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EGTRRA PLAN RESTATEMENT
As you know,
over the past decade, Congress, the IRS and the DOL have made numerous changes
to retirement plan rules. All of
these changes must be incorporated in your plan documents.
Your plans
have already been amended for many of these changes – including the GUST
restatement in 2001-2003, the EGTRRA good faith amendment in 2002-2003, the
final 401(a)(9) regulations for defined contribution plans (Post-EGTRRA
amendment) in 2003, the automatic rollover amendment in 2005 and the final
401(k)/401(m) regulations amendment in 2006.
These have all been legally
required amendments.
The way
the process works is that Congress passes laws, and years later, the IRS and DOL
finally decide what specific language must be included in retirement plans to
meet the various requirements of the legislation. From 2005 through 2007, the
IRS issued guidance as to the more detailed EGTRRA language it will require to
be included in defined contribution plans.
Our base plan
document has been updated for these EGTRRA changes and has been submitted to the
IRS for its approval. We do not
expect to receive formal IRS approval until the first or second quarter of 2008.
Sometime between 2008 and 2010, after
the IRS approves the EGTRRA documents, all
401(k) and other defined
contribution plans will have to be completely restated
to incorporate the changes from the 2001 EGTRRA legislation and other
post-EGTRRA laws and regulations.
This restatement will consolidate the "good faith" amendments described above and also
add the additional, legal language required by the IRS.
Over the last
year, we have been developing internal procedures for handling this restatement
with the least possible inconvenience to you.
We are currently in the process of sending out individual correspondence
describing the restatement process and the related fees.
As always, we remain committed to
providing high-quality, cost-effective service.
PARTIAL TERMINATION OF PLAN
In the summer of 2007, the IRS issued guidance (Rev. Rul. 2007-43) relating to
"partial terminations" of qualified retirement plans.
The guidance provides that a partial
termination is presumed to occur whenever the "turnover rate" for the
plan is at
least 20% during a plan year. This is important because if a
partial termination occurs, all participants who terminated during the plan year
will become 100% vested in their account balance/accrued benefits.
Under the IRS
guidance, the turnover rate is determined by dividing the number of participants
who have an "employer-initiated" termination during the plan year by the total
number of active participants during the plan year. An "employer-initiated" termination
is defined to include generally any termination other than on account of death,
disability or retirement on or after normal retirement age. However, the employer may provide
evidence (such as a written letter of resignation) that a termination was purely
voluntary and thus not "employer-initiated".
Not every
situation resulting in at least a 20% turnover rate will trigger a partial
termination – it is a facts and circumstances test. Factors such as the turnover rate for
the employer during prior years and the extent to which terminated employees
were replaced, whether the new employees performed the same functions, had the
same job classification and title, and received comparable compensation, are all
relevant factors to consider when determining whether a partial termination has
occurred.
Because this
is a fact-specific analysis, your plan administrative firm may ask you to
provide additional information on any terminations reported on your census.
If you have any questions about these rules, please feel free to contact us.
NORMAL RETIREMENT AGE
In May 2007,
the IRS issued final regulations defining the permissible normal retirement age
(NRA) for a pension plan (or for pension assets in a profit sharing or 401(k)
plan). The NRA cannot be earlier
than age 62, or if earlier, the earliest age that is "reasonably representative
of the typical retirement age for the industry in which the covered workforce is
employed". The regulations are
generally effective for plan years beginning on or after July 1, 2008, that is,
January 1, 2009 for calendar year plans.
Existing plans with NRAs lower than
age 55 will have to be amended.
It is uncertain at this time how the rules will be applied to existing plans
with NRAs between 55 and 62. We will
continue to monitor developments and contact you and your financial advisors as
needed.
PENSION PROTECTION ACT OF 2006
As we noted
last year, the Pension Protection Act
of 2006 (PPA) contains a number of wide-ranging changes. The summary
below focuses on significant changes for 2007 and 2008.
For 2007 plan
years, the maximum permitted deductible
amounts for defined benefit pension plans have, in many cases, been
increased to 150% of current liabilities, less plan assets.
Where an employer or affiliated employer
group sponsors and contributes both
to defined benefit and 401(k)/profit sharing plans, the deduction limit has
been increased generally to the
greater of (1) 31% of compensation of the participants benefiting under the
plans or (2) the required defined benefit funding amount plus the
amount contributed to the 401(k)/profit sharing plan up to 6% of compensation. Salary deferral amounts are
deductible in addition to this limit.
Also for 2007
plan years: (1) If a plan permits
participant direction of investments (even if participants do not actually
choose to direct their investments), then the plan must prepare and distribute
quarterly statements.
