Amendments for Adding Automatic Enrollment

The IRS has issued two sample plan amendments for adding an automatic enrollment feature to a 401(k) plan. The first amendment can be used to add an automatic contribution arrangement. The second can be used to add an eligible automatic contribution arrangement (EACA) that allows employees to opt out of automatic enrollment in the plan and to withdraw their automatic contributions within 90 days of the first automatic contribution. Employers may adopt these amendments as late as the end of the plan year in which the amendment is to be effective or, for plans with existing automatic enrollment features, as late as the first day of the plan year beginning on or after January 1, 2009. Employees must be given proper notice of the automatic contribution arrangement. Special deadline rules apply to governmental plans. The amendments do not have to be adopted verbatim. In fact, in many cases, employers will need to modify the chosen amendment to conform to their plan’s terms and procedures. The amendments can be found in IRS Notice 2009-65.

A third of U.S. employers have reduced or eliminated matching contributions to their defined contribution plans since January 2008, and nearly as many plan to over the coming year.* If you are considering amending a basic safe harbor 401(k) plan to reduce or eliminate employer matching contributions, take care. Failure to follow regulations could jeopardize your plan.

A basic safe harbor plan design with matching contributions allows the employer to avoid required annual nondiscrimination tests by making dollar-for-dollar matching contributions on employee elective deferrals up to 3% of compensation and a 50 cent match on elective deferrals that exceed 3% of compensation but do not exceed 5% of compensation. (A different safe harbor design is available for plans with automatic enrollment.)

Amending the Plan

Before you reduce or suspend your current safe harbor matching contributions, you need to provide all eligible employees with a written supplemental notice at least 30 days before the change goes into effect. The notice must explain: (1) how the suspension or reduction will affect matching contributions on future elective contributions and, if applicable, employee contributions; (2) procedures for changing employee elective deferrals; and (3) the date the amendment is effective. Employees must be given the opportunity to change their deferral election.

In addition, you must amend the plan document to remove the matching provision and provide that the actual deferral percentage (ADP) nondiscrimination test will be satisfied for the entire plan year using the current year testing method. If your plan fails nondiscrimination testing, excess contributions by highly compensated employees have to be refunded to the employees or recharacterized as after-tax contributions or additional employer contributions have to be made.

Nonelective Contribution Plans

An employer can adopt a safe harbor 401(k) plan with fixed 3% nonelective employer contributions. Currently, the only way to stop nonelective employer contributions to these plans after the start of the plan year is to terminate the plan. However, the IRS is expected to issue new guidance on these contributions soon.

* The Spectrem Group, March 2009

If you sponsor a group health plan subject to COBRA, you need to be aware of new requirements mandated by the American Recovery and Reinvestment Act of 2009 (the Act). Very generally, the new law provides a 65% premium reduction for nine months to individuals who are eligible for COBRA coverage as a result of their own or a family member’s involuntary termination of employment from September 1, 2008, through December 31, 2009.

COBRA is the federal law that gives individuals covered by your plan the right to continue that coverage for a period of time at their own expense, should something happen that causes them to become ineligible for coverage. COBRA generally applies to employers with 20 or more employees. However, many states have similar requirements for small plans providing benefits through an insurance company. The premium reduction is generally available for plans covered by these state laws.

Who Is Eligible?

To qualify for the premium reduction, a person must be an “assistance eligible individual.” An assistance eligible individual is someone who:

o Is eligible for COBRA continuation coverage at any time during the period from September 1, 2008, through December 31, 2009,

o Elects COBRA coverage (when first offered or during the additional election period provided by the Act*), and

o Is eligible for COBRA as a result of involuntary termination of employment from September 1, 2008, through December 31, 2009.

If the individual is eligible for other group health coverage -- through a new employer’s plan, a spouse’s plan, or Medicare, for example -- he or she is not eligible for the premium reduction. Also, individuals with modified adjusted gross income exceeding $125,000 ($250,000 for joint filers) must repay part or all of any premium reduction received. These individuals may permanently waive the right to the premium reduction, if they choose.

How the Reduction Works

The Act treats eligible individuals who pay 35% of the otherwise required COBRA premium as having paid the full premium amount. The employer (or other responsible entity) has to pay the remaining 65% of the premium. However, once you have received the individual’s payment, you can claim a payroll tax credit on IRS Form 941 (Employer’s Quarterly Federal Tax Return) for the 65% of the premium paid by the company. If you wish, you may reduce your payroll tax deposits during a quarter by the amount of the subsidy you provide during the quarter.

