401(k) Plan - Plan Administrator's Guide - Ascensus Inc. · Plan Administrator’s Guide The...

401(k) PlanPlanAdministrator’s Guide

401(k) Plan Plan Administrator’s GuideThe material in this desktop guide has been drawn from sources believed to be reliable. Every effort has been made to ensure the accuracy of the material. But IRS forms, government regulatory positions, and laws are subject to change, so the accuracy of this information is not guaranteed. This Guide is sold with the understanding that the publisher and the editor are not engaged in rendering legal or accounting services. The material in this Guide reflects the law and regulatory interpretations as of the publication date of December 2018.

The information is designed to answer common questions on 401(k) plans; however, it may be necessary to refer to a more comprehensive text or other source to answer some questions. If you are unsure of an answer, consult a competent professional.

Ascensus® and the Ascensus logo are registered trademarks of Ascensus, LLC.

Copyright ©2018 Ascensus, LLC. All Rights Reserved.

This material may not be reproduced in whole or in part in any form or by any means without written permission from the publisher.

Printed in the United States of America.

This Guide is updated annually to incorporate new guidance issued throughout the year.

For information on industry and regulatory news, visit ascensus.com.

Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2 Plan Adoption . . . . . . . . . . . . . . . . . . . . . . . . 3

3 Plan Operations and Administration . . . . . . 6

4 Contributions . . . . . . . . . . . . . . . . . . . . . . . . . 8

5 Plan Testing . . . . . . . . . . . . . . . . . . . . . . . . . 11

6 Distributions . . . . . . . . . . . . . . . . . . . . . . . . 15

7 Portability . . . . . . . . . . . . . . . . . . . . . . . . . . 22

8 Reports and Notices . . . . . . . . . . . . . . . . . . 26

1

This Guide is a quick reference tool in a Q&A format for 401(k) defined contribution plan administrators. Under all 401(k) plans, the plan administrator is the individual or entity directly responsible for managing the plan’s daily operations.

For most plans, the employer sponsoring the plan serves as the plan administrator. But, depending upon the business, the employer may appoint another individual or entity to be the plan administrator and act as the employer’s representative. All references to the plan administrator in this Guide typically include individuals or entities working on behalf of or assisting the plan administrator with plan responsibilities. The plan administrator may wish to consult an attorney or tax advisor about questions that arise during the course of plan operations.

This Guide is intended to alert the plan administrator to various concepts and issues that are common to 401(k) plan operations. This Guide serves its purpose by bringing to the plan administrator’s attention important issues and requirements applicable to 401(k) plans. It is not intended as a comprehensive source for ensuring compliance with all qualified retirement plan rules under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). It is intended to assist the plan administrator in identifying plan administration issues—some of which may require tax or legal advice. This Guide is not a substitute for the competent tax and legal advice that a plan administrator may require from time-to-time while performing administrative duties.

The 401(k) basic plan document and adoption agreement specify some of the plan operations for which the plan administrator is responsible. Depending upon the plan administrator’s relationship with the plan sponsor (e.g., the document provider for pre-approved plans), the plan administrator may directly or indirectly be involved in

• formulating plan policy consistent with plan documentation;

• determining participation, contribution, and distribution eligibility;

1 Introduction

2 – Introduction

• maintaining plan records;

• preparing and filing government reports; and

• communicating regularly with employees (and beneficiaries) participating in the plan.

A plan administrator should clarify and document areas of responsibility for plan administration with the plan sponsor to ensure the timely performance of all required plan operations.

If a plan is not operated by the terms of its document or is otherwise noncompliant with Department of Labor (DOL) or Internal Revenue Service (IRS) requirements, plan disqualification could result. The DOL and the IRS provide correction programs to help plan administrators identify and correct plan defects.

3

Q What documents are required to establish a 401(k) plan?

A During the second restatement cycle, employers may use plan documents that generally consist of two components: the basic plan document (BPD) and the adoption agreement. The BPD contains all of the nonelective provisions and rules governing the plan. These rules are applicable to all adopting employers. The adoption agreement contains the elective plan provisions. Together with the default provisions in the BPD, the provisions that the employer selects in the adoption agreement govern how the plan will operate in terms of eligibility, vesting, contributions, allocations, etc. Once the employer signs the adoption agreement, the plan sponsor should keep a copy and give a copy of the plan document and the signed adoption agreement to the employer.

During the third restatement cycle (known as “Cycle Three”), plan documents may consist of two formats—either a single plan document or a BPD with an adoption agreement. These documents are expected to be available sometime during 2020.

NOTE: 401(k) plans are subject to a six-year restatement cycle (i.e. every six years employers must adopt new pre-approved plan documents).

Q Does the plan administrator have to do any more than sign required documentation to adopt a 401(k) plan?

