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GUST RESTATEMENTS
We are well into drafting plan documents to comply with the GUST law changes. If you have not already received your GUST document, you will shortly. Once we have received the signed documents back from you, we will schedule the plan for filing with the IRS for a determination letter. If you have any questions about this, please call us.
401(k) SALARY DEFERRAL LIMITS
One of the most significant EGTRRA (the acronym for the 2001 tax law) changes effective for 2002 is the increase in the dollar limits for making salary deferrals to 401(k) plans (called the 402(g) limit) and the new "catch up" rules. The catch-up rules can allow plan participants who are 50 or older at any time during the year to make additional "catch-up" salary deferrals. The maximum dollar amounts increase in each of the next four calendar years and are indexed for inflation after 2006. The limits through 2006 are as follows:
Calendar year
|
402(g) limit
|
Additional
Catch-up limit
|
| 2002 |
$11,000 |
$1,000 |
| 2003 |
$12,000 |
$2,000 |
| 2004 |
$13,000 |
$3,000 |
| 2005 |
$14,000 |
$4,000 |
| 2006 |
$15,000 |
$5,000 |
PARTICIPATION BY FAMILY MEMBERS IN SAFE HARBOR 401(k) PLAN
As we mentioned last year, "safe harbor" 401(k) plans are still extremely popular. A primary reason is that they are the best vehicle to allow owners to take advantage of the increased maximum salary deferral amounts mentioned above. In addition, if a spouse (or other family member) works for the business, is paid and meets the plan eligibility requirements, she (or he) can also participate in the 401(k) plan. Usually, a participant can make salary deferrals of up to 80% of compensation (or if less, the 402(g) dollar maximum described above). If the 401(k) plan is "integrated with Social Security", it is ok for the spouse (or other family member) to start making salary deferrals at that level. However, if the plan is "cross tested" or if your business group has a defined benefit pension plan, you must contact your financial advisor and the administrative firm before the spouse (or other family member) makes any salary deferrals.
SAFE HARBOR NOTICE FOR 401(k) PLAN
The Safe Harbor Notice is the key document in the annual operation of a safe harbor 401(k) plan. The notice describes in simple terms the major provisions of the plan.
A new participant must be given the Safe Harbor Notice (and preferably also the summary plan description and salary reduction agreement) 30 to 90 days before her/his plan entry date. Check your summary plan description to identify the entry dates for your plan. For most plans the plan entry dates are the first day of the plan year and the first day of the 7th month of the plan year on or after the date the employee completes the eligibility requirements. For calendar year plans, those entry dates are January 1 and July 1. For example, if a new participant will enter the plan on July 1, 2003, you must give her/him the safe harbor notice sometime between April 2 and June 1 of 2003. We recommend that you mark May 1 and November 1 on your calendar to review the employee roster and identify any employees who will enter the plan as of the next entry dates (July 1 or January 1), then give them the Safe Harbor Notice on May 1 or November 1.
In addition to providing the initial notice, a Safe Harbor Notice must be given annually to all plan participants. The notice must be given 30 to 90 days before the year begins (thus, between approximately October 2 and November 30 of 2002 for a 2003 calendar year plan). Your plan administrative firm will assist you in providing this notice.
A participant must have 30 days after receiving the Safe Harbor Notice to make or modify her/his 401(k) salary reduction agreement. In addition, changes to the salary reduction agreement can be made as of the dates set out in the salary reduction agreement form. If the safe harbor notice is not given timely, there are adverse financial repercussions.
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PLAN LIMIT INCREASES FOR 2002
The EGTRRA increases for retirement plans are taking effect. For plan years beginning in 2002, the maximum amount that may be allocated to a participant's accounts in defined contribution plans has increased to $40,000 from $35,000. In a 401(k) plan, "catch up" contributions are in addition to that limit. Also, the maximum annual benefit a defined benefit pension plan may provide has increased for 2002 to $160,000 payable at age 62 from $140,000, payable at Social Security Retirement Age.
REHIRED EMPLOYEES
In virtually all plans, if you rehire an employee who previously worked for your business, her/his prior employment is counted in determining her/his eligibility for the plan. Normally, a rehired employee who was previously a participant is eligible immediately as of her/his date of re-employment. For example, assume that employee Joan worked for your business from 1994 through 1997 (and had over 1000 hours in a 12 month period). If you rehire her on September 1, 2002, she is eligible to participate in the plan immediately on September 1, 2002, her date of rehire. If you have a safe harbor 401(k) plan, you must give her the safe harbor notice on her date of rehire.
For rehired employees, we recommend that you contact your plan administrative firm immediately upon rehire to determine exactly when they will be eligible to participate.
LEASED EMPLOYEES
Some of you use leasing organizations and leased employees in your practice. The IRS has recently issued a ruling that relates to leasing organizations. As a result of the IRS ruling, your leasing organization may ask you to become a participating employer to the plan that it sponsors. This can have adverse consequences for you. Do not sign any documents relating to that without consulting us first. Please call us if you are contacted about becoming a participating employer in the plan of the leasing organization.
IRAS AND ROLLOVERS
Under the 2002 EGTRRA law changes, a qualified plan may be amended to receive rollovers from a traditional IRA, IRAs that have been commingled with distributions from qualified plans, and distributions from 403(b) plans and certain governmental 457 plans. IRAs containing after-tax contributions and Roth IRAs may not be rolled into a qualified plan at this time. If you have questions about rollovers, we recommend that you contact your financial advisor.
DEPOSITING OF 401(k) DEFERRALS
The assets of your 401(k) plan include the amounts that participants have had your business withhold from their wages to defer into the plan. Labor Department regulations state that participant 401(k) salary deferrals must be transmitted (i.e., deposited into or a check mailed) to the plan trust account as of the earliest date on which it is reasonably possible to do so. We continue to recommend that you transmit participant 401(k) deferrals as soon as practical after they are withheld from the participants' paychecks, but in no event later than 7-10 days after they are withheld. Please give your financial advisor, plan administrative firm or us a call if you have any questions.
REVISED PLAN AUDIT RULES
The Labor Department has issued regulations (effective for plan years beginning after April 17, 2001) which add additional requirements for small plans to continue to be exempt from the requirement to have an independent financial audit. If at least 95% of the plan assets are in "qualifying plan assets", no audit is required. Qualifying plan assets include: assets held by a regulated financial institution (such as banks and broker-dealers), shares of registered mutual funds, insurance investments and certain participant loans. Examples of non-qualifying assets include real estate, loans, partnership interests and non-publicly traded stocks. If the 95% rule is not met, either the plan must obtain an audit, or the fidelity bond for the plan must be in an amount at least equal to the total value of the non-qualifying assets. All plans must also include additional information about plan assets in the summary annual report. Your plan administrative firm will be in contact with you about these new rules.
This newsletter contains general information and should not be used to resolve legal questions regarding specific fact situations.
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