of the plan year). This small plan safe harbor provides that the deposit will be treated as having been made to the plan timely when contributions are deposited with the plan no later than the 7th business day following the day on which the deferral would have been payable to the participant in cash. Participant contributions will be considered deposited when placed in an account of the plan, without regard to whether the contributed amounts have been allocated to specific participants or investments of such participants.

Last updated on March 21, 2012 by Samantha Nethington

What is the ADP Test?
ADP (Actual Deferral Percentage) Test is a nondiscrimination test designed to limit the percentage of employee 401(k) deferrals contributed by highly compensated employees compared to the percentage of employee deferrals contributed by non-highly compensated employees. If the plan has adopted and is providing an ADP Test Safe Harbor Contribution, the ADP test is not required.

Last updated on March 21, 2012 by Samantha Nethington

What are timing requirements for a Safe Harbor Plan notice?
Each eligible employee must be given a notice within a reasonable time before the beginning of the plan year. The notice will satisfy the timing requirement if it is provided to each eligible employee not less than 30 days but not more than 90 days before the beginning of each plan year. A newly eligible participant must be provided the notice not more than 90 days before the employee becomes eligible, but not later than the date the employee becomes eligible.
Can my Roth 401(k) be rolled into a Roth IRA?
Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan.  The attached chart indicates the rollover that are permitted between various types of plans.  More information can be found in IRS Publication 590.  (see more)

Defined Benefit Plans

Why does my Defined Benefit Plan have to be restated?
der federal law, all qualified retirement plans must be rewritten periodically. This is based on a 6-year restatement cycle established by the IRS. The newest document is referred to as the EGTRRA Document and must be done to maintain the tax qualified status of your plan by keeping it current with laws that have passed from 2001 forward.

Last updated on March 21, 2012 by Samantha Nethington

When is the Defined Benefit restatement due?
Defined Benefit Plans must be restated and adopted no later than April 30, 2012.

Last updated on March 21, 2012 by Samantha Nethington

Who is the PBGC?
PBGC (Pension Benefit Guaranty Corporation) is a nonprofit governmental corporation who is responsible for administering plan termination rules and insuring benefits under certain qualified defined benefit plans.

Last updated on March 21, 2012 by Samantha Nethington

Who is exempt from PBGC coverage
Plans established and maintained by professional service employers that have 25 or less participants at all times, for government or church employees, or for the exclusive benefit of one or more substantial owners.

Last updated on March 21, 2012 by Samantha Nethington

Is there an annual PBGC reporting requirement?
The employer is required annually to file PBGC Form 1 ES and pay a premium. While the forms are prepared by an actuary and filed electronically, payments may be made by electronic transfer or paper check by the employer.

Last updated on March 21, 2012 by Samantha Nethington

Who is Rob Haness and what is his mailing address for payments?
Rob is an actuary whose primarily responsibility is to determine the amount needed by the employer to pay projected benefits to participants. He certifies the amount of tax-deductible dollars an employer must contribute to its plan. The services of an actuary are required.

Haness & Associates, LLC,
P O Box 836,
Rocklin, CA 95677

What is AFTAP?
AFTAP (Adjusted Funding Target Attainment Percentage) is a measure of how well funded a defined benefit plan is, computed as the ratio of plan assets divided by benefit liabilities. If a plan has an AFTAP of less than 80%, the plan will be subject to benefit limitations, including restrictions on lump sum payments and possible limits on benefit increases. The AFTAP notice is provided annually and must be certified in writing by the actuary.

Last updated on March 21, 2012 by Samantha Nethington

IRS- Fixing Common Plan Mistakes: Defined Benefit Plan Restatements
Retirement plan documents need to be revised when the law changes.  Your retirement plan will remain qualified and provide tax benefits only if you update your plan document for law changes by the required deadline.

If you use a pre-approved plan document for your defined benefit plan (purchase for a bank, insurance company or a similar provider), it is likely you should have signed an update version of your plan by April 30, 2012.

