Your Retirement Plan Audit

AdministrationRetirement Plan Design Consulting Actuarial Services

An Inside Look at Your

Retirement Plan Audit

Pinnacle Plan Designwww.pinnacle-plan.com

http://www.pinnacle-plan.com/


The information contained in this presentation is accurate as of May 2014


Eligibility Determination

Maximum Permissible Provisions outlined in Code Section 410(a):

A trust shall not constitute a qualified trust under section 401(a) if the plan of which it is a part requires, as a condition of participation in the plan, that an employee complete a period of service with the employer or employers maintaining the plan extending beyond the later of the following dates-– (i) the date on which the employee attains the age of 21; or

– (ii) the date on which he completes 1 Year of Service.



Time of Participation:

A plan shall be treated as not meeting the requirements of (the above) unless it provides that any employee who has satisfied the minimum age and service requirements specified in such paragraph, who is otherwise entitled to participate in the plan, commences participation in the plan no later than the earlier of-

(i) The first day of the first plan year beginning after the date on which such employee satisfied such requirements, or

(ii) The date 6 months after the date on which he satisfied such requirements.



Example 1:Date of hire 7/10/2014Year of Service 7/9/2015Earliest 1st plan year next beginning 1/1/2016

Example 2:Date of hire 4/10/2014Year of Service 4/9/2015Earliest 6 months thereafter 10/9/2015We’ll usually use dual entry dates of 1/1 and 7/1, such that this participant is in on 7/1/2015.



Exceptions:

• 403(b) requires universal availability;

• Governmental plan;

• Church plan;

• Military and maternity leave

• Special 2-year of service permissible for non-401(k) plans

• Alternative “elapsed time” rules available if actual hours are not tracked.



A Year of Service – a 12-month period during which the employee has not less than 1000 hours of service.

– 12-month period must start with the 1st year of employment; thereafter

– May continue on employment/anniversary years (but causes administrative complexity), or

– Switch to 12-month plan year.



• Common terminology is “date of hire”.

• Date first performed an hour of service for the employer. NOT THE DATE THE OFFER OF EMPLOYMENT WAS EXTENDED TO PROSPECTIVE HIRE.

• Caution to disregard breaks in service only if permitted to disregard under terms of plan.



A M J J A S O N D J F M A M J J A S O N D

Eligibility Measurement Period

Eligibility Measurement Period

Vesting 1st Measurement

Vesting 2nd Measurement

Participation

Date of Hire

(April 1)July 1

End of Plan Year(Dec 31)

End of 1st

Employment Year

(March 31) July 1

End of Plan Year(Dec 31)



• Fewer entry dates means less room for error?

– Need to anticipate new entrants in order to serve required notices and disclosures.

• Participants may be left out of plan no more than 18-months.

• Watch for hire dates on January 2 or July 2.

• “Entry dates” relate to newly eligible employees; not necessarily the same as date individuals can make deferral election changes.


“Otherwise excludable” employees

• More liberal age and/or service requirements creates two groups of individuals for testing purposes.

• Employees gaining entry to plan prior to meeting these maximum permissible age/service requirements are referred to as “otherwise excludable”.


Participant CountEmployee

Eligible Employee

Meets Age/Service Requirement

Entry Date Reached & Employed

Participant

No $

Terminated

Has $

0% Vested Partially Vested

Terminated Terminated

Forfeited Paid in Full/Forfeited


Participant Count

Large Plan Audit Requirement

• 2 – 99 – Small plan

• 100 or more – Large Plan

• More than 120 – Large Plan

• 80 – 120 – Same as Last Year

If freezing plan benefits, should also consider freezing participation.


Participant Count


Compensation

Definition may vary for different purposes. The 3 most relevant to this group of attendees:

1. Allocation – refers to compensation for contribution allocation purposes, including for 401(k) elective deferral withholding.

2. Testing – 414(s) - compensation used in testing cannot be discriminatory. Must prove that the included compensation/total compensation is not more inclusive for the HCEs than it is for the NHCEs.

3. Safe Harbor contributions – must use a definition of compensation that passes 414(s).


Compensation for Allocation Purposes

• Defined in Adoption Agreement, but watch for potential modifications in basic plan document.

• Typically starts with some type of W-2 wages, with inclusions or exclusions.

• Deferral Elections (and other employer contributions) must be applied to this definition of compensation or there’s a failure to follow the terms of the plan document.