A Before signing the plan documents, the employer should take formal steps, if necessary, to adopt the plan. These steps vary depending upon the employer’s legal structure. For example, if the business is organized as a corporation, the board of directors must adopt a resolution authorizing the adoption of the plan. If

2 Plan Adoption

4 – Plan Adoption

the business is a partnership, the plan administrator should consult the partnership agreement to determine the steps necessary, if any, to formally adopt the plan.

Q Does the plan administrator have to submit the plan documents to the IRS for approval?

A If the business has adopted a prototype plan, it generally can rely on the favorable opinion letter issued to the prototype plan sponsor concerning the tax qualification of the plan. If the plan is a volume submitter plan, the volume submitter practitioner receives an IRS advisory letter indicating approval of the specimen plan that the business can rely on.

NOTE: In June 2017, the IRS released Revenue Procedure (Rev. Proc.) 2017-41. This guidance describes the IRS’ new pre-approved qualified retirement plan program, which will replace the current master, prototype, and volume submitter programs with a single opinion letter program for standardized and nonstandardized documents. This change will affect plans being restated during Cycle Three. Rev. Proc. 2017-41 was later modified by Rev. Proc. 2018-42.

Q Once the plan is established, how are the plan assets protected?

A Employers generally must purchase a bond to protect the plan assets against acts of fraud or dishonesty. As a general rule, certain individuals (e.g., plan fiduciaries, officers, or employees) who “handle” plan assets must be bonded for at least 10 percent of the amount of the plan assets that they handle. Plan administrators, however, must be bonded for 10 percent of the full dollar value of the plan. The minimum bond amount, irrespective of plan asset value, is $1,000. The maximum amount required is $500,000. The maximum bond for plans that hold employer securities, however, is $1,000,000.

Plan Adoption – 5

Q How are employees notified about the new plan and its provisions?

A All eligible employees must receive a summary plan description (SPD), which is a comprehensive, easily understood explanation of the plan’s provisions. The plan sponsor typically will prepare the SPD for the employer. The employer must distribute the SPD to all eligible, common-law employees within 120 days of the plan’s adoption.

6

3 Plan Operations and Administration

Q How does the plan administrator determine when an employee is eligible to participate in the plan?

A Before being allowed to participate in the plan, the employee must meet certain eligibility requirements, such as the plan’s minimum age and service requirements (discussed later). Once an employee has met the minimum age and service requirements (in addition to any other eligibility criteria), he may enter the plan. But in most retirement plans, the employer designates specific dates (often referred to as plan entry dates) that a participant must reach before entering the plan.

Once an otherwise eligible employee has completed the initial age and service requirements, she must be allowed to enter the plan within six months of the time she completes such requirements or, if earlier, the first day of the following plan year.

Consequently, while plan entry dates may vary between plans, many 401(k) plans designate the first day of the plan year and the first day of the seventh month of the plan year as the plan entry dates. For example, many plans that operate on a calendar-year basis choose plan entry dates of January 1 and July 1.

Q Can plan administrators exclude employees based on age?

A Plan administrators may impose minimum age requirements for purposes of determining an employee’s eligibility to participate in a 401(k) plan, but they may not require employees to reach an age greater than 21 before becoming eligible to participate in a 401(k) plan.

Plan Operations and Administration – 7

Plan administrators may not exclude employees solely because the employee has reached a given age (e.g., age 65). Assuming an employee has met the plan eligibility requirements, he will continue to receive contributions beyond age 70½ if he continues employment.

Q Is there a maximum service requirement that employees must meet before becoming eligible to participate in a 401(k) plan?

A A plan administrator may not require an employee to complete more than one year of service to be eligible for participation in a 401(k) plan (two years for non-401(k) plans). To be credited with a year of service for plan eligibility purposes, an employee generally must work a minimum number of hours (up to 1,000) during a 12-month computation period. For eligibility purposes, the first 12-month period starts on the employee’s date of hire.

Q Does the plan administrator have to continue to monitor employee eligibility to participate in the 401(k) plan?

A After initial participant enrollment in the 401(k) plan has been completed, the plan administrator should periodically review the conditions for plan eligibility and participation as new employees become eligible to participate in the plan. The plan administrator should refer to the plan documents for minimum age and service requirements and plan entry dates and procedures.

As new employees become eligible, the plan administrator must provide them with a written summary that details information unique to the employer’s plan, such as entry dates, contribution formulas, vesting schedules, and other features. New employees also must receive an SPD within 90 days of becoming eligible to participate.

8

Q What kind of contributions can plan participants make to a 401(k) plan?