Your provider should have sent you an amended plan document, approved by the IRS complying with changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), for you to sign.  Even if you signed an EGTRRA amendment (sometimes referred to as “EGTRRA good-faith amendments”) to your old plan, you are still required to adopt an EGTRRA plan document.  (see more)

Last updated on June 19, 2012 by Samantha Nethington

Distributions

How is federal tax withholding paid from our plan?
On December 7, 2010, the Internal Revenue Service published Final Regulations requiring electronic deposit of all tax withholding payments made by qualified retirement plans. This change was effective January 1, 2011, and plans will no longer be able to make manual deposits using IRS Form 8109-B.

Payments are made to EFTPS (Electronic Federal Tax Payment System), a service offered free by the U.S. Department of the Treasury for people to pay federal taxes electronically. With EFTPS, you make payments whenever you want, 24 hours a day, 7 days a week. You can enter payment instructions up to 120 days in advance for businesses and 365 days for individuals. Payments must be scheduled at least one calendar day prior to the tax due date by 8:00 p.m. ET. Your payment instruction will be executed on the date you selected, and your records will be updated at the IRS.

You must enroll at the EFTPS website www.eftps.gov using the plan’s Trust ID number, your banking account number and routing number, and the address and name as they appear on your IRS tax documents. Once you have enrolled, you will receive a PIN number within 7 business days to proceed with the tax payment.

Exception – An exception has been made for plans with an income tax withholding liability (determined on an annual basis) of less than $2,500. Those plans may continue to deposit withheld taxes by check at the time they file IRS Form 945. However, if the $2,500 threshold is exceeded, penalties may be assessed.

Last updated on March 21, 2012 by Samantha Nethington

When must Required Minimum Distributions (RMD) start?

Required Minimum Distributions must commence by the following dates:

1.  April 1st of year after age 72 is attained for the following individuals:

– Owners of more than 5% of the business, or

– Individuals who are not 5% owners, but who separated employment with the employer prior to or during the year in which they attained age 72.

2.  April 1st of the year after retirement occurs for individuals who are not 5% owners and who continue to work for the employer beyond the year in which they attain 72.

Your plan document will indicate your election of the exception for non-5% owners discussed in item 2 above.

Last updated on March 21, 2012 by Samantha Nethington

Cash Balance Pension Plans

Department of Labor- FAQs about Cash Balance Pension Plans
What is a cash balance plan?
There are two general types of pension plans — defined benefit plans and defined contribution plans. In general, defined benefit plans provide a specific benefit at retirement for each eligible employee, while defined contribution plans specify the amount of contributions to be made by the employer toward an employee’s retirement account. In a defined contribution plan, the actual amount of retirement benefits provided to an employee depends on the amount of the contributions as well as the gains or losses of the account.

A cash balance plan is a defined benefit plan that defines the benefit in terms that are more characteristic of a defined contribution plan. In other words, a cash balance plan defines the promised benefit in terms of a stated account balance.  (see more)

Last updated on August 8, 2012 by Samantha Nethington

408(b)(2) Fee Disclosure

Department of Labor-Q & A
On October 20, 2010, the Department of Labor (Department) published a final regulation(1) requiring plan administrators to disclose certain plan and investment-related information, including fee and expense information, to participants and beneficiaries in participant-directed individual account plans, e.g., 401(k) plans (the “participant-level disclosure regulation” codified at 29 CFR § 2550.404a-5). At the same time, the Department published conforming changes to 29 CFR § 2550.404c-1 (the “404(c) regulation”) relating to plans that allow participants to direct the investment of their individual accounts. This Bulletin supplements the participant-level disclosure regulation by providing guidance on some of the most frequently asked questions concerning the participant-level disclosure regulation and how it may be implemented. In addition, on February 3, 2012, the Department published a final regulation under section 408(b)(2) of the Employee Retirement Income Security Act of 1974 (ERISA). The 408(b)(2) regulation, in relevant part, requires certain covered service providers to furnish specified information to plan administrators so that they may comply with their disclosure obligations in the participant-level disclosure regulation. Consequently, the guidance in this Bulletin also serves as guidance concerning that specific requirement of the 408(b)(2) regulation. (see more)

