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Recommended Resources

 
 

www.payroll401k.com for information about 401k plan fees and irs form 5500 reporting-Topics include: - 401k Advisory Council Study, - Sample IRS Reporting for 401k,
- Executive Summary of IRS 5500 401k Reporting, - Recommendations of Regulatory Change, - Who is responsible for ensuring that plan participants understand 401k fees?

www.lifestyle401k.com for information about lifestyle funds are for 401k plans-Topics include: - Investment Companies, - Each type has its own unique features, - The average
401K account balances, - Hedge Funds, - SEC's Definition of a Hedge Fund, - The Danger of ETF for the 401k Investor

www.cpas-401k.com for information about 401k compliance testing rules-Topics include: - Non-Discrimination Requirements, - ERISA 404c Compliance, - Using 401k
Software to Run compliance Tests, - 401k Plan Operations

www.easy-401k-online.com for information about compliance testing rules for 401k plans-Topics include: - Actual Deferral Percentage (ADP) Testing, - ERSA Compliance
Features, - Plan Testing of 401k and Auto Enrollment, - 401k Plan Operations

www.web-ira.com for information about small 401k enrollment negative elections-Topics include: - 401k for small businesses using automatic enrollment to increase
participation, - small business 401k salary deferrals, - 401k enrollment assistance and information, - 401k elective deferrals, automatic enrollments and negative
elections

www.compare401k.com for information about principles of 401k investing in lifecycle funds-Topics include: - General Principles of 401k Investing, - Risk and Risk
Tolerance, - Types of 401k investments, - Familiarity with 401k Investments

www.low-cost-investing-advice.com for information about selecting a pension plan for your small business-Topics include: - Choosing a small business retirement pension
plan, - 401k for small businesses, - Qualified plans and 401k plans, - Small business retirement savings chart, - Report on small business 401(k) pension plans, - What you
should know about pension rights

www.401kenginuity.com for information about 401k Enginuity; record-keeping and administration software for third-party administrators for 401k plans of all sizes.

 

Commentary

Answers to 401k Trustees & 401k Fiduciaries Responsibilities

  Q: Who should serve as trustee of a 401(k) plan's assets?

A: A trustee's job is to accept funds, manage them prudently and distribute them to beneficiaries. A plan sponsor can either choose individual trustees - usually the owners or officers of the business - or a single institutional trustee, such as an affiliate of a bank, insurance company or other financial institution.


 

  Q: What is a fiduciary? -TOP

A: A Fiduciary is a person who exercises any discretionary authority or control over the management of the plan or its assets, or who is paid to give investment advice regarding plan assets. The definition depends on the functions a person performs and not on the person's title. Plan service providers such as actuaries, attorneys, accountants, brokers, and recordkeepers are not fiduciaries unless they exercise discretion or are responsible for the management of the plan or its assets. 


 

  Q: What is a named fiduciary? -TOP

A: A named fiduciary is one who has the ultimate authority to control and manage the operation and administration of the plan. This fiduciary must be specifically named or clearly identifiable in the plan document so that participants or other interested parties such as the Internal Revenue Service (IRS) or the DOL will be able to identify who is responsible for the plan and will be able to address issues to that person. 


 

  Q: What is the trustee's responsibility? -TOP

A: The trustee collects and holds plan assets in trust for the participants. The trustee will also be responsible for managing the plan investments unless the plan expressly provides that the trustee is subject to direction from a named fiduciary or an investment manager. 


 

  Q: What is the role of the named fiduciary? -TOP

A: Every plan document must clearly identify one or more persons to be the named fiduciary for the plan. If there is only one named fiduciary, that person or entity will be considered a fiduciary for all purposes under the plan. If there is more than one named fiduciary, the named fiduciaries can allocate responsibilities among themselves. The purpose of the named fiduciary designation is to clearly identify to participants and government agencies who is primarily responsible for the plan.