A At a minimum, 401(k) plans generally allow participants to make pretax deferrals. Some 401(k) plans also allow participants to make Roth deferrals. The plan documents will indicate whether the plan allows for Roth deferrals. Pretax and Roth deferrals typically are made to the plan through a payroll deduction process. The plan administrator should refer to the plan document to determine if the participant must make an affirmative election to begin contributing or if the plan contains automatic contribution arrangement provisions (discussed later). Pretax deferrals are not subject to federal income tax withholding, but are subject to Federal Insurance Contribution Act (FICA) and Federal Unemployment Tax Act (FUTA) tax. Roth deferrals are subject to federal income tax as well as FICA and FUTA. The plan administrator should refer to the plan documents to determine the type of compensation from which elective deferrals may be made to the plan.

Regular 401(k) plans may allow participants to make additional contributions on an after-tax basis. These are called nondeductible employee contributions. The plan documents will determine whether the plan provides for nondeductible employee contributions.

Q What are “matching contributions”?

A Many 401(k) plans provide for an employer contribution that matches employee 401(k) deferrals. These employer contributions are called matching contributions. The plan documents typically will limit the match to a percentage of deferrals or a compensation ceiling. The plan administrator

4 Contributions

Contributions – 9

should refer to the plan documents to determine if the plan allows or requires matching contributions and, if so, to find the matching contribution formula and vesting schedule.

Q What other types of contributions can employers make?

A In lieu of matching contributions, an employer who maintains a 401(k) safe harbor or SIMPLE 401(k) plan may choose to make nonelective contributions to employees who have met the plan’s eligibility requirements, entered the plan, and earned a minimum amount of compensation. Nonelective contributions are made to all eligible employees—even those who are not contributing to the plan.

Some regular 401(k) plans (i.e., not 401(k) safe harbor or SIMPLE 401(k) plans) also provide for an employer profit sharing contribution to be made annually, subject to employer discretion. The plan documents will indicate whether the plan provides for a profit sharing contribution and, if so, the contribution and allocation formula and vesting schedule that applies to the contributions.

Q What are QNECs and QMACs?

A Because regular 401(k) plans are subject to special nondiscrimination tests, a plan also may provide for special contributions called qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs). These contributions typically are made to satisfy any deficiencies in a plan’s 401(k) nondiscrimination testing. The plan documents will determine whether QNECs or QMACs can be made under the plan.

10 – Contributions

Q Are 401(k) plan contributions nonforfeitable?

A All pretax deferrals, Roth deferrals, 401(k) safe harbor minimum matching and nonelective contributions, SIMPLE 401(k) matching and nonelective contributions, nondeductible employee contributions, QNECs, and QMACs are nonforfeitable when made. This means that employees are 100 percent vested in these contributions at all times. Profit sharing and matching contributions made to regular 401(k) plans, however, may be subject to vesting schedules. The plan documents will indicate whether a vesting schedule applies to these contributions.

Q What are automatic contribution arrangements?

A Some 401(k) plans incorporate automatic contribution arrangements (ACAs), which allow plan administrators to withhold a predetermined percentage of compensation as an employee deferral if a plan participant fails to elect not to have deferrals withheld from compensation.

Q When must plan administrators deposit 401(k) plan contributions?

A To ensure the deductibility of an employer contribution for a given tax year, the plan administrator must deposit the contribution into the plan by the business’ federal income tax return due date (including extensions).

Plan administrators must deposit employee deferrals as soon as administratively possible, but a safe harbor deadline is available for plans with less than 100 participants. Under the safe harbor deadline, plan administrators are deemed to have deposited employee deferrals as soon as administratively possible if they deposit the deferrals within seven business days after withholding from the employee’s pay.

11

Q Are there any annual tests that a 401(k) plan might have to pass?

A To maintain its favorable tax status, a 401(k) plan must pass several tax qualification and nondiscrimination tests each plan year. The nondiscrimination rules exist to ensure that highly compensated employees (HCEs) and key employees do not receive, or have available to them, disproportionately more valuable benefits than those received by, or made available to, lower paid employees.

Q How does the plan administrator determine if an employee is an HCE?

A An HCE is someone who

• was more than a five percent owner at any time during the current plan year or preceding year, or

• during the preceding year earned more than $125,000 (for 2019 and $120,000 for 2018) in compensation. For example, for the 2020 plan year, look back to the compensation figure in effect for 2019 ($125,000). (The employer may elect to use the additional condition of membership in the top-paid group when determining HCE status. This election may be revoked.)

Q Which employees are considered key employees?

A An employee is considered a key employee if, at any time during the plan year, the employee is

• an officer of the employer and has annual compensation greater than $180,000 for 2019 and $175,000 for 2018 (indexed),

• a more than five percent owner of the company, or

• a more than one percent owner of the company with annual compensation exceeding $150,000 (not indexed).

5 Plan Testing

12 – Plan Testing

Q How do the nondiscrimination rules apply to 401(k) plans?

A IRC Section (Sec.) 401(a)(4) prohibits 401(k) plans from discriminating in favor of HCEs. Under these rules, a 401(k) plan must be nondiscriminatory in each of three general categories.