Last updated on June 12, 2012 by Samantha Nethington

Drinker Biddle- Impact on Investment Managers
This bulletin discusses the impact of the U.S. Department of Labor’s DOL final 408(b)(2) disclosure regulation on discretionary investment managers- that is, investment advisers with the authority to manage the assets of ERISA-governed retirement plans.  The final regulations require various disclosures to be made by an investment adviser to its ERISA plan clients prior to July 1, 2012.  Failure to comply with these new disclosures could result in substantial penalties, excise taxes and forfeiture of investment advisory fees. (see more)

Last updated on August 20, 2012 by Samantha Nethington

Benefits Pro- 5 Fee Disclosure Steps for Plan Sponsors
The impending deadlines for plan sponsors to begin officially disclosing fees in the 401(k) space are approaching rapidly. America’s major retirement plan providers say they’ve been working on disclosure arrangements for years – evidenced by a litany of white papers and preparation guides available online. But are plan sponsors ready to meet the letter of the law for the July 1 408(b)(2) deadline to receive disclosure from all covered service providers, and where do you go to make sure you’re taking the right approach?  (see more)

Last updated on June 12, 2012 by Samantha Nethington

Department of Labor- Sample 401(k) Fee Disclosure Form
The Employee Retirement Security Act of 1974, as amended (ERISA) requires employee benefit plan fiduciaries to act solely in the interest of, and for the exclusive benefit of, plan participants and beneficiaries.  As part of that obligation, plan fiduciaries should consider cost, among other things, when choosing investment options for the plan and selecting plan service providers.

This 401(k) plan fee disclosure form may assist you in making informed cost-benefit decisions with respect to your plan.  The purpose of this form is to help you determine the total cost of the plan.  It is also intended to provide you with a means to compare investment product fees and plan administration expenses charged by competing service providers, regardless of how a particular service provider structures its fees.  (see more)

Last updated on June 19, 2012 by Samantha Nethington

Department of Labor- Understanding Retirement Plan Fees and Expenses
As the sponsor of a retirement plan, you are helping your employees achieve a secure financial future.  Sponsoring a plan, however, also means that you, or someone you appoint, will be responsible for making important decisions about the plan’s management.  Your decision making will include selecting plan investments or investment options and plan service providers.  Many of your decisions will require you to understand and evaluate the costs to the plan.

The Federal law governing private-sector retirement plans, the Employee Retirement Income Security Act (ERISA), requires that those responsible for managing retirement plans — referred to as fiduciaries — carry out their responsibilities prudently and solely in the interest of the plan’s participants and beneficiaries.  Among other duties, fiduciaries have a responsibility to ensure that the services provided to their plan are necessary and that the cost of the services is reasonable.  (see more)

Last updated on June 26, 2012 by Samantha Nethington

JD Supra- Best Practices for Plan Fiduciaries: The New 408(b)(2) Service Provider Disclosure Regulation
Employers that sponsor section 401(k), 403(b), and other types of retirement plans rely on third parties to conduct the day-to-day administrative functions of these plans.  Investment managers, record-keepers, consultants, and other third parties all provide necessary plan service and are compensated for their efforts.

It is the responsibility of the plan fiduciaries-those ultimately responsible for the administrations of the plan and the investment of plan assets-to pay those third parties no more than “reasonable” compensation.  If a fiduciary pays a third party an unreasonable amount, the fiduciary could have liability and face excise tax penalties under the Employee Retirement Income Security Act of 1974 (ERISA), the federal employee benefits law. (see more)

Last updated on June 20, 2012 by Samantha Nethington

Department of Labor- Definition of the Term “Fiduciary” Proposed Rule
The comments will be made available in alternative format to persons with disabilities upon request.

