| 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 | |  | 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. |