The premium reduction began on March 1, 2009, for plans that charge for COBRA coverage on a calendar-month basis. The reduction ends when the individual becomes eligible for other group health coverage (or Medicare), after nine months, or when the individual is no longer eligible for COBRA coverage, whichever occurs first.

Notice Requirements

Plans are required to notify qualified beneficiaries regarding the premium reduction and other information about their rights under the Act. A general notice must be sent to all qualified beneficiaries who experience a qualifying event during the period from September 1, 2008, through December 31, 2009. The U.S. Department of Labor has made two model versions of the general notice, along with an alternative notice for use where coverage is subject to state continuation requirements, and a notice regarding the additional election period available at http://www.dol.gov/ebsa/COBRAmodelnotice.html.

* The additional election period applies to assistance eligible individuals whose qualifying event was an involuntary termination of employment during the period from September 1, 2008, through February 16, 2009, and who refused COBRA coverage when it was offered or elected COBRA but later dropped the coverage. These individuals have until 60 days after the plan provides the required notice (the notification deadline was April 18, 2009) to elect COBRA and take advantage of the premium subsidy. The coverage elected during this special election period begins with the first period of coverage beginning on or after February 17, 2009.

“. . . you can claim a payroll tax credit . . . for the 65% of the premium paid by the company.”

What would you say to a retirement plan that could give your company additional tax deductions and you and other key employees greater retirement benefits? If your answer is “where do I sign up?” you may want to take a look at creating a cash balance defined benefit plan.

Cash balance plans combine some of the best features of a traditional defined benefit plan and a defined contribution plan. They tend to be less expensive than traditional defined benefit plans and may be easier for employees to understand. Employees who understand the advantages of a plan are more likely to appreciate the benefit their employer is providing.

How They Work

With a cash balance plan, you create a hypothetical plan account for each plan participant and credit the account annually with a percentage of the employee’s pay (or a flat dollar amount) plus interest. The interest rate can vary from year to year and is commonly tied to an industry benchmark specified under the plan. Benefits generally are paid out as an annuity or in a lump-sum distribution.

Employer plan contributions are pooled and invested in securities chosen by the employer. Employees receive regular statements showing the accumulated balances in their accounts, but these balances are merely “on paper” until the employee retires or leaves the company. When participants receive a lump-sum distribution from the plan upon retirement or a job change, they generally can roll over the amount to an individual retirement account (IRA) or another employer’s plan. This portability is an attractive feature to many employees.

Benefits

In addition to being less costly than a traditional defined benefit plan, a cash balance plan may allow your company to make annual deductible contributions on behalf of key employees that are greater than the maximum contributions permitted under a 401(k) or other defined contribution plan. Within limits, contributions can be made according to a formula that increases the annual benefit based on age or service. You may also have the ability to fund higher contributions in years when the business does well.

Drawback

A big drawback of this type of plan is that the employer bears the investment risk. Benefits are based on the plan’s formula and do not vary with the performance of the plan’s investments. With a 401(k) or other defined contribution plan, the employee bears the risk since benefits are based on actual account balances.

A cash balance plan can be an attractive alternative to traditional plan designs for both employers and employees. If it sounds like an option worth exploring for your company, give us a call. We would be happy to go over the benefits and requirements with you in more detail, including how you could convert an existing defined benefit plan to a cash balance plan.

“. . . a cash balance plan may allow your company to make annual deductible contributions on behalf of key employees that are greater than the maximum contributions permitted under a 401(k) plan . . . .”

The annual Form 5500 filing for a qualified retirement plan generally must include audited financial statements for the plan. However, the U.S. Department of Labor (DOL) exempts a small retirement plan from the general audit requirement under certain conditions.

Definition of a Small Plan

Plans with fewer than 100 participants at the beginning of the plan year are eligible for the audit waiver if they meet specific requirements. In addition, a plan that has between 80 and 120 covered participants at the beginning of the plan year that filed a small plan annual report for the previous year may elect to continue to file as a small plan.

Covered participants generally include active plan participants and beneficiaries; employees who were eligible to participate in the plan as of the beginning of the plan year, even if they don’t contribute to the plan; and terminated participants who have plan account balances.