As a result of the decision to re-propose this rule, the Department closed the public record on this proposed rule. Interested parties will be provided with an opportunity for comment at the time the rule is re-proposed.  (see more)

Last updated on August 8, 2012 by Samantha Nethington

Mckenna Long & Aldridge- I Received My 401(k) Service Provider Fee Disclosure - What Do I Do Now?
You have probably received one or more fee disclosures from your retirement plan’s covered service providers (see our earlier alert here for determining whether a service provider is “covered”). The deadline for covered service providers to give you these disclosures was July 1, 2012. So now what? There are steps that retirement plan fiduciaries need to take to protect their plans, the plan participants and themselves.  (see more)

Last updated on August 9, 2012 by Samantha Nethington

Drinker Biddle- ERISA Service Provider Disclosures: What Plan Sponsors Need to Do Now
July 1 was a watershed date in the ERISA world. By that date, covered service providers to ERISA-governed retirement plans had to provide written disclosures about their services, fiduciary status and compensation to the “responsible plan fiduciary” for all their existing plan clients. Failure to do so made their service arrangements prohibited transactions under ERISA.

Click on the PDF button above to view the full bulletin.  (see more)

Last updated on August 20, 2012 by Samantha Nethington

404(a)(5)

Fiduciary News- The Role and Responsibilities of the Individual Trustee
Congratulations. You’ve just had a great honor bestowed upon you. You have been selected to serve as a trustee. You may not be called a trustee. Your title might be that of a director or officer. You may ‘merely’ be a member of an appointed or elected Board. Indeed, you may have no title or formal position at all. Whatever the case, you have one thing that very few people have. You have a fiduciary responsibility.  (see more)

Last updated on August 8, 2012 by Samantha Nethington

Department of Labor- Fee Disclosure Guidance
On October 20, 2010, the Department of Labor (Department) published a final regulation(2) requiring plan administrators to disclose certain plan and investment-related information, including fee and expense information, to participants and beneficiaries in participant-directed individual account plans, e.g., 401(k) plans (the “participant-level disclosure regulation” codified at 29 CFR § 2550.404a-5). At the same time, the Department published conforming changes to 29 CFR § 2550.404c-1 (the “404(c) regulation”) relating to plans that allow participants to direct the investment of their individual accounts. This Bulletin supplements the participant-level disclosure regulation by providing guidance on some of the most frequently asked questions concerning the participant-level disclosure regulation and how it may be implemented. In addition, on February 3, 2012, the Department published a final regulation under section 408(b)(2) of the Employee Retirement Income Security Act of 1974 (ERISA). The 408(b)(2) regulation, in relevant part, requires certain covered service providers to furnish specified information to plan administrators so that they may comply with their disclosure obligations in the participant-level disclosure regulation. Consequently, the guidance in this Bulletin also serves as guidance concerning that specific requirement of the 408(b)(2) regulation. (see more)

Last updated on August 8, 2012 by Samantha Nethington

Department of Labor- Fiduciary Requirements for Disclosure
This document contains a final regulation under Employee Retirement Income Security Act of 1974 (ERISA) that requires the disclosure of certain plans and investment-related information, including fee expense information, to participants and beneficiaries in participant-directed individual account plans (e.g., 401(k) plans).  This regulation is intended to ensure that all participants and beneficiaries in particpant-directed individual account plans have the information they need to make informed decisions about the management of their individual accounts and the investment of their retirement savings.  (see more)

Last updated on August 9, 2012 by Samantha Nethington

Department of Labor- Final Rule to Improve Transparency of Fees and Expenses
The Department of Labor’s Employee Benefits Security Administration (EBSA) released a final rule that will help America’s workers manage and invest the money they contribute to their 401(k)-type pension plans. The rule will ensure: that workers in this type of plan are given, or have access to, the information they need to make informed decisions, including information about fees and expenses; the delivery of investment-related information in a format that enables workers to meaningfully compare the investment options under their pension plans; that plan fiduciaries use standard methodologies when calculating and disclosing expense and return information so as to achieve uniformity across the spectrum of investments that exist among and within plans, thus facilitating “apples-to-apples” comparisons among their plan’s investment options; and a new level of fee and expense transparency.  (see more)