1. Amount of contributions or benefits

2. Availability of benefits, rights, and features

3. Effect of plan amendments and terminations

Q What is the minimum coverage rule?

A IRC Sec. 410(b) requires that a minimum percentage of non-HCEs be covered by the plan in relation to the percentage of HCEs covered by the plan. A plan will pass this test if at least 70 percent of the non-HCEs are covered by the plan.

Q What is the top-heavy rule?

A IRC Sec. 416 provides that a 401(k) plan is top heavy if more than 60 percent of all plan assets are held in the accounts of key employees. If a 401(k) plan is top-heavy, the plan administrator must follow special rules that may include making a minimum contribution for non-key employees.

NOTE: The top-heavy rules do not apply to SIMPLE 401(k) plans.

Q What is the annual additions rule?

A IRC Sec. 415 limits the contribution amount that can be allocated to a participant for any plan year. The maximum amount that may be allocated to any participant during any plan year is limited to the lesser of 100 percent of the participant’s compensation or $55,000 for 2018 and $56,000 for 2019 (indexed for cost-of-living).

Plan Testing – 13

Q What are the 402(g) limitations?

A IRC Sec. 402(g) requires that deferrals made during a participant’s tax year (generally the calendar year) do not exceed the required limitations, which are indexed annually ($18,500 in 2018 and $19,000 in 2019). If a participant exceeds the limit, an excess deferral exists and the employer must take steps to correct the excess.

Q What is the ADP test?

A IRC Sec. 401(k) limits the percentage of compensation that HCEs may defer into the plan each year in relation to the percentage deferred by non-HCEs. This test is called the actual deferral percentage (ADP) test, and involves a series of mathematical computations. If the plan fails the ADP test, the plan administrator should consult the plan documents to determine the steps necessary to correct the excess contributions. This likely will involve returning deferrals to the HCEs or making a QNEC or QMAC. The ADP test will be deemed satisfied, however, if the plan uses an available ADP test safe harbor.

NOTE: The ADP test does not apply to SIMPLE 401(k) plans.

Q What is the ACP test?

A IRC Sec. 401(m) requires that the matching or after-tax contributions made or received by HCEs be compared with those made or received by non-HCEs. This test is called the actual contribution percentage (ACP) test. This test involves a series of mathematical computations similar to those used in the ADP test. If the plan fails the ACP test, the plan administrator should consult the plan documents to determine the steps necessary to correct these “excess aggregate contributions.” The ACP test will be deemed satisfied, however, if the plan administrator uses an available ACP test safe harbor.

NOTE: The ACP test does not apply to SIMPLE 401(k) plans.

14 – Plan Testing

Q What type of compensation is used to perform the various qualification and nondiscrimination tests?

A To perform the various tests described previously, the plan administrator often must calculate each participant’s compensation first. The type of compensation used for each test, however, can vary. Some tests allow the plan to define the compensation type, while others have statutorily defined compensation types. The plan administrator should refer to the plan documents for more information.

Q Can a 401(k) plan avoid ADP/ACP testing?

A A 401(k) plan may avoid ADP/ACP testing by adopting and satisfying certain safe harbor provisions. These provisions require specific employer contributions to be made, based on elections made in the plan documents. The plan administrator also must provide specific safe harbor notices to eligible employees at required times. Plans that meet the ADP/ACP safe harbor requirements generally are deemed to meet the top-heavy testing requirements.

15

Q How does the plan administrator determine which distribution options are available under the 401(k) plan?

A The plan documents specify the forms of distribution available under the plan. Plans subject to the Retirement Equity Act of 1984 (REA) must distribute plan assets in the form of an annuity unless this option is properly waived. The plan documents will determine whether distributions from the plan may be taken in forms other than an annuity, or whether a waiver is required to do so.

Q When is a participant allowed to take distributions from the plan?

A A participant (or his designated beneficiary) generally may begin taking distributions upon one of the following events (known as triggering events).

• Attainment of normal retirement age (as defined in the plan)

• Death

• Disability

• Attainment of age 59½ (employee 401(k) contributions only)

• Severance of employment

• Plan termination

The plan administrator should refer to the plan documents to determine the specific circumstances under which participants may receive distributions.

6 Distributions

16 – Distributions

Q Can a participant take a distribution before a standard triggering event occurs?

A In addition to the previously described standard triggering events, profit sharing plans (including 401(k) plans) may allow plan participants to take in-service distributions of employer contributions. An in-service distribution provision permits participants to take distributions from the plan before incurring a standard triggering event. Similar to other distributions, the maximum amount that a participant may withdraw as an in-service distribution is the vested portion of her account balance. The amount, however, may be further limited depending on the length of time the employee has been a participant in the plan and depending on whether the in-service distribution is taken because of financial hardship. The plan administrator should refer to the plan documents to determine if the plan allows these types of distributions.

Q May the plan administrator make a distribution to a participant who has a hardship?