Other Waiver Requirements

In addition, a plan has to meet three other basic requirements to be eligible for the audit waiver:

o As of the last day of the preceding plan year, at least 95% of the plan’s assets must be “qualifying plan assets.” If less than 95% are qualifying plan assets, any person who handles nonqualifying assets must be bonded in an amount at least equal to their value.

o The plan must include certain information in the Summary Annual Report (SAR) furnished to participants and beneficiaries in addition to the usual required information.

o The plan administrator must furnish, without charge, copies of statements the plan receives from financial institutions holding or issuing the plan’s qualifying plan assets to any participant or beneficiary who requests the information. In addition, the administrator must provide participants evidence of any required fidelity bond, upon request.

Check with us if you have questions about plan audit requirements or the waiver.

Financing Retirement

A recent Spectrem Group survey found that many retirement plan participants are unsure of how they will fund their retirement. Out of 400 participants surveyed, two thirds age 50 or over plan to work until age 65 or later, with many saying they will work until the age they can receive full Social Security benefits. For 25% of the participants, Social Security was the only specific source of retirement income they could identify. When it comes to meeting their income needs in retirement, only 17% of participants believe that Social Security and the income sources they know about today will be sufficient to meet all of their income needs. A majority of the participants (57%) estimate that when they retire they will have less than $300,000 in total invested assets.

Lump-sum Distribution Rollovers

Participant education materials stress this message: Retirement security can be adversely affected if a departing employee cashes out his or her retirement plan account and spends the account assets rather than rolling them over to an individual retirement account or another employer’s plan. Still, rollover rates are below 50% for most age groups, according to the Employee Benefit Research Institute. Here are the statistics: The rate for employees ages 21 to 30 is 34.8%; for those ages 31 to 40, 43.4%; ages 41 to 50, 47.4%; ages 51 to 60, 54.6%; ages 61 to 64, 64%; and age 65 and older, 40.7%.

Plan Eligibility

From the Profit Sharing/401(k) Council of America’s most recent plan eligibility survey: In 1998, only 24% of plans allowed employees to begin making contributions immediately upon employment (that is, within one month of hire). By 2008, 55.1% of plans allowed immediate contributions. Even higher percentages of larger plans allow immediate participation -- 70.5% of those with 1,000 or more employees and 74.4% of plans with 10,000 or more employees. Employers are not so quick to start employer matching contributions, however. Only 38% of plans start matching contributions immediately.

As a retirement plan sponsor, you should be aware that every person who handles the property or funds of the plan must be bonded. The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) has issued a field assistance bulletin (FAB) that provides guidance on fidelity bonding requirements. Understanding these requirements fully will help protect your plan and your business.

The bulletin includes the following information about applying the fidelity bonding requirements.

What is the purpose of a fidelity bond? The purpose of a fidelity bond is to protect your organization’s retirement plan from risk or loss due to acts of fraud or dishonesty by individuals handling the plan's assets. These acts include theft, embezzlement, and forgery.

Who must be bonded? Generally, plan fiduciaries and any other person who handles plan funds or other property (a "plan official") must be bonded. For example, officers and employees of the plan or plan sponsor who handle the receipt, safekeeping, and disbursement of plan funds are subject to bonding. Service providers and fiduciaries don’t need to be bonded if they don't handle plan funds or property. Several specific exemptions also are included in the pension law.

What is meant by "handling" plan funds? Generally, "handling" plan funds refers to activities that pose a risk that the funds or property could be lost in the event of fraud or dishonesty, such as:

o Physical contact with cash or checks

o Power to transfer funds or property from the plan to oneself or a third party

o Authority to direct disbursement

o Authority to sign checks or other negotiable instruments over activities that require bonding

o Supervising or decision-making responsibility over activities that require bonding

How much coverage must the bond provide? Each plan official must be bonded in an amount equal to at least 10% of the amount of funds he or she handled in the previous year, with a minimum bond requirement of $1,000. Generally, the maximum bond amount that can be required for any one plan official is $500,000 per plan. However, the maximum required bond amount is $1,000,000 for plan officials of plans that hold employer securities.

Is a fidelity bond the same as fiduciary liability insurance? A fidelity bond is not the same as fiduciary liability insurance. Fiduciary liability insurance is additional coverage that generally protects the plan against claims for losses sustained because of a plan fiduciary’s breach of duty.