Last updated on August 9, 2012 by Samantha Nethington

Workers in 401(K) - Type Retirement Plans

Pension Resource Institute- Participant-Level Disclosure under 404(a)(5)
The Department of Labor’s (DOL) final regulation on participant-level disclosure under ERISA 404(a)(5) will become effective April 2012.  This rule completes the DOL’s three-part initiative, including new plan-level disclosure under 408(b)(2) and enhanced reporting via Schedule C of Form 5500.  These new requirements are presenting challenges to plan sponsors, and many are seeking out knowledgeable advisors who can provide specific assistance with the new rules.  Although 404(a)(5) does not require any affirmative steps on the part of broker-dealers or investment advisers (each is required to disclose sufficient information under 408(b)(2) to allow plan sponsors to meet their requirements under 404(a)(5)), advisers who become first-movers by realigning their services to meet these needs will be well positioned to benefit through differentiation and enjoy more successful retention and prospecting.  (see more – pdf download)

Last updated on August 9, 2012 by Samantha Nethington

Employee Census

Who should I include in the census data?
Include all employees who received pay at any time during the plan year, even if they terminated employment or are not eligible for the plan.

Last updated on March 21, 2012 by Samantha Nethington

What is considered compensation?
Compensation generally includes wages and other payments reported on Form W-2. Compensation also includes compensation deferred under a 125 cafeteria plan, and compensation deferred under a 401(k) plan (both pre-tax or Roth). For sole proprietors, compensation is Schedule C net-income. For partners, compensation is K-1 income. Check with your administrator or plan document if you are unsure of your plan’s definition of compensation.

Last updated on March 21, 2012 by Samantha Nethington

Why do we need dates of birth, hire, rehire and termination and hours worked?
We need to determine if employees are eligible to participate in the plan, if they are retirement age, and if they are required to take age 70½ minimum distributions. Age is a factor in determining a participant’s contribution in some plan designs. We use hours worked, as well as dates, to determine when an employee becomes eligible to participate in the plan, whether they are eligible to receive a contribution and to determine vesting.

Last updated on March 21, 2012 by Samantha Nethington

Top-Heavy

When my plan is deemed Top-Heavy?
A plan is top-heavy for a plan year if, for the preceding plan year, the total value of account balances of Key Employees is more than 60% of the total value of account balances of all employees.

Last updated on March 21, 2012 by Samantha Nethington

Who is a Key Employee?
A participant who at any time during the plan year is 1) a more than 5 percent owner of the employer, 2) an officer earning more than $150,000 (indexed periodically by IRS), or 3) a more than 1 percent owner earning more than $150,000.

Last updated on March 21, 2012 by Samantha Nethington

Who shares in Top-Heavy contributions?
Only participants employed on the last day of the plan year are entitled to the top-heavy contribution in a defined contribution plan. Any hour of service requirement may not be imposed even if the plan requires hours of service for an allocation of matching or non-elective (Profit Sharing) contributions. In addition, Top-Heavy rules for Defined Benefit plans do not require the participant to be employed on the last day to accrue a top-heavy benefit.

Last updated on March 21, 2012 by Samantha Nethington

Are Safe Harbor 401(k) plans exempt from Top-Heavy rules?
A safe harbor plan is considered exempt from the top-heavy rules for the year in which allocations include only safe harbor contributions, elective deferrals and a discretionary match. The discretionary match must be limited to 4% of compensation and may not match on deferrals in excess of 6%. This is a year-by-year determination.

Last updated on May 4, 2012 by Samantha Nethington

Fidelity Bonds

Is a Fidelity Bond required?
The Employees Retirement Income Security Act (ERISA) and related regulations generally require that every fiduciary of an employee benefit plan and every person who handles funds or other property of the plan shall be bonded. ERISA refers to persons who handle funds or other property of an employee benefit plan as “plan officials.”

 

Last updated on March 21, 2012 by Samantha Nethington

Which plans are exempt?
All one-participant plans are exempt from the bond requirement.

 

Last updated on March 21, 2012 by Samantha Nethington

What protection does the bond provide?
ERISA’s bonding requirements are intended to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of persons who ”handle” plan funds or other property.

 

Last updated on March 21, 2012 by Samantha Nethington

What bond amount is required?
Each plan official must be covered by a fidelity bond in an amount equal to the value of the non-qualifying assets, but not less than 10% of all plan assets. Non-qualifying assets include assets such as trust deeds, limited partnerships and collectibles. The minimum bond requirement is $1,000 and in most instances, the maximum bond amount required with respect to any one plan official is $500,000 per plan.