  Q: What is the role of the plan trustee? -TOP

A: All plan assets must be held in a trust, and a plan trustee must be named. The trustee holds plan assets and is usually responsible for managing the plan's investments, although this function can be subject to the direction of another fiduciary, an investment manager, or plan participants. The plan trustee is usually responsible for processing contributions and investment transactions, preparing financial statements, and disbursing funds to participants or to pay fees and expenses of the trust.


  Q: What is the role of the plan administrator? -TOP

A: A plan administrator is responsible for determining who is eligible to participate in the plan, determining what benefits are due under the plan, and responding to benefit claims and appeals. Plan administrators also have responsibilities dictated under the Internal Revenue Code (Code) and Employment Retirement Income Security Act of 1974 (ERISA) as follows: 

  1. Distribution of summary plan description, summary annual reports, and statement of vested benefits to participants and beneficiaries 

  2. For plans with over 100 participants, engaging an independent qualified public accountant to audit the financial records of the plan 

  3. Maintenance of plan records for at least six years

  4. Determination of whether a domestic relations order is qualified and 

  5. Providing a written explanation of rollover and tax withholding election options, as well as an explanation of tax options with respect to distributions to recipients. 


  Q: Can an outside financial or legal entity (i.e. bank, law firm, CPA, trustee company, etc.) serve as trustee for a 401(k) ? -TOP

A: Technically the answer is "yes," but it is not typical or financially appropriate in today's small plan marketplace, because outside trustees add additional costs to the operation of pension plans without adding a benefit. Even with an outside trustee it is impossible for the employer to transfer any legal liability away from himself. The outside trustee will not reduce the employer's liabilities or responsibilities to the plan by one atom! In the past decade virtually all new small pension plans have been set-up to be self-trustee precisely because it is less expensive, and there is no benefit doing it differently.

Outside trustees typically charge 1/2 % to 1% of the plan assets per year for their services, which amount to inspecting investment statements and certifying their accuracy. With our 401k plans, monthly statements are sent to the plan participants and employer directly from the custodian investment companies; It is both inefficient and wasteful to pay an outside trustee to certify statements that originate from an SEC-regulated custodian such as a mutual fund investment company. 401(k) Pro plans are IRS-approved to be employer-trusteed. (The IRS has allowed retirement plans to be employer-trusteed since 1962) .


 

  Q: Under law how long must plan administer or plan provider keep 401(k)-related records? -TOP

A: The requirement is that records must be retained for 6 years. Records used to compile information that is required to be reported under the reporting and disclosure rules must be preserved by plan administrators (and by actuaries, accountants and others who may be involved) for 6 years after the due date for filing the documents to which they relate (ERISA Sec. 107). These records must have sufficient detail to permit the necessary basic information and data to be verified, explained or clarified for accuracy and are to include vouchers, worksheets, receipts, and applicable resolutions.

Accidental destruction of records will not discharge the persons required to retain records from their statutory duty with regard to the purposes for which such records are required to be retained. Where persons required to retain records know or should know that such reconstruction is impossible, or possible only at an excessive or unreasonable cost, such persons would not be under a duty to reconstruct or attempt to reconstruct the lost or destroyed records.

 

Various DC Plans

  Small Business Retirement Savings Programs

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Option/Feature

SEP-IRA

Payroll Deduction IRA

SIMPLE-IRA

401(k)