If your plan allows participant direction of investments, you should contact your plan administrative
firm and investment advisor to be sure that these statements are being provided. The penalty for failure to provide
the statements can be up to $110 per day per participant. (2) The DOL and IRS
are required to implement simplified Form 5500 reporting for plans with fewer
than 25 participants. However, this
simplified reporting will not apply where the plan sponsor is part of an
affiliated service/control group or uses leased employees. (3) Non top-heavy
defined contribution plans must adopt one of the two basic top-heavy vesting
schedules. (4) A non spouse beneficiary (including a trust) may rollover a
distribution from a qualified plan directly to a rollover IRA. Distributions from that rollover IRA
are then treated like an "inherited IRA" under the minimum required distribution
rules.
For 2008 plan
years, many new rules apply to defined benefit plans. As of this date, it is unclear how
some of these rules will actually be applied.
(1) Between 2008 and 2012, the interest rates used in calculating the
present value of a participant's benefit in a defined benefit plan will change.
(2) Required funding contribution amounts
will likely increase. (3) Generally, if
the value of plan assets is less than 80% of the plan's current liabilities,
there will be restrictions on the payment of benefits in forms other than
annuities, e.g. lump sums. Further,
neither benefit levels nor the value of benefits can be increased. More stringent rules apply if the
value of assets is less than 60% of the current liabilities.
We will
continue to provide more information on the various PPA provisions in future
newsletters.
If you have specific questions about any of these provisions, feel free to contact us.
REHIRED EMPLOYEES
In virtually all plans, if you rehire an employee who previously worked for your
business (or a predecessor or related business), her prior employment is counted
in determining her eligibility for the plan. This applies even if the prior employment
occurred before the plan existed. This also applies even if the employee is
only rehired on a "fill-in", temporary or part-time basis.
Normally, a rehired employee who had
previously met the eligibility requirements is eligible
immediately as of her date of re‑employment.
The following examples illustrate this. All
examples assume a plan with 12 month/1000 hour eligibility requirement.
·
Employee Betty worked for your business from 1990 through 1994 (and had over 1000 hours
in a 12‑month period). You established a
retirement plan in 2003. If you rehire
Betty on October 1, 2007, she is eligible to participate in the plan immediately
on October 1, 2007, her date of rehire.
·
Employee Leslie was hired April 1, 2002 and worked until December of 2002. When she quit, she had worked over
1000 hours. If she is rehired on May
1, 2007, she is eligible to participate in the plan immediately on May 1, 2007,
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 2002.
·
Employee Karen was previously a participant in the plan.
She terminates in March 2006 to stay home and take care of her children. From June 1 through August 31, 2007,
she comes back to work to fill-in for another employee who is out on temporary
leave. She is eligible to re-enter the
plan on June 1, her date of rehire.
It does not matter that she is only employed on a fill-in 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. You will also need
to give her a copy of the current Summary Plan Description.
If you fail to do so, you will be required to make corrective
contributions for the rehired employee in accordance with the IRS program known
as Employee Plans Compliance Resolution System (EPCRS). These contributions will
be immediately 100% vested.
For any rehired employees, we recommend that
you contact your plan administrative firm or us
immediately upon rehire to determine
exactly when they will be eligible to participate.
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ROTH 401(k) PROVISIONS
Most of you
who sponsor a 401(k) plan are now familiar with the Roth tax-planning feature
that first became available in 2006.
Under the Roth feature, a participant may have an additional Roth 401(k) Account
within your existing 401(k) plan.
A.
Designated Roth Contributions
If your 401(k) plan has been amended
to add the Roth feature, then Roth
401(k) Accounts are available to all participants. A participant can
prospectively designate that all or a portion of her salary deferrals will be made to a Roth 401(k)
Account. These deferrals are called
"designated Roth contributions" or "DRCs".
Like Roth
IRAs, DRCs are made with after‑tax dollars.
DRCs are immediately 100% vested. Any portion of salary deferrals that
the participant does not designate as DRCs will be traditional pre‑tax 401(k)
deferrals. DRCs and pre-tax 401(k)
deferrals are aggregated for purposes of the 402(g) limit (see discussion
of 401(k) limit on page 4).
B.
Qualifying Distributions
If a
distribution of a participant's balance in a Roth 401(k) Account is "qualified",
then investment earnings are tax‑free. This means that the participant will not pay
any federal income tax (or capital gains) when she withdraws her Roth 401(k)
Account balance from the plan.
A
distribution must satisfy two requirements in order to be "qualifying" - (1) the
distribution must occur after attainment of age 59½, death or disability; and
(2) the distribution must occur at least 5 years after the participant
contributes her first DRC. For example, if the participant made her
first DRC in 2006, then the earliest "qualifying" distribution can be made on or
after January 1, 2011 (assuming the first requirement is also satisfied).
Qualifying
distributions can be taken in cash or rolled over to an individual Roth IRA or
to a Roth 401(k) Account in another 401(k) plan.