 

Last updated on March 21, 2012 by Samantha Nethington

Where are bonds purchased?
You should contact your current insurance broker. If they are unable to assist, you may want to contact Pat Henderson, Farmers Insurance Group, at (530) 345-9035 or phenderson@farmersagent.com or, Colonial Surety Company at 1-800-221-3662 or on their secure website, www.erisadirect.com.

 

Last updated on March 21, 2012 by Samantha Nethington

Colonial Surety Company: Provider of Online Fiduciary Liability Insurance Fidelity Bonds
Offering a retirement plan can be one of the most challenging, yet rewarding, decisions an employer can make.  The employees participating in the plan, their beneficiaries, and the employer benefit when a retirement plan is in place.  Administering a plan and managing its assets, however, require certain actions and involve specific responsibilities.

 

To meet their responsibilities as plan sponsors, employers need to understand some basic rules, specifically the Employee Retirement Income Security Act (ERISA).  ERISA sets standards of conduct for those who manage an employee benefit plan and its assets (called fiduciaries).  Meeting your Fiduciary responsibilities provides an overview of the basic fiduciary responsibilities applicable to retirement plans under law.  (see more)

Last updated on June 26, 2012 by Samantha Nethington

Missing Participants

What you need to do to find missing participants?

What you need to do to find missing participants?

The Department of Labor (DOL) issued guidance on locating missing participants in a defined contribution plan. The guidance emphasized that an employer has a fiduciary responsibility under ERISA to attempt to locate missing participants when the plan is either being terminated, or when an involuntary cash out of under $5,000 is about to be made and a distribution election cannot be secured.

Required Methods of Searching for Lost Participants

The DOL provides four search methods that must be used. These are considered efficient and relatively inexpensive:

1. Certified Mail can easily ascertain, at little cost, whether a participant can be located for distribution purposes,

2. Check Related Plan Records.  The employer must review its other retirement and welfare benefit plans for more up-to-date information on the missing participant’s address.

3. Contact the beneficiary designated by the participant.

4. Use the Social Security Administration (SSA) letter-forwarding services at this link www.socialsecurity.gov/foia/html/ltrfwding.htm.  As of August 31, 2012, the IRS suspended their lost participant letter forwarding program.

Optional Search Methods

If the required methods are unsuccessful, the employer should determine whether it is prudent to use other search methods depending on the size of the account and the facts and circumstances of the distribution.  These additional search methods could be the Internet, commercial locater companies and credit reporting agencies.

Distribution Options

If, after searching, the participant cannot be located, the employer may choose from the following distribution options:

1. Automatic Rollover to an Individual Retirement Account.  If a missing participant’s account is $5,000 or less, the DOL permits the account to be automatically rolled into an IRA.  (We have provided Automatic IRA Rollover providers on the next tab.)

2. Alternative Arrangements

If the employer is unable to locate an IRA rollover provider, they may consider other alternatives. However, the employer needs to be aware of the immediate tax liability for the participant.

a. Federally Insured Bank Accounts – Features such as the interest rate, guarantee periods, and associated bank charges should be reviewed.  In addition, the participant must have an unconditional right to withdraw funds from the account upon resurfacing.

b. Escheat to State Unclaimed Property Fund – Depending on whether the relevant state law permits this, a fiduciary may transfer the missing participant’s funds to the state’s unclaimed property fund.

The employer must check the plan document and review its distribution provisions.  The 100% income tax withholding of the distribution is not a permitted means of distributing a missing participant’s account.

 

Last updated on May 30, 2013 by Samantha Nethington

Automatic IRA Rollover Providers

  • A Missing Participant IRA rollover program will be:

    • Governmental Compliant

    • Follows DOL notification requirements

    • Lowers Plan Sponsor fiduciary exposure

    • Saves on administrative expenses

    The following firms provide missing participant searches in addition to the services listed above.

    Inspira                 http://www.inspirafs.com/

    PenChecks        http://www.penchecks.com/Solutions/IRA.aspx

     

    Last updated on May 30, 2013 by Samantha Nethington

Real Estate

Can a plan invest in Real Estate?

