Who are a plan’s fiduciaries?

A person is a fiduciary to the extent he or she:

  1. exercises any discretionary authority or discretionary control with respect to the management of the plan or its assets; or
  2. renders investment advice for a fee or other compensation, direct or indirect, with respect to any plan moneys or other plan property, or has any authority or responsibility to do so; or
  3. has any discretionary authority or discretionary responsibility in the administration of the plan.

A person may be a fiduciary regardless of whether he has a fiduciary title such as “Trustee” or “Plan Administrator.” A person who exercises discretionary authority or control over the plan is a fiduciary even if he acts outside the scope of his actual authority with respect to the plan. A fiduciary also includes a person that a plan’s “named fiduciary” designates to carry out fiduciary responsibilities.

For what purpose is a trust identification number used?

A trust identification number (TIN) is required by the IRS to identify a retirement trust and to register all trust investments. The TIN is also used on Form 1099-R and Form 945 to report distributions to participants and beneficiaries, rollovers, and to remit to the IRS taxes withheld on plan distributions.

When and to whom must the Summary Plan Description be given?

The Plan Administrator must distribute a Summary Plan Description (SPD) to plan participants and beneficiaries, in general, on or before 90 days after the employee becomes a participant (or 90 days after the beneficiary begins to receive benefits).

When distributing SPDs, the Plan Administrator must take reasonable actions to ensure actual receipt by participants and beneficiaries.

The Plan Administrator must furnish an updated SPD every fifth year to reflect plan amendments made during the preceding 5-year period. If there are no amendments during the 5-year period, an updated SPD must be given to plan participants at least every tenth year.

When and to whom must the Safe Harbor Notice be given?

The Safe Harbor Notice must be given to every eligible employee at least 30 days, but no more than 90 days, before the beginning of the plan year to which the Safe Harbor Notice applies. If an employee becomes an eligible employee later than 90 days before the beginning of the plan year to which the Safe Harbor Notice applies, such employee must be given the Safe Harbor Notice within the 90-day period ending on the date he becomes an eligible employee.

When and to whom must the Summary Annual Report be given?

The Plan Administrator must furnish a Summary Annual Report (SAR) to plan participants and to beneficiaries receiving benefits (other than beneficiaries under a welfare benefit plan). The due date for furnishing the SAR is two months after the due date, including extensions, for filing the plan’s annual return/report (Form 5500).

Which employees should be reported on the annual employee census?

Every individual employed by the employer during the plan year, regardless of whether they are eligible for the plan, must be reported on the “census” or Employee Data form.

What are the ERISA fidelity bond requirements?

With some exceptions, every person who is a fiduciary or who has access to plan assets must be bonded by an ERISA fidelity bond. The bond is intended to protect the plan assets from losses resulting from fraud, theft, or dishonesty on the part of the persons bonded, not from market losses.

Unless additional coverage is needed for “non-qualifying” plan assets, the minimum amount of the bond is the greater of $1,000 or 10% of the plan assets at the beginning of the plan year, and the maximum required bond is $500,000. The assets of more than one plan of the employer may be added together to determine the amount of required coverage.

If the trust holds “non-qualifying” plan assets (i.e. investments not held by a bank or similar financial institution, an insurance company, a registered broker-dealer or other organization authorized to act as trustee for individual retirement accounts), a bond covering the persons handling such assets must be acquired in order for a plan to be exempt from the Small Plan Audit Requirement. The minimum amount of this bond is the greater of 10% of the total plan assets or 100% of the value of the “non-qualifying” plan assets at the beginning of the plan year.

Plans covering only an owner (or owner and spouse) are not required to be bonded.

When must 401(k) salary deferrals be deposited in the trust?

The timely deposit of participant contributions and loan payments to pension plans has continually been under scrutiny by the Department of Labor (DOL). The DOL finalized regulations for pension plans with less than 100 participants allowing for a 7-business day safe harbor. This rule states that if these contributions are deposited to the plan no later than the 7th business day following the date the amount was received or withheld from payroll, they will be considered timely. We highly recommend compliance with this new regulation and the protection it provides to avoid fines and/or interest that could be due for late deposits.

What is a prohibited transaction?

This is a question about which entire books have been written! The short answer is that a prohibited transaction occurs when a fiduciary causes the plan to enter into a transaction which benefits any trustee or person or entity connected to the plan. Examples of these are not limited to persons are owners and participants, their relatives, the company sponsoring the plan, persons supplying service to the plan, and organizations owned by owners of the company sponsoring the plan. Attorneys specializing in ERISA law should be consulted with questions about whether a given transaction is prohibited.

What value should be used for non-publicly traded trust investments?

Fair market value. For investments not traded on the open market, such as closely held employer stock, real estate, and limited partnerships, establishing the fair market value may require a qualified appraisal.

Because amounts allocated or distributed to participants in defined contribution plans (and required contributions and PBGC premiums in defined benefit pension plans) are based on the fair market value of plan assets, fair market value must be established at least once a year as of the plan’s valuation date. In addition, employer securities must be valued whenever they are acquired or sold.

