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REHIRED EMPLOYEES IN 401(k)
PLANS
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 or who had
met the eligibility requirements, is eligible immediately as of her/his
date of reemployment
The following two examples illustrate this. Assume that employee Anne
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, 2004, she is
eligible to participate in the plan immediately on September 1, 2004,
her date of rehire.
Employee Nicole was hired April 1, 2000 and worked until December of
2000. When she quit she had worked over 1000 hours. If she is rehired on
May 1, 2004, she is eligible to participate in the plan immediately on
May 1, 2004, her date of rehire.
Note that the rehire rules apply even if the employee is coming back to
work on an intermittent, temporary or part-time basis. If a rehired
employee is eligible and you have a safe harbor 401(k) plan, you must
give her the Safe Harbor Notice and salary reduction agreement form on
her date of rehire. For any rehired employees, we recommend that you
contact your plan administrative firm immediately upon rehire to
determine exactly when they will be eligible to participate.
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. So, if a new
participant will enter the plan on July 1, 2004, you must give her/him
the Safe Harbor Notice sometime between April 2 and June 1 of 2004. 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 2003 for a 2004 calendar year plan). Your plan
administrative firm will assist you in providing this notice.
A participant must have at least 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.
CONSEQUENCES OF FAILURE
TO GIVE NOTICE TIMELY
If you do not give an eligible
employee (including a rehired employee) the Safe Harbor Notice timely
and allow salary deferrals to be made, you have caused, at the very
least, an operational error which should be corrected under the IRS
program known as Employee Plans Compliance Resolution System (EPCRS).
This will result in increased funding costs and administrative and legal
expenses to you.
401(k) SALARY DEFERRAL LIMITS
One of the most significant EGTRRA law
changes (the acronym for the 2001 tax law) has been 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 three 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
|
| 2003 |
$12,000 |
$2,000 |
| 2004 |
$13,000 |
$3,000 |
| 2005 |
$14,000 |
$4,000 |
| 2006 |
$15,000 |
$5,000 |
|
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PARTICIPATION BY FAMILY MEMBERS
IN SAFE HARBOR 401(k) PLAN
Family members of the owner can
participate in “safe harbor” 401(k) plans if they provide services
for the business, are paid wages and meet the plan eligibility
requirements. If the 401(k) plan is “integrated with Social
Security,” it is ok for the otherwise eligible spouse (or other family
member) to start making salary deferrals. 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. It is also important to treat a family member
employee just like any other employee. For example, their hours worked
and services performed must be carefully documented. Any wages paid to a
family member must also be able to meet the “reasonable
compensation” test.
BLACKOUT NOTICES
New Labor Department regulations
require plan administrators to give participants and beneficiaries
written notice at least 30 days in advance of any “blackout period.”
A blackout period is a period of more than 3 consecutive business days
in which participants are temporarily unable to exercise their rights
under the plan to direct their investments or to obtain loans or
distributions. These periods typically occur when plans change
administrative firms or investment firms, or when plans are merged or
terminated. The regulations provide for penalties of up to $100 per day
per participant for failure to give timely notice. Please
contact your financial advisor or us if you are planning to make any of
the listed changes, or if you think you may need to issue a blackout
notice for any other reason.
IRAs AND ROLLOVERS
Under the EGTRRA law changes for 2002,
a qualified plan may be amended to receive rollovers: from a traditional
IRA; from IRAs that have been commingled with distributions from
qualified plans; from distributions from 403(b) plans; or from certain
governmental 457 plans. Generally, Roth IRAs and other IRAs containing
after-tax contributions may not be rolled into a qualified plan at this
time. Before you make or allow any rollovers, you must contact your
financial advisor or us.
DEPOSITING 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 days after they are withheld.
Please give your financial advisor, plan administrative firm or us a
call if you have any questions.
CAFETERIA PLANS
If you have a cafeteria plan,
please let us know. It can have an impact on your retirement
plan.
PLAN AMENDMENTS
As part of our retainer services, we
monitor your plan to be sure it complies with relevant IRS and Labor
Department regulations. If regulations (or the laws) change and an
amendment is required, we will amend the plan because it must be done to
maintain the plan’s tax qualified status. If changes are technical in
nature, we will prepare the amendment without contacting you. If changes
are substantive, we will contact you first to discuss them and describe
the options for your final decision. In today’s environment, it is
likely that the IRS will require more frequent amendments than in the
past, possibly on an annual basis.
MISCELLANEOUS
Any change in your business structure
(incorporation, new partner, split in partnership, etc.) may impact your
qualified retirement plan. Please let us know about any change
in your business structure as soon as possible.
Also, please notify us of any changes regarding your office, mailing or
email address or your telephone or fax number (including area code) so
that we may keep our records up to date.
This newsletter contains general
information and should not be used to resolve legal questions regarding
specific fact situations.
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