A Plan can invest in real estate provided that the document would allow for it.  Any discussion must include the various issues involved.  While a plan may invest in real estate, once the issues are flushed out, it should be apparent that it is not generally an appropriate investment for the small plan.

These issues are: Prohibited Transactions, UBTI, Fiduciary Issues, Valuation Problems and Tax issues.

The trustees must avoid creating a prohibited transaction with any real estate investment.   Prohibited transactions are transactions between the plan and a disqualified person that are prohibited by law. Prohibited transactions generally include the following transactions:

– A transfer of plan income or assets to, or use of them by or for the benefit of, a disqualified person;

– Any act of a fiduciary by which he or she deals with plan income or assets in his or her own interest;

– The receipt of consideration by a fiduciary for his or her own account from any party dealing with the plan in a transaction

that involves plan income or assets;

– Any of the following acts between the plan and a disqualified person:

Selling, exchanging, or leasing property;

Lending money or extending credit;

Furnishing goods, services, or facilities.

The term “disqualified person” means a person who is:

– A Fiduciary;

– A person providing services to the Plan;

– An employer, any of whose employees are covered by the Plan;

– An Employee organization any of whose members are covered by the Plan;

– An owner, direct or indirect, of 50 percent or more of a participating employer;

– A family member of a disqualified person. Family member, for this purpose, means a spouse, ancestor, lineal descendant,

or spouse of a lineal descendant.

Often, The trustee wants to buy or sell a piece of real estate to the trust.  They may want a condo or a house for a family member to live in. They may want to buy an office building for their office.  They may want a piece of property that they may retire too and want to buy it out later. All of these would be prohibited transactions.

What is Unrelated Business Taxable Income (UBTI?)

Whether income is UBTI depends on the type of tax-exempt organization that generates the income.  The UBTI rules focus on the purpose for which an organization is tax exempt and whether certain activities are contrary to that purpose.  The purpose of a qualified trust is to provide retirement income through investment of contributions made to the Trust.  Therefore, the primary purpose of a qualified trust is to generate investment income.

The qualified trust is generally exempt from taxation in income that is derived from investment activity.  The purpose of this rule is to protect taxable entities from unfair business competition from tax-exempt organizations.  See Tres. Reg. Section 1.513-1(b).  The following income derived by the qualified trust would be exempt income:

Common investment income (dividences, interest, etc.)

Royalties;

Rents.  Rents from real property (land, building, etc), and rents from personal property leased with such property, are generally exempt.  An Exception is if the rent on the personal property (such as equipment) is not inceidental to the total rent.  If the rent is based on profits or it equipment rental is more than 10% of total rent, it would be taxed as UBTI;

Gains on sell of property;

Debit-financed property;

S-Corporation investments;

Common Trust funds;

Securities lending.

If the trust conducts an active trade or business, the income derived from that activity is taxed as UBTI. The term “trade or business” means activity which is carried on for the production of income from the sale of goods or the performance of services.

It would be argued by the IRS that by personally fixing up buildings, marketing or acting as a landlord would fall under UBTI.

Clearly, a real estate agent who is leasing rentals or trading property would fall under these rules.

The purchase and sale of property normally does not subject the plan to UBTI tax on the gains derived from the sale. When the sales of property are regularly carried on however, the plan may be to be engaging in a trade or business. Issues such as the frequency or volume of the sales, and whether the properties are divided or improved prior to sale, are relevant in making the decision if such activity constitutes a trade or business. In PLR 9127045, the IRS, considering these factors ruled that the sale of parcels did not constitute a trade or business.

Taxation of UBTI

UBTI earned by the qualified trust is taxed under the tax rates for estates and trusts, as prescribed by IRS Code Section 1(e).  To compute the tax under the rate schedule, substitute “UBTI” for “taxable income”.  The minimum tax is 35%.  See IRC Code Section 1(i)(2).

$1,000 exemption.  A deduction of $1,000 is allowed in arriving at UBTI.  See IRS Code Section 512(b)(12).  If the UBTI for the trust’s taxable year is $1,000 or less, no tax applies.