The IRS monitors compliance with asset valuation standards on Form 5500, which requires a statement of plan assets valued at fair market value. A valuation problem may become apparent if, for example, a plan reports assets with level values in successive years or there is a sudden jump in plan asset values in the same year a large distribution is made to a highly compensated employee.

Who may borrow from my retirement plan?

A plan may permit loans to participants. Loans to owners and highly compensated participants are permitted only if they are available on the same basis as loans to “rank-in-file” participants. The requirements for participant loans include limiting the term to five years, repayment in level amounts including principal and interest, adequate security, and reasonable interest rates.

What are the requirements for and limitations on participant loans?

Participant loans must be made in accordance with specific plan provisions. Generally, participant loans are secured by the participant’s account balance under the plan, and must satisfy the following limitations:

  1. Participant loans must be re-paid to the trust, with interest, within 5 years. If the plan so allows, this period can be extended when the purpose of the loan is to acquire the participant’s principal residence.
  2. Loan payments are commonly made through payroll deduction, but they must be made at least quarterly, with principal and interest amortized over the life of the loan.
  3. Participant loans must be evidenced by a legally enforceable agreement (typically, a promissory note).
  4. Participant loans are limited to the lesser of:
    1. $50,000; or
    2. One-half (1/2) of the participant’s vested account balance.

Other restrictions may apply depending on the loan provisions set forth in the plan document.

What happens if participant loan payments are not made on schedule?

Failure to make loan payments on schedule results in the default of the remaining amount of the loan. A defaulted participant loan is treated as a distribution to the participant, which means it must be included in the participant’s taxable income.

There is a period, however, in which missed loan payment(s) can be made up to avoid a loan default. If the missed payment is made by the end of the calendar quarter following the calendar quarter in which the missed payment was due, a default will not occur.

When must participant loan payments be deposited in the trust?

The rules for depositing participant loan payments are the same as the rules for depositing 401(k) employee salary deferrals. Loan payments, whether withheld from employee paychecks or paid (by check, for example) directly to the Trustee, are considered assets of the trust as soon as payment is withheld/received.

What is IRS Form 1099-R?

Form 1099-R, “Distributions from Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc.,” is used to report a distribution from a qualified plan, whether or not the distribution is taxable. Any distribution over $10, including a direct rollover, must be reported on Form 1099-R. Deemed distributions, such as defaulted participant loans, are also reported on Form 1099-R.

Form 1099-R must be given to the participant by January 31 of the calendar year following the calendar year of distribution. The penalty for failure to file Form 1099-R on a timely basis is $25 per day, up to a maximum of $15,000.

What is IRS Form 945?

Form 945, “Annual Return of Withheld Federal Income Tax,” is used to report all federal income taxes withheld on plan distributions during a calendar year. The IRS uses Form 945 to determine if all of the taxes that were withheld during the calendar year were remitted to the IRS on time.

Form 945 must be filed with the IRS by February 10th following the close of the calendar year to which the form relates, assuming all taxes withheld during the year were remitted to the IRS on time.

When must Required Minimum Distributions begin?

Generally, the latest beginning date is April 1st of the calendar year following the calendar year in which the participant reaches age 70 ½.

However, there is a special rule for a participant who is not a 5% owner (meaning he does not own more than 5% of the stock in the employer corporation, is not a sole proprietor, or a greater than 5% partner), as long as the participant continues to work for the employer/plan sponsor: Required minimum distributions can be delayed until April 1st of the calendar year following the calendar year in which the participant separates from service with the employer/plan sponsor.

When must income tax be withheld on plan distributions?

Distributions from qualified plans that are eligible rollover distributions are subject to mandatory withholding of federal income taxes if they are not directly rolled over into an eligible retirement plan or IRA. The amount of tax that must be withheld is 20% of the amount eligible to be rolled over. A participant may elect to have more than 20% withheld as federal income tax, and he may elect to have state income tax withheld on eligible rollover distributions.

Non-periodic distributions that are not eligible rollover distributions are not subject to the 20% mandatory federal income tax withholding. However, a participant may elect to have state and/or federal income tax withheld on these distributions.

Periodic distributions that are not eligible rollover distributions are subject to federal income tax withholding, unless the payee has elected out. The amount of tax to withhold is determined by the payee’s Form W4-P. If no W4-P is in effect, the amount of tax to withhold will be determined by treating the payee as a married individual claiming three withholding allowances.

What is an eligible rollover distribution?

An eligible rollover distribution is any distribution to an employee of all or any portion of the balance to the credit of the employee in a qualified plan, including “offset distributions” of participant loans.

The following are not eligible rollover distributions:

Dividends on employee stock ownership plan (ESOP) stock either paid to participants or used to repay an ESOP loan.

How are withheld taxes remitted to the Internal Revenue Service?

Federal taxes withheld from plan distributions must be deposited with an authorized financial institution or the Federal Reserve Bank or branch in your area. Alternatively, the taxes can be remitted to the IRS through the Electronic Federal Tax Payment System (EFTPS). To get more information about EFTPS or to enroll in ERPS, visit www.eftps.gov or call 1-800-555-4477/. Additional information about EFTPS is also available in Publication 966, The Secure Way to Pay Your Federal Taxes.