A The plan documents indicate whether hardship distributions are available. Hardship distributions that occur before the time an employee reaches age 59½ may be subject to a mandatory 10 percent penalty tax.

To qualify as a hardship distribution, the distribution must be made on account of an immediate and heavy financial need. The distribution also must be necessary to satisfy the immediate and heavy financial need.

Distributions – 17

Q What does the IRS consider an immediate and heavy financial need?

A The IRS provides certain safe harbor expenses that constitute an immediate and heavy financial need for hardship distribution purposes. Employers maintaining a nonprototype plan are not subject to these safe harbors. Instead, employers may consider all relevant facts and circumstances associated with the requested distribution before granting a hardship distribution of elective deferrals. Employers maintaining prototype plans, however, must follow these safe harbors.

• Medical expenses of the employee, spouse, beneficiary, or dependents of the employee

• Purchase of a principal residence for the employee, excluding mortgage payments

• Rent or mortgage payments needed to prevent the eviction of the employee from, or foreclosure of the mortgage on, the employee’s principal residence

• Tuition and fees for the next 12 months of post-secondary education of the employee, spouse, children, beneficiary, or other dependents of the employee

• Funeral expenses of the employee, spouse, parent, beneficiary, or dependent of the employee

• Repair of damage to the employee’s principal residence that would qualify for the casualty deduction

The plan administrator should refer to the plan documents to determine if the plan allows these types of distributions.

NOTE: Proposed regulations issued in November 2018 would add a new safe harbor for “expenses and losses—including loss of income—incurred by the employee” in FEMA-declared disasters; This would apply to distributions taken on, or after, January 1, 2018.


Q How can the plan administrator determine if a distribution is necessary to satisfy the immediate and heavy financial need?

A The plan administrator must consider all of a participant’s financial resources to determine whether a hardship distribution is needed to satisfy an immediate and heavy financial need. The plan administrator may rely on a participant’s written certification that states why the need cannot be relieved by other resources.

If the following conditions are met under the safe harbor rules, a hardship distribution will be deemed necessary, thereby alleviating the need for the plan administrator to consider all of a participant’s financial resources. Prototype plans always must use the safe harbor rules.

• Although the distribution may not exceed financial need, the amount may include any amounts necessary to pay federal, state, and local income taxes (and any penalty taxes) that the participant is likely to incur because of the distribution.

• The participant receives any other distributions or loans available under all of the employer’s qualified plans before the hardship distribution is deemed necessary. (Depending on the plan document, this requirement may not be applicable after 2019.)

• The participant cannot make any elective deferrals (or employee after-tax contributions) under all of the employer’s plans for a period of six months following the hardship distribution. Effective January 1, 2020, the Bipartisan Budget Act of 2018 and proposed regulations will no longer allow for a six-month suspension of deferrals following a hardship distribution. Employers may still require this for distributions taken before January 1, 2020.

NOTE: If finalized, proposed regulations would require employers to use one general standard when determining whether a hardship distribution is necessary to satisfy a financial need (optional for distributions taken before January 1, 2020; required for distributions taken on or after January 1, 2020).


Q Is the plan administrator responsible for providing any notices at the time of distribution?

A The plan administrator must give a notice that describes tax treatment options to participants who request a payment from the plan. This notice generally must be provided to the participant at least 30 days, but no more than 180 days, before the distribution.

To satisfy requirements under IRC Sec. 411(a)(11) and REA, the plan administrator also may have to provide a notice to properly get a participant’s consent before distributions occur.

Q Does the plan administrator have to make distributions to participants who reach age 70½?

A Special distribution rules apply when plan participants reach age 70½. Similar rules also apply to distributions to beneficiaries of deceased plan participants. Plan participants generally must begin taking required minimum distributions (RMDs) when they reach their required beginning date (RBD). The RBD generally is April 1 of the year following the year in which a participant turns age 70½ or, if later, April 1 of the year following the year in which a participant who is not a five percent owner separates from service. Once triggered, an RMD must be taken annually by December 31. In general, the RMD amount will be determined by dividing the balance in the participant’s account by the applicable life expectancy factor.

Q Can a distribution of plan assets be made to an ex-spouse in the case of a divorce?

A Under limited circumstances, a distribution of a plan participant’s benefits may be made pursuant to a divorce or legal separation. The plan administrator must ensure that any distribution relating to child support, alimony, or marital property is considered a qualified distribution according to the terms of the plan. To accomplish this, the plan administrator (or the plan’s legal


counsel) should review the plan documents and any domestic relations order that concerns plan assets to determine whether the order is a qualified domestic relations order (QDRO) under the plan. Once this determination has been made, the plan administrator must notify all persons affected by the determination within a reasonable time. Any distribution of benefits made pursuant to a QDRO is nontaxable to the participant if the alternate payee is the spouse or former spouse of the participant.