Be aware that participants who roll out their
total account balance under the plan
will potentially have to establish two IRAs to receive the rollover - (1) a
traditional IRA for pre-tax 401(k) deferrals and employer contributions and (2)
a Roth IRA for DRCs.
If a
distribution is "non-qualifying", then the
investment earnings are subject to tax (though the participant may defer the tax by rolling
over her Roth 401(k) Account as discussed above).
The IRS has issued regulations addressing how this tax will be
calculated. Any participant who is
considering taking a "non-qualifying" distribution should consult a tax
professional to review the tax consequences.
C.
Administrative Requirements
There are
many additional administrative steps that are involved in accounting for DRCs. To highlight just a few:
First,
participants must make a written election to designate their deferrals as DRCs
in advance, before the wages are
earned. Normally, this would be done
on the Salary Reduction Agreement form.
Participants can change their election in accordance with the plan's
rules, but once deposited, pre-tax deferrals must stay in the pre-tax deferral
account and DRCs must stay in the Roth 401(k) Account.
Second, a
participant's DRCs must be separately accounted for under the plan. This is a separate "source" account
maintained by the plan administrative firm and not a separate investment
account. A participant's Roth 401(k)
Account must be maintained on the plan's records until it is fully distributed. No other contributions or forfeitures
can be allocated to the participant's Roth 401(k) Account.
D.
Form W-2 Reporting
DRCs must be
separately reported on a participant's Form W-2.
The IRS has instructed preparers to report DRCs in
box 12
with code AA (pre-tax deferrals are reported with code D). In addition, because DRCs are made
with after-tax dollars, they should also be included in the amount of taxable
compensation reported in box 1 of the Form W-2.
Because it is the employer who is
responsible for the complete and accurate reporting of income on the Form W-2
(even if another entity actually prepares the W-2s), the employer should review
with its payroll company or other tax professional that DRCs are being properly
reported.
If incorrect
information is reported on a Form W-2, the employer is subject to fines, which
can be substantial, particularly since this might be considered to be tax fraud.
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.
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 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, 2008, you should
give her the Safe Harbor Notice sometime between April 2 and June 1 of 2008.
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 plan year begins (thus, between approximately October 2 and
December 1 for a calendar year plan). Your
plan administrative firm will assist you in providing this notice.
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 (AND OTHER)
LIMITS
The dollar
limits for making salary deferrals to 401(k) plans (called the 402(g) limit) and
the new "catch-up" rules continue to increase.
The catch-up rules allow plan participants who are
50 or older at any time during the year
to make additional "catch‑up" salary deferrals. For
2007, the 402(g) limit and catch-up limit are $15,500 and $5,000, respectively.
After 2007 the limits are indexed for
inflation.
The IRS
recently released the 2008 dollar limits:
402(g) limit
$15,500
catch-up
limit
$5,000
annual
compensation limit
$230,000
limit for
defined contribution plan
annual additions
$46,000
defined
benefit plan dollar limit
$185,000
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. DOL regulations state that
participant salary deferrals (including
DRCs, if applicable) 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 salary deferrals
as soon as practical after they are
withheld from the participants' paychecks,
but in no event later than 7 days after the pay date.
Please give your financial advisor, plan
administrative firm or us a call if you have any questions.
Please be
aware that the DOL is taking a much more proactive role in policing the late
deposit of salary deferral amounts.
Thus, you may receive a letter from the DOL regarding salary deferral amounts
that have been reported as late on Form 5500.
Generally, the DOL letter will invite you to participate in a voluntary
correction program. However, in some
cases, plan sponsors are being notified that their plan has been selected for an
audit.
If you are contacted by the DOL, we
recommend that you contact your plan administrative firm or us immediately.
NON-TRADITIONAL INVESTMENTS
There are
many legal issues that arise in connection with any "non-traditional"
investments. Basically, this
includes any investment that is not in publicly traded stocks, bonds,
mutual funds or qualified group pooled trusts. Examples include real estate
investments, partnership interests, non-publicly traded stocks or loans. With respect to plan investments, we
see three legal issues that often require analysis - fiduciary duties,
prohibited transaction rules and plan asset regulations. In addition, there are administrative
issues concerning valuation and reporting of the non-traditional asset.
If you are considering investing plan
assets in a "non-traditional" investment, please contact your financial advisor
or us for a general review of the legal issues.
In certain circumstances, we may also
advise a more thorough analysis of your specific facts and circumstances.
CHANGES IN YOUR BUSINESS OPERATION AND/OR CONTACT INFORMATION
Any change in
your business structure (incorporation, new partner, split in partnership, etc.)
or purchase of an interest in another business 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, your telephone or fax number (including area code), or your plan
advisors so that we may keep our records up to date.
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This newsletter contains general information and should not be used to resolve
legal questions regarding specific fact situations.
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