Can any bonding or insurance company issue an ERISA fidelity bond? No, fidelity bonds must be placed with a surety or reinsurer that is named on the Department of the Treasury’s Listing of Approved Sureties, Department Circular 570 (http://fms.treas.gov/C570/c570.html).

Are any plans exempt from the bonding requirements? Plans that are completely unfunded or not subject to Title I of ERISA are exempt from the bonding requirements. An unfunded plan is one that pays benefits only from the general assets of the organization.

Can a bond insure more than one plan? If your organization sponsors more than one retirement plan, you can purchase one bond to cover all of your plans. However, the bond’s amount must be sufficient to allow for a recovery by each plan in an amount at least equal to the amount that would have been required for each plan under separate bonds.

Can the bond have a deductible? No. The bond must provide coverage from the first dollar of loss up to the maximum amount required.

If the amount of funds handled by the plan increases after the bond is purchased, must the bond be updated during the plan year? No. The bond amount must be fixed annually (or estimated at the beginning of the plan’s year pending receipt of necessary information) for each covered person based on the highest amount of funds handled by that person in the preceding plan year. So the bonding amount can change from year to year, but not during the year. If the plan doesn’t have a complete preceding reporting year, the amounts covered must be estimated.

". . . EBSA has issued a field assistance bulletin . . . that provides guidance on fidelity bonding requirements."

Signed into law in late December 2008, the Worker, Retiree, and Employer Recovery Act of 2008 (the “Act”) includes technical corrections to the Pension Protection Act of 2006 (PPA), along with short-term relief to help individuals and plan sponsors cope with the recent economic turmoil. Here are some highlights of the Act.

RMDs Waived

The Act waives “required minimum distributions” (RMDs) from tax-deferred retirement accounts -- including 401(k)s, 403(b) tax-sheltered annuities, 457(b) governmental plans, individual retirement accounts (IRAs), and others. The waiver applies to RMDs for calendar year 2009 only for plan participants, IRA owners, and designated beneficiaries.

Under the tax law’s RMD rules, individuals generally must take RMDs from their plan accounts annually after reaching age 70½ or pay a 50% tax penalty on the amount that should have been withdrawn but wasn’t.* In most cases, the deadline for a plan participant’s first RMD is April 1 of the year following the year the participant turns 70½. RMDs for each subsequent year must be taken by December 31 of that year.

The new law provides that participants who turn age 70½ in 2009 will not have to take their first RMD -- technically, the RMD for 2009 -- by April 1, 2010. Instead, the first RMD will be for 2010, and the deadline for taking it will be December 31, 2010. Participants who have already begun taking RMDs may skip their 2009 RMD. But, if they do take a withdrawal in 2009 that is not an RMD for 2008, they may be able to roll over the withdrawn amount into an IRA or other eligible retirement plan. Beneficiaries who are receiving distributions over a five-year period may waive the distribution for 2009, effectively extending the distribution period to six years.

The Act provides no relief to individuals who turned 70½ in 2008. These taxpayers are still required to take their 2008 RMDs by April 1, 2009. RMDs will resume for all for 2010, and they must be taken by December 31, 2010.

Nonspouse Rollover Option Required

PPA allows plans to offer a nonspouse beneficiary the option to directly roll over an eligible rollover distribution to an IRA set up to receive the distribution on behalf of the beneficiary. The Act requires employers that sponsor 401(k), 403(b), and 457(b) plans to offer this option for plan years beginning after December 31, 2009. Sponsors must provide nonspouse beneficiaries with a Section 402(f) notice explaining the tax options for distributions.

EACA Definition Broadened

Under PPA, automatic contributions to eligible automatic contribution arrangements (EACAs) had to be invested in a qualified default investment alternative (QDIA) as prescribed by U.S. Department of Labor regulations, unless otherwise directed by the participant. Participants in EACAs could make “permissible withdrawals” within 90 days of the date the first automatic contribution was made to the participant’s EACA.

The Act repeals the QDIA requirement for EACAs. It also broadens the definition of applicable plan to include SIMPLE IRAs and Simplified Employee Pension (SEP) plans that have a salary reduction arrangement (SARSEPs) and makes permissible withdrawals available to participants in these plans.