Form 990-T.  Form 990-T must be filed by the trustee to pay the tax on UBTI.  The return is due by the 15th day of the 4th month following the close of the trust year.

Valuation is always an issue.  The law requires that “Fair Market Value” be used for all reporting and valuation purposes.  Given that real estate is very illiquid, a fair market value is open to scrutiny.  An independent appraisal can give some relief, but how often.  Every year, every three years, this can be expensive and time consuming just for reporting purposes.  Clearly, just carrying it at the purchase price is not adequate.

In addition, supposed a one person plan wants to take the real estate out as an in-kind distribution.  What value do you use? Taxes need to be paid on that value and it will be open to interpretation. I’ve seen many plans stuck with just real estate waiting for it to sell so it may be distributed because they didn’t have the cash to pay the taxes.

This leads to Fiduciary Issues.  If there are other participants in the plan, payouts and balances are based on this valuation.  Under value and you pay out too little, over value and you hurt other participants.  In addition, liquidity has been a huge problem in these plans.  Real estate can take years to sell, what do you do with those who have a “piece” of that land and want to retire?

Another fiduciary issue is the red flag reporting for owning more than 10% in any asset class.  It’s a question on the 5500 and often real estate exceeds this amount.  By answering this yes, you red flag your plan for a DOL audit.

Often, the person wanting to invest in real estate says, “I know real estate; I’m in the real estate business”.  Sound like UBTI and what about the diversification requirements imposed by the “prudent man investment rule”.

Finally, the tax issues need to be discussed.  Real estate owned outside a plan is able to deduct expenses, depreciate its costs and is treated as capital gains. 15% today.  In a plan, when the real estate is sold, any gain is treated as ordinary income when it’s distributed.  (39%)

Bottom Line, the best way to invest in real estate is to purchase raw land for 100% cash from a third party.  Hold it for appreciation, and sell it to a third party.  You still have valuation and fiduciary issues, but can eliminate the others.

This is not a legal opinion and NH Hicks, Inc. is not legally responsible for the determination. If a legal opinion is desired, it should be sought from an ERISA attorney.

 

Last updated on June 12, 2012 by Samantha Nethington

403(b)

Prudential- Compliance Checklist 2012
As a retirement plan sponsor, you know how important it is to comply with the Employee Retirement Income Security Act (ERISA) and the ever-changing reporting and disclosure requirements mandated by the federal government.  You also know how confusing it can be.

As your provider of retirement services, we are always looking for ways we can make your job easier.  That is why we are pleased to provide you with our Compliance Checklist for 2012, offered to Prudential Retirement Clients by our Retirement Plan Strategies department.

The compliance checklist incorporates defined benefit, defined contribution and ERISA 403(b) requirements and provides information on the materials that you will need to file, filing due dates and agencies to which the filings should be made.  In addition, we’ve identified how Prudential Retirement can help you complete each task, so you can rest assured you have what you need to meet the latest governmental filing and disclosure requirements.  (see more – pdf download)

 

Last updated on June 19, 2012 by Samantha Nethington

How do we determine a separate line of business?

TQ Plans - Separate Line of Business Rules
The IRS has established a procedure under Code §414(r) that allows a company to file a Form 5310-A in order to notify the IRS that one or more separate lines of business (SLOBs) will be tested independently for minimum participation and coverage and nondiscrimination purposes because they (see more)

PPA Restatements

What is the PPA Restatement?
All Defined Contribution plan documents (including 401(k), Profit Sharing, and Money Purchase Plans) will need to be restated by no later than April 30, 2016 to incorporate the language and provisions from the Pension Protection Act (PPA), and various other required amendments that took effect between 2007 and 2011.  At NH HICKS, our goal is to have our clients’ plans updated before the end of 2015.

Below is a list of topics regarding the restatement process.

1.  What is the PPA Restatement?

2.  PPA Restatement Services and Fees

3.  PPA Restatement Checklist

4.  Proposal Request

5.  PPA Voluntary Correction Program

You need the plan document written correctly and tailored to the company’s needs.  Let us help.  We are available to go over the opportunities available with this PPA Restatement process.

Questions?  Contact Us.

Debbie Rath or Samantha Nethington

(530) 891-4975