• Special language may be available within the plan document with respect to deferral elections.

• Dollar elections may be more “error free”.

• Ensure deferral election form doesn’t conflict with document provisions. (Isn’t it misleading to provide a separate election for catch-up contributions?)

• Think through application of definition to your organization’s practices, and design the plan to be as error free as possible.

• Keep it simple!


Compensation for Testing Purposes

• i.e. testing compensation for:– ADP = Average deferral % - i.e. utilization of 401(k)

component of plan;– ACP = Average contribution % - i.e. testing on the matching

contribution percentages– Non-elective (i.e. profit sharing and safe harbor non-

elective contributions)

• May/(could/should?) be the same as allocation compensation, if no exclusions from compensation were used.

• Must pass 414(s) (i.e. be non-discriminatory).– Ratio of compensation included, as it relates to grand total

compensation, must not be greater for HCEs than NHCEs.– IRS informal guidance provides 3% “wiggle room”.



414(s) Testing Compensation - Inclusion Ratio Test



• Failure of 414(s) doesn’t mean you change allocation; rather, need to test on compensation that does pass.

• Testing compensation not typically a plan provision; may cause challenges if it is.


Compensation for Safe Harbor Contributions

• Safe harbor contributions, for this purpose, includes:– Uniform allocation of PS contribution

– Permitted disparity allocation of PS contribution

– ADP Safe Harbor Contributions (i.e. safe harbor contributions that cause automatic passage of ADP testing)

– ACP Safe Harbor Contributions (i.e. safe harbor contributions that receive automatic passage of ACP testing.


Compensation for Safe Harbor Contributions

• Must use a definition of compensation that passes 414(s);

• Watch for definition in plan document;

• What would correction method be if 414(s) failed yet you must allocate based on definition in plan document?

• Safer to use a definition of allocation compensation that automatically passes 414(s).


Tying to Form W-2/W-3 Challenges

W-2 Box 1 – Wages Tips and Other

Compensation

Box 5 –Medicare Wages

Other Boxes

Pre-tax 401(k) deferrals

No Yes Box 12 – yes

Post-tax (Roth) deferrals

Yes Yes Box 12 - yes

Section 125-Cafeteria

No No Not noted on W-2

2% S-Corp Shareholder Medical Premiums

Yes No


Highly Compensated Employees

All participants fall into one of two categories:

• HCE – plan cannot discriminate in their favor

• NHCE – certain minimums required relative to what’s provided to HCEs

• Each contribution, benefit, right and feature subject to non-discrimination rules.

• About 100 pages of regulations on non-discrimination.



HCE:

In general, means any employee who

1. Was a 5% owner at any time during the year or preceding year, or

2. For the preceding yeara) Had compensation from the employer in excess

of $115,000;

b) If the employer elects, was in the top-paid group of employees for such preceding year.



Generally the preceding year refers to a “look-back” year that is the previous plan year.

Look-back year can never be less than 12-months long.

TPG – An employee is in the top-paid group of employees for any year if such employee is in the group consisting of the top 20 percent of employees when ranked on the basis of compensation paid during such year.

TPG useful document election if you desire to move otherwise HCEs down to NHCE group, and you’d want to do so if advantageous to the non-discrimination testing.

HCE due to ownership always HCE; this election potentially moves those who are HCEs solely due to compensation.


Key Employees

Employees also fall into one of two categories with respect to “key” or “non-key”. Key employees included:

• An employee owning more than 5% of the employer;

• An employee owing more than 1% of the employer and having compensation I excess of $XXX,XXX for 2014.

• An officer with annual compensation in excess of $XXX,XXX for 2014.


Non-Key Employee Minimums

A plan is “top heavy” if 60% or more of the plan’s assets are held by the Key employees.

A top heavy plan must provide certain minimum benefits if the plan benefits a key employee.

Plans in which there are solely 401(k) elective deferrals combined with contributions that satisfy the ADP or ACP safe harbors are deemed not top heavy.

401(k) elective deferrals count as a key employee benefit.Non-key employees in top heavy plan must receive minimum

of the greater of:• Highest benefit received by any Key employee;• 3% of annual 415 compensation.


What are you “saying” to employees?

Are you LITERALLY practicing what these documents say?• Plan document• Summary Plan Description• Safe Harbor Notice• Automatic Contribution Arrangement Notice• Fee Disclosure• Investment Election• Deferral Election• QDIA Notice• Summary Annual Report• Periodic Benefit Statement – changes coming!• Black Out Notice


What are you “saying” to employees?