Q Can the IRS place a levy on plan assets?

A Creditors generally may not levy plan assets. A limited exception to this rule exists for the benefit of the IRS, which is recognized as the tax collector for the United States Government. The IRS may attempt to satisfy a tax lien through levy upon plan assets. Under these circumstances, the financial organization in custody of the plan assets will receive an IRS form called a “Notice of Levy.” It will then be incumbent upon the financial organization to follow the appropriate steps required by law.

Q Can a participant take a loan from a 401(k) plan?

A Under certain circumstances, plan participants may be eligible to receive loans from their plan assets. The plan administrator should refer to the plan documents to determine if the plan offers a plan loan program.

Q Are there any requirements that loans have to meet to be exempt from the prohibited transaction rules?

A All 401(k) plan loan programs generally must have the following characteristics.

• Loans must be made available to all participants and beneficiaries on a reasonably equivalent basis.

• Loans must not be made available to HCEs, officers, or shareholders in an amount or ratio greater than the amount available to other employees.


• Loans must be made in accordance with specific loan provisions as described in the loan disclosures part of the SPD.

• Loans must bear a reasonable interest rate.

• Loans must be adequately secured.

• Loans must have level amortization, with payments at least quarterly.

• Loans generally must be repaid within five years.

• Loans must not exceed statutory limits.

22

Q Can a participant roll over distributions to other retirement plans?

A Many different types of plan assets may be rolled over to an IRA or to another employer’s qualified retirement plan. Distributions that may be rolled over are called eligible rollover distributions.

Q Which distributions are eligible rollover distributions?

A Most distributions are eligible rollover distributions except for amounts that are

• required minimum distributions (RMDs),

• distributions that are part of a series of substantially equal periodic payments that will last for the participant’s lifetime (or joint lives of the participant and beneficiary) or for a specified period of 10 years or more,

• distributions paid to nonspouse beneficiaries of deceased participants,

• certain distributions to correct plan excess contributions, and

• distributions because of hardship.

7 Portability

Portability – 23

Q What types of plans are eligible to receive rollovers?

A An employee may roll over any eligible rollover distribution from one eligible retirement plan into another eligible retirement plan. Eligible retirement plans include

• Traditional, Roth, and SIMPLE IRAs,

• 401(a) qualified plans,

• 403(a) qualified annuity plans,

• 403(b) plans, and

• governmental 457(b) plans.

Employees may only roll over Roth elective deferrals and the associated earnings to a Roth IRA or another Roth 401(k) or 403(b) plan that separately accounts for the rollover amounts.

In addition, after-tax contributions may be included in an eligible rollover distribution provided that the receiving plan is an IRA or a retirement plan that separately accounts for the after-tax amounts. Plan administrators should refer to the plan documents to determine which types of rollovers are allowed in their plans.

NOTE: Individuals may roll over assets from Traditional IRAs, QRPs, 403(b) plans, and governmental 457(b) plans to SIMPLE IRAs. But they first must satisfy a two-year waiting period beginning on the date the first contribution under the employer’s SIMPLE IRA plan was made to the SIMPLE IRA.

Q How does the plan administrator directly roll over assets to an IRA or to another plan?

A IRS regulations allow the plan administrator to establish reasonable procedures that participants must follow to elect a direct rollover. The plan administrator also may ask participants and the provider of the receiving IRA (or a representative of the new employer’s plan) to provide reasonable information about the IRA or plan as a condition of the direct rollover.

24 – Portability

When issuing a check for a direct rollover, the regulations specify that the check is to be made payable to the trustee, custodian, or issuer of the IRA or new plan. For example, if John Q. Smith elects a direct rollover to his IRA at ABC Financial Organization, the payee line of the check should read “ABC Financial Organization as trustee of John Q. Smith’s IRA.”

Q What if a participant chooses to take a distribution of the assets rather than directly rolling over the assets?

A Eligible rollover distributions that are not directly rolled over to an IRA or to another eligible plan are subject to mandatory 20 percent federal income tax withholding. In other words, a plan participant who requests a check payable to herself will receive only 80 percent of the payment. The plan administrator must withhold 20 percent of the payment and send it to the IRS as income tax withholding to be credited against the participant’s income tax liability. The participant cannot waive withholding on any eligible rollover distribution that is paid directly to herself.

Q Can plan participants directly roll over their pretax and after-tax assets to different retirement plans?

A The IRS allows individuals to split pretax and after-tax employer plan assets that are directly rolled over to multiple destinations (i.e., other employer plans or IRAs). For individuals attempting to roll over pretax assets to a Traditional IRA and after-tax assets to a Roth IRA, this eliminates the need to complete two separate indirect rollovers.

Portability – 25

Q What is the difference between a direct rollover and a transfer?

