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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.
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
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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