Profit Sharing

Defined Benefit

Money Purchase Plan

Key
Advantage
Easy to set up and maintain. Easy to set up and maintain. Salary reduction plan with little administrative paperwork. Permits employee to contribute more than in other options. Permits employer to create large account balances for employees. Provides a fixed, pre-established benefit for employees. Permits employer to make a larger contribution than through other Defined Contribution Plans.
Employers Who Can Provide This Option
Any business that does not currently maintain any other retirement plan. Any business with one or more employees. Any business with 100 or fewer employees that does not currently maintain any other retirement plan. Any business with one or more employees. Any business with one or more employees. Any business with one or more employees. Any business with one or more employees.
Employer's   Responsibilities
Set up plan by completing IRS Form 5305-SEP. No employer tax filing required. Set up arrangements for employees to make payroll deduction contributions. Transmit contributions for employees to funding vehicle.
No employer  tax filing required.
Set up by completing IRS Form 5304-SIMPLE or 5305-SIMPLE. No employer tax filing required. Bank or financial institution does most of the paperwork. There is no model form to establish a plan. Advice from a financial institution or employee benefit advisor would be necessary.
Annual filing of IRS Form 5500 required. Also requires special testing to ensure plan does not discriminate in favor of highly compensated employees.
There is no model form to establish a plan. Advice from a financial institution or employee benefit advisor would be necessary.
Annual filing of IRS Form 5500 is required.
There is no model form to establish a plan. Advice from a financial institution or employee benefit advisor would be necessary.
Annual filing of IRS Form 5500. Actuary must determine funding obligations.
There is no model form to establish a plan. Advice from a financial institution or employee benefit advisor would be necessary.
Annual filing of IRS Form 5500 is required.
Funding Responsibility
Employer contributions only. Employee contributions remitted through payroll deduction. Employee salary reduction contributions and/or employer contributions. Employee salary reduction contributions and/or employer contributions. Employer contribution level can be determined year to year. Primarily employer; may require or permit employee contributions. Employer contributions only.

Option/Feature

SEP-IRA

Payroll Deduction IRA

SIMPLE-IRA

401(k)

Profit Sharing

Defined Benefit

Money Purchase Plan

Maximum Annual Contribution Per
Participant
Up to 15% of compensation or a maximum of $35,000; in 2002, up to 25% of compensation or a maximum of $40,000. 1 $2,000 for 2001; $3,000 for 2002-2004; $4,000 for 2005-2007; $5,000 for 2008. Employee: $6,000 per year, up to $7,000 in 2002 and increasing in $1,000 annual increments until the limit reaches $10,000 in 2005.
Employer: Either match employee contributions $ for $ up to 3% of compensation (can be reduced to as low as 1% in any 2 out of 5 yrs.) or contribute 2% of each eligible employee's compensation, up to $3,200 2
Employee: $10,500 in 2001; $11,000 in 2002 with $1000 annual increments until the limit reaches $15,000 in 2006. Employer/Employee combined: Up to a maximum of 15% of compensation or a maximum of $35,000; in 2002, up to a maximum of 25% of compensation or a maximum of $40,000.1 Up to a maximum of 15% of salary or a maximum of $35,000; in 2002, up to a maximum of 25% of salary or a maximum of $40,000.1 Per plan terms, employer may permit or require employee contribution. Up to a maximum of 25% of salary or a maximum of $35,000; in 2002, up to a maximum of 100% of salary or a maximum of $40,000.1
Minimum Employee Coverage  Requirements
Must be offered to all employees who are at least 21 years of age, employed by the business for 3 of last 5 years and earned at least $400 in a year. Should be made available to all employees. Must be offered to all employees who have earned at least $5,000 in previous 2 years. Must be offered to all employees at least 21 years of age who worked at least 1,000 hours in previous year. Must be offered to all employees at least 21 years of age who worked at least 1,000 hours in previous year. Must be offered to all employees at least 21 years of age who worked at least 1,000 hours in previous year. Must be offered to all employees at least 21 years of age who worked at least 1,000 hours in previous year.
Withdrawals, Loans & Payments
Withdrawals at anytime; subject to current federal income taxes and a possible 10% penalty if the participant is under age 59 1/2. Withdrawals at anytime; subject to current federal income taxes and a possible 10% penalty if the participant is under age 59 1/2. Withdrawals at any time. If employee is under age 59 1/2, may be subject to a 25% penalty if taken within the first 2 years of participation and a possible 10% penalty if taken afterwards. Cannot take withdrawals until a specified event, such as reaching 59 1/2, death, separation from service or other event as identified in plan. May permit loans and hardship withdrawals. Withdrawals may be subject to a possible 10% penalty if participant is under age 59 1/2. May permit loans and hardship withdrawals. Hardship withdrawals may be subject to a possible 10% penalty if participant is under age 59 1/2.
Payment of benefits generally at retirement.
Payment of benefits generally at retirement, may offer participant loans. Payment of benefits generally at retirement, may offer participant loans.
Vesting
Immediate 100% Immediate 100% Employee and employer contributions vested 100% immediately. Employee contributions vested immediately. Employer contributions may vest over time according to plan terms. May vest over time according to plan terms. May vest over time according to plan terms. May vest over time according to plan terms.
Contributor's Options
Employer can decide whether or not to make contribution year to year. Employee can decide how much to contribute at any time. Employee can decide how much to contribute. Employer must make matching contributions or contribute 2% of each employee's salary up to the set maximum. Employee makes contribution as set by plan option. The employer may match. Employer makes contribution as set by plan terms. Employer makes contributions as set by plan terms. Employer makes contribution as set by plan terms.

