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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 (or a related business), her/his prior employment is counted
in determining her/his eligibility for the plan. This
applies even if the prior employment occurred before the plan existed.
Normally, a rehired employee
who had met the eligibility requirements previously, is eligible immediately
as of her/his date of reemployment.
The
following two examples of plans with 12 month/1000 hour eligibility
illustrate this. Assume that
employee Jane worked for your business from 1985 through 1988 (and had
over 1000 hours in a 12 month period). You
establish a retirement plan in 2003. If
you rehire her on September 1, 2005, she is eligible to participate in the
plan immediately on September 1, 2005, 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, 2005, she is eligible to participate in the plan
immediately on May 1, 2005, her date of rehire. This
is because more than 12 months has passed since her original hire date and
she worked more than 1000 hours before she quit in 2000.
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) PLANS
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.
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 two calendar years and are
indexed for inflation after 2006. The
limits through 2006 are as follows:
Additional
Calendar
year
402(g) limit
Catch-up limit
2004
$13,000
$3,000
2005
$14,000
$4,000
2006
$15,000
$5,000
PLAN
LOANS TO PARTICIPANTS
Some
plans allow loans to be made to participants.
Loans must comply with a number of precise rules and restrictions,
including a specific repayment schedule.
Repayment of the loan must
begin within 90 days of the date it is made, according to the repayment
schedule. The trustee of the
plan is responsible for collecting the payments on a timely basis. If
any of the loan restrictions are violated, or if
repayments are not timely, the entire loan could be treated as a
taxable distribution to the borrower participant.
This means that it will be
reported as current taxable income. An
additional 10% penalty tax may also be assessed.
In addition, the loan may still have to be repaid.
Because of the
complexities and serious consequences of improper loans, you must contact
your plan administrative firm to prepare the documentation for any loans
from the plan and strictly adhere to the repayment schedule.
IRS
AUDITS
The IRS is currently
auditing defined benefit plans and 401(k) plans.
If the IRS contacts you
about an audit, contact us immediately.
IRAs
AND ROLLOVERS
A
qualified plan may permit 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 any
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
requested 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
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PARTICIPATION BY FAMILY MEMBERS
IN SAFE HARBOR 401(k) PLAN
A
new participant must be given the Safe Harbor Notice (and
preferably also the summary plan description and salary reduction
agreement form) 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, 2005, you
must give her/him the Safe Harbor Notice sometime between April 2 and June
1 of 2005.
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 2004 for a 2005
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 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.
CONSEQUE
NCES 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
Under
current law, the dollar limits for making salary deferrals to 401(k) plans
(called the 402(g) limit) and the new “catch-up” rules are continuing
to increase.
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.
PLAN
INVESTMENTS
Labor Department regulations
state that for a plan to be exempt from the requirement to have an
independent financial audit, at least 95% of the plan assets must be in
“qualifying” plan assets. Qualifying
plan assets include: assets held in
the name of a regulated financial institution (such as banks,
broker-dealers, regulated trust companies), 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. Stocks and bonds held in the
name of the individual trustee, as opposed to being held in the name of a
regulated financial institution, are also considered to be
“non-qualifying” assets. If
the 95% rule is not met, either the plan must obtain an independent
financial 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 (or 10% of the
value of plan assets, if more). If
you wish to acquire any non-qualifying assets or have questions about this
rule, contact your financial
advisor, administrative firm or us.
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.
CHANGE
IN PRACTICE STRUCTURE
We
are pleased to announce a change in the practice structure beginning
October 1, 2004. As of that
date David Hilburn will become Of Counsel to the firm; he will continue to
be a shareholder. David
expects to be involved in the firm for many years, but his duties will
change. David will maintain
an office for the foreseeable future.
With the addition of our new associate attorney Allison Kohler, our
law firm will continue to work with our many clients.
We remain committed to providing quality legal services at a
reasonable fee.
This newsletter contains general
information and should not be used to resolve legal questions regarding
specific fact situations.
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