Taxes withheld from plan distributions must be reported as tax type 945, and the payer identified by the name of the retirement trust and the trust identification number (TIN).

The accumulated amount of the income tax withheld will determine the due date for making the deposits. Ordinarily, withheld taxes must be remitted to the IRS by the 15th day of the month following the month in which the tax was withheld. However, different rules may apply:

If the total income tax withheld for the year is less than $2,500, the withheld income tax may be paid with the filing of the calendar year’s Form 945.

What is a lump-sum distribution?

A lump-sum distribution is a distribution from a plan that is made in one taxable year of the employee, which is the entire amount of the employee’s interest in the plan. The distribution must be made on account of the employee’s death, attainment of age 59 ½, separation from service, or disability.

If a single sum qualifies as a lump-sum distribution, then favorable tax treatment may be available to the participant. If the distribution does not qualify as a lump-sum distribution, the entire distribution is taxable as ordinary income in the year of receipt.

Prior to the passage of the Small Business Job Protection Act of 1996 (SBJPA), the definition of a lump-sum distribution was relevant to all plan participants due to the availability of five-year forward averaging, a technique designed to lower the tax rate on plan distributions. For distributions occurring after December 31, 1999, five-year averaging is no longer available and the definition of a lump-sum distribution is only relevant to plan participants who were 50 years of age or older on January 1, 1986, or who receive a distribution in the form of employer securities.

What is a direct rollover?

A direct rollover is an eligible rollover distribution that is paid directly to an IRA or to the plan of a new employer of the employee.

If a participant fails to choose a direct rollover, the plan administrator is required to withhold 20 percent of the distribution for income tax.

What happens if a participant cannot be located?

The Plan Administrator is required to take all reasonable steps to locate lost or missing participants. A number of methods are available to the employer to carry out his duty to find such participants.

Contact the Internal Revenue Service letter forwarding program. The details and information regarding this letter forwarding program can be found at: www.irs.gov/privacy-disclosure/irs-letter-forwarding-program-forwarding-letters-to-49-or-fewer

Contact an employee locator service. One suggested service is Apscreen at: www.employeelocator.com

If the employee locator and/or the letter forwarding program does not locate the employee an auto rollover would be the next suggested step. Auto rollovers are when funds are rolled out of the plan into and IRA set up in the participant’s name.

What is a Qualified Domestic Relations Order (QDRO)?

A Domestic Relations Order (DRO) may be issued by a court relating to child support, alimony or property rights of a spouse, child, or any other dependent of a participant. A Qualified Domestic Relations Order (QDRO) is a DRO which:

  1. Creates a right of a non-participant to receive some or all of a participant’s benefits in a plan.
  2. Specifies the name an address of each person to receive a benefit from the participant’s account, the amount to be paid to each, how the payments are to be made, and the plan(s) to which the order applies.

The QDRO may not require the plan to pay:

  1. a benefit not permitted by the plan;
  2. more than the plan promised to pay to the participant; or
  3. amounts covered by another QDRO.

What is the Actual Deferral Percentage (ADP) test?

The Actual Deferral Percentage (ADP) test is an annual compliance test applicable to 401(k) plans (other than Safe Harbor 401(k) plans).

The ADP test compares the average deferral ratios of highly compensated employees (HCEs) to the average deferral ratios of the non-highly compensated employees (NHCEs). A participant’s “deferral ratio” is the amount of his 401(k) salary deferrals for the current year OR prior year (must be defined in plan document the method used) divided by the amount of his compensation for the current year.

In order to pass the ADP test, the law requires that the average of the HCE deferral ratios does not exceed the average of the NHCE deferral ratios by more that a specified amount. Such specified amount is calculated on a year-to-year basis and varies from one plan to another.

What is the Actual Contribution Percentage (ACP) test?

Similar to the Actual Deferral Percentage (ADP) test, the Actual Contribution Percentage (ACP) test is an annual compliance test applicable to 401(k) plans that permit employer matching contributions or after-tax employee contributions. Some Safe Harbor 401(k) plans are not subject to the ACP test.

The ACP test compares the average contribution ratios of highly compensated employees (HCEs) to the average contribution ratios of the non-highly compensated employees (NHCEs). A participant’s “contribution ratio” is the amount of his employer matching contributions (and after-tax employee contributions) for the current year divided by the amount of his compensation for the current year.

In order to pass the ACP test, the law requires that the average of the HCE contribution ratios does not exceed the average of the NHCE contribution ratios by more that a specified amount. Such specified amount is calculated on a year-to-year basis and varies from one plan to another.

What happens when a participant terminates with an outstanding participant loan?

A plan may provide that loan notes are immediately due and payable upon termination of employment. In that case, a participant must pay the note in full within a quarter following termination to avoid triggering a loan offset.

When a loan offset occurs, whether or not it occurs at the time of a termination distribution, a participant can roll over the taxable amount by contributing to an IRA (or to another qualified plan) cash equal to the loan offset amount within 90 days after the date of the offset.

A previously taxed deemed distribution of a defaulted loan is not eligible for rollover at the time of an offset.

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