Combined Plan Deduction Limit Clarified

For employers with both a defined benefit plan and a 401(k) or other defined contribution plan, the Act clarifies that, if contributions to the defined contribution plan do not exceed 6% of compensation, the defined benefit plan is not subject to the combined plan deduction limit. If contributions to the defined contribution plan exceed 6% of compensation, only the contributions in excess of 6% of compensation count toward the combined deduction limit.

Other PPA Corrections

The Act clarifies that the income restriction on rollovers to a Roth IRA does not apply to rollovers from a designated Roth account under a 401(k) or 403(b) plan to a Roth IRA. In addition, the Act repeals the requirement that “gap period income” (the income from the last day of an employee’s taxable year to the date an excess deferral distribution is made) be calculated and distributed to employees along with the excess deferrals. It also provides relief to underfunded pension plans by adjusting the phase-in to PPA’s new full funding rules.

With the noted exceptions, the technical corrections to PPA are generally effective as though they were included in PPA.

* Some plans allow employees who are still working for the employer that sponsors the plan when they reach age 70½ to delay the start of RMDs until after retirement, provided the employee is not a 5% owner of the employer.

“. . . the technical corrections to PPA are generally effective as though they were included in PPA.”

In 2007, the IRS issued comprehensive regulations that are designed to bring 403(b) plans more in line with 401(k) plans. In response to the difficulties some 403(b) plans were having with putting a written plan document in place by January 1, 2009, as required by the regulations, the IRS has released a notice providing some relief.*

More Time To Meet Written Plan Requirement

The final regulations generally require 403(b) plans to have a written plan document. The IRS has extended the written document deadline by a year to December 31, 2009.

The notice says that the IRS will not treat a 403(b) plan as failing to satisfy the final regulations or Internal Revenue Code Section 403(b) for the 2009 calendar year if the sponsoring employer:

o Adopts a written 403(b) plan that satisfies the final regulations on or before December 31, 2009

o Operates the plan in accordance with a reasonable interpretation of Section 403(b), taking into account the final regulations

o Before the end of 2009, makes its best effort to retroactively correct any operational failure during the 2009 calendar year to conform to the terms of the written plan, with such corrections to be based on the general principles of correction found in the IRS’s Employee Plans Compliance Resolution System (EPCRS)

In granting the extension, the IRS noted that, other than through a private letter ruling, there is no current program under which an employer can obtain assurance that the written form of its plan satisfies Section 403(b). The IRS plans to issue further guidance, including a prototype plan program and a determination letter program for individually designed 403(b) plans. These programs will include a means for plans to make remedial amendments to retroactively fix plan provisions. The IRS also plans to modify the EPCRS to include additional 403(b) issues.

Other Requirements Are in Effect

Employers that sponsor 403(b) plans need to be aware that other provisions of the final regulations are now in effect. These include, among others, the requirements that:

o Employer contributions (contributions other than a participant’s elective deferrals) and after-tax employee contributions satisfy certain nondiscrimination rules similar to those for 401(k) plans

o 20% federal income-tax withholding be applied to any eligible rollover distribution that is not directly rolled over to an IRA or another employer plan accepting 403(b) rollovers

o Employees receiving a distribution be provided a 402(f) notice explaining the tax options for distributions

If you would like to review your 403(b) plan provisions and discuss how the regulations affect the administration of the plan, please contact us.

* Notice 2009-2, 2009-IRB, IR 2008-140

More Education = More Plan Participation

Whether or not workers participate in employer-sponsored retirement plans may depend in part on educational attainment. According to the Employee Benefit Research Institute, workers with lower levels of education participated in retirement plans at lower levels than more highly educated workers. Of workers who earned $50,000 or more in 2007, 50.7% of those without a high school diploma participated in a retirement plan, 65% of those with a high school diploma participated, and 76.1% of those who had a graduate or professional degree participated in a plan.

Reluctant To Retire?

If asked, many recent retirees would have stayed longer with their employers instead of retiring. In a recent Employee Benefit Research Institute survey, 61% of recent retirees said they would have viewed a request to stay on longer positively. Nearly half reported that such a request would have encouraged them to delay retirement. A pay increase, continuing to receive subsidized health insurance benefits, meaningful work, locking in already-earned pension benefits, telecommuting, and being able to work part-time rather than full-time all were highly rated incentives to working longer.