options/features

SEP-IRA

Payroll Deduction IRA

SIMPLE-IRA

401(k)

Profit Sharing

Defined Benefit

Money Purchase Plan

1 Maximum compensation on which 1997 contributions can be based is $160,000. For plan years beginning
   on or after January 1, 1998, maximum compensation on which contributions can be based is $160,000.
2 Maximum compensation on which 1998 employer 2% non-elective contributions can be based is $160,000.

TOP

 

Tip About 401k

Many small businesses overlook retirement planning for themselves and don't think that they can afford them for their employees. Retirement plans can be a great benefit for both you and your employee, and there are low-cost options available for small businesses. Target Laboratories (www.targetlab.com) a small company, is maximizing the benefits of the 401k, by providing professional 401k investment advice to company employee.

  Q: What are the advantages of in-house administration of a 401(k) plan?

A: One major advantage is control over the original source data. The employer always maintains certain basic employee information in individual human resources files: name, Social Security number, date of birth, date of employment, and pay information. If this information is passed on to a third party, updates or changes must be handled twice: once by the employer and once by the third party. As a result, errors can occur. The employer also has easiest access to information about the other benefit plans it provides for its employ-' ees, making the coordination between plans much simpler. Moreover, an employer who is concerned about the confidentiality of data may be reluctant to pass information on to a third party.

TOP

  Q: What is the difference between 401(k), 403(b) and 457 plans?

A: Comparison of §401(k), §403(b) and §457 Plans

 

Feature    §401(k) Plan §403(b) Plan §457 Plan
Who Can Sponsor?
  • Private employers
  • Non-profit employers
  • Government employers for plans adopted before 5/6/86
  • Non-profit employers with §501(c)(3) status
  • Public school systems
  • State and local governments
  • Non-profit employers (for top-hat employees only)

 