A While the transactions do have some similarities (e.g., in both types of transactions, checks generally are made payable to a new trustee or custodian), the differences between the two transactions are quite distinct. A direct rollover occurs when a participant who is eligible to receive a distribution elects to move his retirement assets directly to another qualified retirement plan or directly to an IRA. In other words, a participant’s account balance is being moved to an entirely different plan. Because a direct rollover technically represents a distribution followed by an immediate rollover, the distributing plan must comply with all of the standard distribution procedures (e.g., providing REA notices).

With a transfer, an employer generally is moving an entire plan from one trustee/custodian to another. Because an entire plan generally is being moved in a transfer, no distribution reporting is required and the plan administrator need not follow the standard distribution procedures.

26

Q What types of reports and notices must the 401(k) plan administrator provide?

A The following is a summary of possible disclosure and reporting requirements.

8 Reports and Notices

REQUIRED DOCUMENTS DESCRIPTION TIMING

Notice to Interested Parties

A plan must inform interested parties if it applies for an IRS determination letter as to the plan’s qualified status.

The plan administrator must provide the notice no less than 10 and no more than 24 days before the time the application is filed.

Salary Reduction Agreement

Allows participants to authorize a reduction of salary or wages by a specific amount or percentage each pay period.

The plan participant must complete and sign the agreement before payroll deductions start.

Investment Direction Form

Allows participants to direct how their plan assets are invested.

The plan participant should complete this form when she signs the Salary Reduction Agreement.

Beneficiary Designation Form

Allows participants to name beneficiaries for their 401(k) plan assets.

The employee should complete this form when she begins participation in the plan.

Summary Plan Description (SPD)

Provides vital plan information in an easily understood manner.

Distribute the SPD to employees within 120 days after plan adoption. Distribute the SPD to each new participant within 90 days after plan entry and to each beneficiary receiving benefits within 90 days after commencement of benefits.

Participant Disclosure/Reporting

Reports and Notices – 27


Summary of Material Modifications (SMM)

Summary of changes to the document that also affect the SPD; or may provide updated SPD.

Distribute the SMM to employees within 210 days after the end of the plan year during which the change was adopted. The plan administrator must distribute the SMM to each plan participant and beneficiary receiving benefits.

Summary Annual Report (SAR)

Summary of Form 5500, including plan expenses and value of plan assets, and right to receive full 5500.

The plan administrator must distribute the SAR annually, the later of nine months after the close of the plan year or two months after the SAR is due (in the case of an IRS granted extension) to each plan participant and beneficiary receiving benefits.

Qualified Domestic Relations Order (QDRO)

The plan administrator must determine whether a DRO meets the IRC Sec. 414(p) specifications to be a QDRO.

The plan administrator, upon receipt of a DRO, must promptly notify each affected plan participant and beneficiary of the plan’s procedures for determining the DRO’s qualified status. The plan administrator must send a second notice once a QDRO determination has been made.

Form 1099-R The plan administrator must provide a Form 1099-R to each participant or beneficiary who receives a distribution from the plan.

Forms 1099-R are due to participants by January 31 of the year after distribution.

Form 1098-Q The QLAC issuer must generate Form 1098-Q for each plan participant who purchases a QLAC.

Forms 1098-Q are due to participants by January 31.

IRS Form W-4P or Substitute Form

Explains IRS withholding requirements and allows distribution recipients to make withholding elections.

In general, the plan administrator must provide the notice annually to individuals receiving periodic payments from the plan and each time an individual receives a nonperiodic payment.

Participant Benefit Statement

Statement of nonforfeitable balance, includes certain required disclosures.

A plan administrator must provide a statement of benefits to plan participants at least quarterly for plans that allow participants to direct their investments. Plans that are not participant-directed must provide benefit statements annually.

28 – Reports and Notices


Qualified Preretirement Survivor Annuity (QPSA) Notice

Explains the participant’s and spouse’s right to receive distributions in the form of a life annuity, and the right to waive this option (applies only to plans subject to REA).

Provided within the applicable period (i.e., whichever of the following periods ends last).• The period beginning with the

first day of the plan year in which the participant attains age 32 and the last day of the plan year in which he attains age 34.

• A one-year period ending after the individual becomes a participant.

• A one-year period ending after the QPSA is no longer fully subsidized.

• A one-year period after IRC Sec. 401(a)(11) first applies to the participant.

If the participant separates from service before age 35, the employer must provide the notice within a one-year period of time following the separation.

If the participant waives the QPSA before age 35, the plan must provide the participant with a new notice, and require a new election or waiver to be made.

Qualified Joint and Survivor Annuity (QJSA) Notice

Informs participants of the terms and conditions of the QJSA, their right to waive the QJSA, and the optional forms of benefit under the plan (applies only to plans subject to REA).

The plan administrator must provide the notice to each plan participant no more than 180 days and no less than 30 days before distributions commence. A participant may reduce the 30-day distribution waiting period to 7 days.