Retirement Savers and Current Economic Conditions

Despite the year-long recession and significant drop in stock prices, the majority of participants in the defined contribution retirement plans surveyed by the Investment Company Institute continued to participate in their plans. Only 3% of participants stopped contributing in 2008. And only 3.7% withdrew money from their plans last year. Fewer than one in seven participants changed the asset allocation of their account balances, and fewer than one in ten changed the allocation of their contributions.

Maintaining employee participation in, and contributions to, a company retirement savings plan can be a challenge for employers. What can you do to encourage employees? Knowing your work force and how employee attitudes affect deferral decisions can help.

According to a new Spectrem Group study, Deferral Rate Decision Making,* the amount of compensation an employee defers to a retirement savings plan is strongly influenced by four “attitudes”:

o Whether the employee considers him- or herself a saver or a spender

o Concerns about household debt

o The belief by the employee that he or she has a well-defined retirement investing strategy

o Whether the employee thinks his or her household isn’t saving enough to meet their financial goals

If you can identify any of these as discernable attitudes in your work force, you may be able to develop strategies to maintain, or encourage greater, participation in your plan. To help, here are profiles of the different attitude groups, along with some possible ways to increase employee deferrals.

Saver Mentality

On average, the savers -- surveyed employees who said they consider themselves more of a “saver” than a “spender” -- contributed 8.4% of their compensation to their 401(k) plans. The spenders contributed only 6.2%. Savers tended to be college educated, be age 55 or older, and have household incomes of $75,000 or more.

One way you might encourage lower paid employees to become savers is to provide them with information about the federal income-tax saver’s credit for contributions to retirement savings plans.

Strategists

The employees who believed they had a well-defined strategy for investing their retirement plan money also had a higher deferral rate -- 8.5% versus 6.5% for their nonplanning coworkers. Strategists were more likely to be male and have higher incomes.

Seminars stressing the importance of retirement planning and explaining investment basics may be a good way to reach nonplanners. Combining access to online planning tools that help employees set retirement goals with seminars and/or written materials about retirement planning and investing may be particularly effective. People who set retirement goals generally have higher deferral rates.

Concerned Employees

Deferral rates were lowest for employees who said they were concerned about debt (5.7%) or were concerned that their households were not saving enough to meet their financial goals (5.8%). As a group, these concerned employees were more likely to be younger, female, and less educated and have household earnings of $50,000 or less. However, among those with incomes of $75,000 or more, 28% were concerned that their households weren’t saving enough.

Employees in these two groups can benefit from seminars or written materials that explain basic financial planning principles, such as budgeting and debt management. The study acknowledges that you probably won’t see an immediate increase in contributions. However, as employees learn to retire their debt and control debt and/or spending, they should discover that they have more money to put toward their retirement.

Choosing a Deferral Rate

Knowing how employees choose a deferral rate for their retirement plan contributions may help you fine-tune the strategies you develop. The following are the approaches employees in the study said they use, along with the corresponding average deferral rates of those using each approach.

Approach Deferral Rate

51% save as much as they can afford 7.0%

20% target a percentage of earnings to save 7.2%

13% want to save something but have no particular
reason for deferral rate 5.1%

10% have set a target retirement balance 8.2%

3% save all earnings and live on spouse’s income 7.2%

3% have other approaches 7.3%

* Deferral Rate Decision Making, the Spectrem Group, www.spectrem.com

For many employees, the assets in their 401(k) plan accounts represent a majority of their savings. So, not surprisingly, over the past year as money has gotten tighter, employers have seen an increase in requests for plan loans and hardship distributions. If you are receiving distribution requests, the following information should be a helpful review for handling them.

Employers sponsoring 401(k) plans are not required to offer plan loans or hardship distributions. However, many employers include plan loan and hardship provisions in their plans to encourage employees to participate. The reasoning is that, if employees know they can access the money in their plan accounts if they really need to, they will be more comfortable contributing to the plan.

Plan Loans

Under federal tax law, the maximum amount an employee can borrow from his or her plan account is (1) the greater of $10,000 or 50% of the balance of the employee’s account; or (2) $50,000, whichever is less. All of the employee’s outstanding loans are taken into account when determining the maximum loan amount.

Most plan loans must be repaid within five years. However, loans used to buy a principal residence may have a longer repayment period. Loans are typically repaid through payroll deduction.

To help control the use of plan loans, many employers impose restrictions, such as loan fees and a minimum loan amount (usually between $500 and $1,000), and place limits on the number of outstanding loans an employee can have at a time.