Limits on Elective Deferrals  Up to $10,500 (2001)   Up to $10,500 (2001), with increased limit for certain long-service employees of qualified organizations Up to $8,500 (2001), or 33% of net pay (25% of gross pay), whichever is less. Limits may be increased to $15,000 for last 3 years before normal retirement.
Limit Is Reduced by Elective Deferrals to:    §403(b) plan or SEP SEP or §401(k) plan §401(k), SEP, or elective or non-elective contributions to a §403(b) plan
 Other Contribution Limits   §415 limit and the deduction limit, which is an aggregate limit of 15% of compensation for all employees §415 limit and the maximum exclusion allowance  None
Minimum Vesting   5-year cliff or 7-year graded vesting on employer (non-deferral) contributions  ERISA plan is subject to 5-year cliff or 7-year graded vested. Non-ERISA plan has no requirements No vesting requirements
Loans Yes Yes Yes, for governmental plans only
In-service Distributions    Yes, but only on plan termination or hardship if under age 59½ or at plan termination Yes, but only on hardship if under age 59½ Yes, but only on account of an unforeseeable emergency
Distributions Without Tax Penalties  Payments for:
  • Retirement after 55
  • Death or disability
  • All payments after age 59 1/2
  • Lifetime annuity or installments
  • Rollover to an IRA or another qualified plan
Payments for:
  • Retirement after 55
  • Death or disability
  • All payments after age 59 1/2
  • Lifetime annuity or installments
  • Rollover to an IRA or another 403(b) plan
No tax penalty for early payment
Latest Date Benefit Payments May Begin  April 1st following the calendar year in which the participant reaches age 70½ or retires, if later  April 1st following the calendar year in which the participant reaches age 70½ or retires, if later April 1st following the calendar year in which the participant reaches age 70½ or retires, if later
Taxes on Elective Deferrals:
FICA Taxes Yes Yes Yes
Income Taxes No No No
Timing of Taxation When distributed  When distributed  When paid or otherwise made available
Tax Treatment of Benefit Payments 
  • Ordinary income, or 5-year averaging in certain cases
  • May be "rolled over" tax-free to an IRA or another qualified plan
  • Ordinary income
  • May be "rolled over" tax-free to an IRA or another §403(b) plan
  • Ordinary income
  • May be "rolled over" tax-free to another 457 plan
Distributions With Tax Penalties 10% penalty on payments before retirement, death, disability, or job separation before age 55, unless paid as a life annuity or in installments for life 10% penalty on payments before retirement, death, disability, or job separation before age 55, unless paid as a life annuity or in installments for life None
Rollovers Allowed From Other Plans From other qualified plans [§401(k) and §401(a) plans] From other §403(b) plans From other §457 plans
ERISA Reporting, Disclosure, and Investment Responsibility Yes No, if employer's involvement is minimal No
Investments Available No limitations Annuity contracts and mutual fund custodial accounts No limitations
Benefits Security Assets held in a separate trust May use insurance contracts owned by the participant, a group-funded insurance contract with individual accounts, or custodial accounts with a mutual fund Held by non-profit employer, subject to claims of creditors of the employer. Government employer must put in trust (effective date 1/1/99 for plans in existence on 8/20/96)
IRS Nondiscrimination Tests Minimum coverage test, benefits test, and average deferral percentage test. Plans with matching contributions must meet special matching contributions test All employees must be allowed to make elective deferrals. Plans with matching contributions must meet minimum coverage and matching contributions test. Plans with employer non-elective contributions must meet minimum coverage and general nondiscrimination tests (safe harbors available) No discrimination tests
Considered an "Active Participant" for Purposes of IRA Eligibility? Yes  Yes No

 


 

  Q: What are the maximum contribution limits for all DC plans? -TOP

A: Maximum Benefit and Contribution Limits 2007-2012

Limitation 201220112010200920082007
IRAs $5000$5000$5000$5000$5000$4000
Catch-up Contributions for IRAs $1000$1000$1000$1000$1000$1000
401(k)/403(b)/SAR-SEP IRA Elective Deferrals $17000$16500$16500$16500$15500$15500
Catch-up Contributions for 401(k)/403(b)/ Government 457(b) Plans and SAR-SEP IRAs $5500$5500$5500$5500$5000$5000
Defined Benefit Plans $200000$$1 95,000 $195000$195000$185000$180000
Defined Contribution Plans and SEP IRAs $50000$49000$49000$49000$46000$45000
Annual Compensation Limits $250000$245000$245000$245000$230000$225000
457(b) Plans $17000$16500$16500$16500$15500$15500
Highly Compensated Employee* $115000$110000$110000$110000$105000$100000
SIMPLE IRA Elective Deferrals $11500$11500$11500$11500$10500$10500
Catch-up Contributions for SIMPLE IRAs $2500$2500$2500$2500$2500$2500
Key Employee Threshold $165000$160000$160000$160000$150000$145000
SEP Minimum Compensation $550$550$550$550$500$500
Income Subject to Social Security $110100$106800$106800$106800$102000$97500

Source: Internal Revenue Service, October 20, 2011. *Note: Maximum HCE compensation utilizes prior year limits. Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Smith Barney Financial Advisors do not provide tax or legal advice and are not "fiduciaries" (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise agreed to in writing by Morgan Stanley Smith Barney. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their tax or legal advisors before establishing a retirement plan and to understand the tax, ERISA and related consequences of any investments made under such plan

 

  Key Employee: Dollar amount for officer is 50% of the DB limit.