• Is it consistent with the plan document?

• Is it consistent with the operations of the plan?

• Have they been made aware of the fees they will incur, or potentially may incur?

• Have they been made aware of all of their investment options, in writing?

• What does your Employee Handbook say about the plan? Best practice: Limit what you say here.

• How do you communicate its features? Best practice: Do so via reference to plan document.


Correcting operational errors

Most common errors:• Failure to provide opportunity to defer when eligible to do so.• Failure to fund contributions and loan repayments timely;

– Per pay-period safe harbor allocations due quarterly; otherwise due by last day of following plan year.

• Failure to implement deferral election;• Failure to implement deferral election on correct compensation;• Failure to cover employees of related employer;

Employee Plans Compliance Resolution System (EPCRS; Revenue Procedure 2013-50);• General principal is to restore the plan to where it would have been but for the

error;• Somewhat difficult to navigate.• Ensure correction is made in accordance with guidance; record-keepers get caught

up in navigating their systems rather than the law.


Maintaining and Amending the Plan

• Pre-approved plans (non-403(b)) : Amendment and Restatements on a 6-year cycle.

• A&R for EGTRRA closed 4/30/2010.

• A&R for PPA opened 5/1/2014; closes 4/30/2016.

• Good faith amendments made between cycles generally included:– 415– WRERA– HEART– PPA– Optional/discretionary amendments (including in-plan Roth conversion)– Windsor decision guidance in IRS Notice 2014-19 and, FAQs for 403(b)s in on IRS website.

• Review your A&R PPA document thoroughly before signing.– Ensure no unanticipated amendments occurring, especially cutbacks;– Ensure you’re still administering the plan in accordance with restatement;– Ensure all other notices and disclosures remain consistent, and reissue if necessary

• Pre-approved plans for 403(b)s – submission period for document sponsors through 4/30/2015 – likely 4/30/2017 before 2-year window begins on 403(b) plans. Dates subject to number of documents received by IRS and available resources.


Maintaining and Amending the Plan

• Anticipate any desired amendments before restating, especially if an ADP or ACP safe harbor plan, under which mid-year amendments are restricted. (See _____________________________.)

• Some pre-approved documents currently permit use of forfeitures for reduction in deposit requirement on safe harbor contributions; no longer permissible under PPA document.

– If safe harbor matching plan, advise adding discretionary ACP safe harbor source in order to utilize forfeitures.

– Not relevant if all plan assets are fully vested.

• Do not destroy historical documentation; must retain indefinitely.

• Fee disclosure best place to address fees rather than within the plan document.


Plan asset transfers/conversions

Current (unfortunate) climate has employers chasing lowest fees.

Evaluate record-keepers based on services needed for current plan design features:

• Prompting on newly eligible employees;• Prompting on deferral escalation;• Vesting increase procedures;• Prompting on loan payments not received;• Mailing of disclosures and notices;• Auto rollover opportunities;• Loan default alerts;• Ability to remit loan repayments post termination;• Ability to fund through multiple accounts.


Plan asset transfers/conversions

Plan carefully and communicate clearly:

• Clean up plan with respect to termination distributions prior to the transfer.

• Ensure all old distribution checks have cleared.

• Timing:– Blackout Notice;

• new investment options;• new default investment;• new fees;• new features;• mapping or reenrolling;• to all, INCLUDING TERMINATED, BENEFICIARIES AND ALTERNATE PAYEES.

– Last deposit to old record-keeper– First deposit to new record-keeper– Avoid liquidation crossing quarters


Collaboration

We strongly value collaboration, which means…

We Are a Part of Your Team

We Are Committed to Your Continued Success

We Listen and Offer Customized Solutions

We Respond Quickly to Your Needs


About Pinnacle Plan Design

Retirement Plan Design and Administration At Pinnacle Plan Design, we collaborate with employers and their advisors to design and administer retirement plans that turn tax dollars into retirement benefits.

Qualified retirement plans, such as 401(k) plans and defined benefit plans offer business owners and executives the ability to reduce current tax liabilities, help ensure their personal retirement plans stay aligned with firm goals, and provide a benefit to recruit and retain the talent needed to grow their business.


Robbie Petrillo, QKAPlan Opportunity [email protected](520) 618-1305

www.pinnacle-plan.com

http://www.pinnacle-plan.com/

Your Retirement Plan Audit

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