Hardship Distributions

The plan documents must specify a method for determining eligible hardships. Hardship distributions -- unlike loans -- are not repaid to the plan. Where a plan uses a facts-and-circumstances method, the plan administrator reviews all relevant facts and circumstances in each individual situation. While the plan generally can allow a hardship distribution for any reason, it must have established rules to ensure that the distribution will be used for an immediate and heavy financial need.

The safe harbor method permits hardship distributions to: (1) pay certain medical expenses incurred by the participant, participant’s spouse, or dependents; (2) purchase a principal residence; (3) cover post-secondary educational expenses for the participant, the participant’s spouse, children, or dependents; (4) prevent eviction from or foreclosure on a principal residence; (5) pay the funeral expenses of a spouse, parents, children, or dependents; and (6) repair damage to the participant’s principal residence that would qualify for the income-tax casualty loss deduction (without regard to whether the loss exceeds 10% of adjusted gross income). Participants generally are prohibited from making elective deferrals to the plan for six months following the hardship distribution.

Hardship distributions generally are limited to the amount of the employee’s total elective contributions as of the date of distribution minus the amount of any previous hardship distributions.

Please talk with us if you have questions about plan loans, hardship distributions, or your retirement plan’s provisions for them.

“To help control the use of plan loans, many employers impose restrictions . . . .”

403(b) Snapshot

With new 403(b) plan regulations going into effect January 1, 2009, these plans have been in the limelight lately. To develop an understanding of what’s happening with 403(b) plans, the Profit Sharing/401(k) Council of America recently conducted a snapshot survey. Here are some of the highlights:

o 79% of respondents offer other plans in addition to their 403(b) plan

o 60% were aware that the new regulations change the rules for what constitutes discriminatory employer contributions

o 62% were aware that the new regulations clarify who must be allowed to make elective deferrals under the universal availability rules

o 21.4% were considering reducing the number of vendor options

o 76.2% stated that one vendor on their plan is ideal

o 67% had hired a consultant to help manage required 403(b) changes

o 80.8% of plans have a written plan document

Participant Fee and Expense Disclosure

The U.S. Department of Labor (DOL) has proposed regulations requiring the disclosure of certain plan and investment-related information, fees and expenses involved with 401(k) plan investments, and the investments available to plan participants and beneficiaries under a plan. According to the DOL, disclosure will make it easier for plan participants to make informed decisions about their retirement savings. The centerpiece of the proposed regulation is a requirement to provide investment-related information in a comparative chart or similar format. The proposed regulations call for the new disclosure rules to apply to plan years beginning on or after January 1, 2009. However, at press time, the regulations had not been finalized.

401(k) plan design can have a significant influence on plan participation and contributions. One way to see how your plan’s features compare with similar plans is to use a benchmark, such as the Profit Sharing/401(k) Council of America’s (PSCA) Annual Survey of Profit Sharing and 401(k) Plans.* Here are some of PSCA’s most recent findings.

Employee Contributions and Participation

One of the first things you may want to look at is your plan’s participation rate and employee deferrals. Overall, the average participation rate for the 401(k) plans surveyed was 81.9% (percentage of eligible employees having a balance in their plans). Plans with fewer than 200 participants had the highest participation rate at 83.6%. Lower paid employees (as defined by the actual deferral percentage tests) contributed an average of 5.6% of pretax pay, while higher paid employees contributed an average of 7%.

In the 30.3% of participating plans that allowed Roth contributions, only 12.6% of employees made such contributions. In 15.6% of these plans, no employees used this feature. The average Roth deferral was 3.8% for lower paid employees and 5.1% for higher paid employees. Ninety nine percent of 401(k) plans allowed catch-up contributions by employees age 50 and older, and 24.7% of eligible employees took advantage of the opportunity.

Employer Contributions

The survey found that plans that offer employer contributions have higher participation rates than plans that don’t. Plans with a safe harbor (required) match and discretionary match have the highest participation (88.1%), while plans with no employer contribution had the lowest (64.8%). Plans with a fixed match only had a participation rate of 79.7%. A third of the plans that allowed catch-up contributions offered an employer match on those contributions.

Automatic Enrollment

Participation increased the most at large companies, probably due to the increase in the use of automatic enrollment by these plans. More than half (53.2%) of plans with more than 5,000 participants reported having automatic enrollment. Overall, the percentage of surveyed plans using automatic enrollment has more than tripled since 2004, from 10.5% to 35.6% in 2007.