 

  Q: What is a Non-Qualified Retirement Plan? -TOP

A: A retirement plan that is not given favorable tax treatment.


 

  Q: What is a SIMPLE-IRA? -TOP

A: Savings Incentive March Plan for Employees (SIMPLE). Created by the Small Business Job Protection Act of 1996, a SIMPLE is a type of employer sponsored retirement plan. Individual SIMPLE IRAs are established by or on behalf of all eligible employees into which the employer must make annual SIMPLE contributions and employees may defer an amount (or percentage) of annual compensation. In general, employers with 100 or fewer eligible employees may establish a SIMPLE.


 

  Q: What is a Simplified Employee Pension or SEP? -TOP

A: Created under the Revenue Act of 1978 to help small employers establish a pension plan, SEP's are arrangements under which an IRA is established for each eligible employee. The employee is immediately vested in employer contributions and generally directs the investment of the money. These arrangements are sometimes called SEP-IRAs. SEPs must meet some qualified retirement plan ruse for eligibility, coverage, vesting and contributions.

Additional non-profit websites that include relevant unbiased information about 401k plans include: www.insurance-401k.com and www.hidden-fees-401k.com.


 

  Q: Can a SEP IRA be rolled into a 401(k) Plan? -TOP

A: Yes, beginning in 2002


 

  Q: Can a non profit company have a 401(k) plan with profit sharing? -TOP

A: Yes


 

  Q: Can a Simple Plan be converted into a standard 401(k) Plan? -TOP

A: If it is a Simple 401(k) Plan, they can simply amend the plan and notify the participants. A Simple 401(k) is a regular 401(k) with a SIMPLE provision. If it is a Simple IRA, under current law they can't convert the IRA to a 401(k) Plan nor can they commingle the funds. They can stop contributions to a Simple IRA as of the end of the year and set up a 401(k) Plan effective the beginning of the next year. Under EGTRA, if the 401(k) Plan is a Safe Harbor 401(k) Plan, at the election of the Simple IRA holder, the Simple IRA can be rolled into the Safe Harbor 401(k) at any time. A Simple IRA can be rolled into a regular 401(k) only after the accounts have been open for 2 years. (As long as the plan provides for rollovers)


 

  Q: Can someone contribute to both a SEP and a 401(k)? Does this affect maximum contribution limits? -TOP

A:  Unless it is a model SEP. An individual has one 401(g) limit (employee deferrals) regardless of the number of plans. Their 415 limit (annual additions) is based upon each employer or controlled group of employers. If an individual worked for two unrelated companies they would have 2 415 limits but only 1 402(g) limit.


 

  Q: Under the new laws, can a "rollover IRA" ($ rolled over from a 401(k)) be combined with a "contributory IRA" ($ which has come from regular IRA contributions)? -TOP

A:  Yes, however it is possible that the IRA owner will be in a position in the future to roll the IRA into a plan that does not accept rollovers from contributory IRAs, but would from rollover IRAs. In other words, there is not a requirement to keep the IRAs separate, but there may be a reason to.


 

  Q: Can a company have both a Keogh and a 401(k) plan? -TOP

A:  A Keogh isn't a type of plan. A "Keogh plan" is a qualified plan sponsored by a self employed individual. Otherwise, it is the same as any other plan. And, a self employed person can sponsor 2 plans, one of which is a 401(k) plan.


 

Q: Can an employer have both a Defined Benefit Plan and a 401(k) Plan, which they would run as a Safe Harbor Plan? If they did run it as a Safe Harbor Plan, would they have to make the 3% of compensation contribution rather than the matching Safe Harbor contribution? -TOP

A:  They can maintain both plans at the same time and the safe harbor 401(k) can have either pro-rata or matching contributions. Many times in situations like this, the defined benefit plan is used to provide the top heavy minimum.


401(k)plans

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