IRC Sec. 402(f) Notice

Informs participants of tax treatment applicable to eligible rollover distributions

The plan administrator generally must provide the notice to the plan participant no more than 180 days and no less than 30 days before eligible rollover distributions commence. Participants may waive the 30-day distribution waiting period.



IRC Sec. 411(a)(11) Notice

Explains a participant’s distribution options and automatic rollover requirement.

The plan administrator generally must provide the notice to the plan participant no more than 180 days and no less than 30 days before distributions commence. Participants may reduce the 30-day waiting period to 7 days.

ERISA Sec. 404(c) Notice

Disclosure of intent to satisfy ERISA Sec. 404(c), including investment options

The plan administrator generally provides this information with the SPD.

Sarbanes-Oxley Blackout Notice

The plan administrator must notify affected plan participants if a blackout period (i.e., a period during which participants cannot make changes to their retirement plan assets) will last more than three consecutive business days.

The plan administrator generally should provide the notice no more than 60 days and no less than 30 days before the blackout period starts.

SIMPLE 401(k) ContributionNotice

Notification of participant’s rights to make or change deferral election, and the employer contribution that will be provided for the current or coming plan year.

The plan administrator must provide the notice to plan participants within a reasonable time before the 60th day before the beginning of each year.

NOTE: This notice applies only to SIMPLE 401(k) plans. It does not apply to regular 401(k) plans.

ADP/ACP Safe Harbor Notice

Summary of ADP/ACP safe harbor employer contributions and how to make deferral elections (applies only to ADP/ACP safe harbor 401(k) plans)

The plan administrator generally must provide the notice to each plan participant no earlier than 90 days and no later than 30 days before the beginning of each plan year. (Additional notice requirements apply if a plan adds safe harbor provisions mid-year.)

Automatic Contribution Arrangement (ACA) Notice

Notice of participant’s right to make an affirmative election, and consequences of not making an election.

Eligible employees in an ACA must receive this notice within a reasonable time before the first day of the plan year (generally 30 days).

Eligible Automatic Contribution Arrangement (EACA) Notice


Eligible employees in an EACA must receive this notice within a reasonable time before the first day of the plan year (generally 30–90 days).



Qualified Automatic Contribution Arrangement (QACA Notice)


Eligible employees in a QACA must receive this notice within a reasonable time before the first day of the plan year (generally 30–90 days).

Qualified Default Investment Alternatives (QDIAs)

Default fund information to be followed if participant does not make investment elections. Includes participant’s rights to make own elections

The plan administrator generally must provide this notice at least 30 days before the first day of the plan year.

Participant Directed Fee Disclosures

Disclosure of fees assessed against participant accounts

Timing of initial/annual notice• Provided on or before the date

participant can first direct investments

• Annually thereafterStatement of fees is provided on a quarterly basis (included in participant statement)

IRS Disclosure/Reporting


Application for Determination Letter (District Submission)

Currently, the plan administrator must file the following documents with the IRS: plan document, adoption agreement, IRS Form 8717, favorable opinion letter, prior determination letter, IRS Form 5300, 5307, 6406, or 5310, and IRS Schedule Q (optional).

The plan administrator must file the documents timely with the IRS after the Notice to Interested Parties is given (see page 24).



Form 5500-EZ and Form 5500

The plan administrator must file Form 5500-EZ if the plan has more than $250,000 in assets and covers only the sole proprietor and spouse or the partners and spouses. The plan administrator must file Form 5500 and appropriate schedules (depending on large plan or small plan designation).

The plan administrator must file the reports with the DOL by the last day of the seventh month following the close of the plan year.

Form 8955-SSA Disclosure of vested account balance and form of benefit to plan participants who have separated from service

The plan administrator must provide the statement by the last day of the seventh month, following plan year end (plus extensions)

Form 1099-R The plan administrator must generate a Form 1099-R for each plan participant or beneficiary that receives a 401(k) plan distribution.

The plan administrator must file with the IRS by February 28 (March 31 if filing electronically) of the year after distribution.

Form 1098-Q The QLAC issuer must generate a Form 1098-Q for each plan participant who purchases a QLAC.

The plan administrator must file with the IRS by February 28 (March 31 if filing electronically).

Form 945 The plan administrator must file Form 945 to report all withholding on nonpayroll distributions.

The plan administrator generally must file by January 31 of the year following the year to which it relates.

Form 945-A Certain plan administrators deemed “semiweekly depositors” must file Form 945-A to report the withholding amount collected each day.

This form is attached to Form 945.



SPD Provides vital plan information in an easily understood manner.

File with DOL if requested.

SMM Summary of changes to the document that also affect the SPD; or may provide updated SPD.

File with DOL if requested.

Department of Labor Disclosure/Reporting

Ascensus provides administrative and recordkeeping services and is not a broker-dealer or an investment advisor .

279 (12/2018)

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