The most common default deferral is 3%, used by 53.2% of the plans. Half (49.7%) of the plans automatically increase the default deferral percentage over time. The most common default investment option for automatic deferrals is a target date fund (48.7%).

While different employers have different plan objectives and employee demographics vary, checking out benchmark surveys can give you an idea of what similar plans offer.

* 51st Annual Survey of Profit Sharing and 401(k) Plans, reflecting 2007 plan experience, www.psca.org, 2008

The IRS has announced the 2009 cost-of-living adjustments for plan limitations. As you can see below, most of the limitations have risen due to inflation.

2009 2008

Defined Contribution Plan Dollar Limit on
Annual Additions $49,000 $46,000

Defined Benefit Plan Limit on Annual Benefits $195,000 $185,000

Maximum Compensation Used To Determine
Benefits or Contributions $245,000 $230,000

401(k), SARSEP, 403(b), and 457 Plan
Deferrals/Catch-up $16,500/$5,500 $15,500/$5,000

SIMPLE Deferrals/Catch-up $11,500/$2,500 $10,500/$2,500

IRA Contributions/Catch-up $5,000/$1,000 $5,000/$1,000

Dollar Limit Used To Define Highly
Compensated Employee $110,000 $105,000

Compensation Defining Key Employee (Officer)
for Top-heavy Plans $160,000 $150,000

Social Security Taxable Wage Base $106,800 $102,000

For employers who offer their employees tax-favored health savings accounts (HSAs) to supplement a high deductible health plan (HDHP), the IRS recently released additional guidance addressing a variety of HSA issues (IRS Notice 2008-59).

With an HSA, an individual sets aside money that, along with account earnings, can be used tax free to pay qualified medical expenses that aren’t reimbursed by the health insurance plan. HSAs are available only to individuals covered by an HDHP. For 2008, an HDHP’s deductible must be at least $1,100 for self-only coverage ($2,200 for family coverage). Out-of-pocket expenses payable under the plan can’t be more than $5,600 for individual coverage ($11,200 for family coverage).

The following are some of the issues covered by the guidance that might affect your employee benefit program.

FSAs and HRAs

Generally, if an employee participates in an employer-provided flexible spending account (FSA) or health reimbursement arrangement (HRA), he or she cannot contribute to an HSA. An exception applies to FSAs and HRAs that provide certain limited benefits, such as reimbursement only for dental, vision, or preventive care. The new guidance clarifies that these limited benefits can include reimbursement for the employee’s share of premiums for the employer-sponsored HDHP.

Switching Coverage

The IRS also weighs in on situations in which an HSA-eligible employee switches from family HDHP coverage to self-only coverage during the year. For purposes of satisfying the employee’s self-only deductible for the year, the HDHP may use any reasonable method to allocate covered expenses incurred during the period of family coverage. The IRS notice gives examples.

Recouping Employer Contributions

The notice also explains how employers can recoup excess contributions or contributions made to an HSA on behalf of an ineligible employee.

The Pension Protection Act of 2006 (PPA) enhanced the benefits of adding automatic enrollment features to 401(k) plans. However, many plan sponsors are still weighing whether automatic enrollment is the way to go for their plans. If your company is as yet undecided, new analysis from the Employee Benefit Research Institute (EBRI) may help in your decision.*

The study looks at the likely impact of switching from a voluntary enrollment system to automatic enrollment with automatic increases in employees’ contribution rates over time. Researchers basically assumed that the new plan features would apply to essentially all employees, not just current 401(k) plan participants or those eligible to participate in a plan, and that everyone was starting from scratch in 2008 with a zero balance.

The study projects that automatic enrollment and contribution increases would have the greatest benefit for younger and lower paid employees. For example, according to co-author Jack VanDerhei, a 25-year-old worker making $25,000 would be likely to have a median increase of between $92,000 and $166,000 in today’s dollars by age 65.

As you can see in the accompanying table, most higher paid employees in the youngest group would benefit, as well. Projections for other age groups are similar but less dramatic, particularly at higher income levels.

But automatic enrollment won’t do it all. The EBRI analysis notes that the extra retirement savings expected to be generated by auto enrollment will still not be enough for some workers to be able to meet savings targets that would provide sufficient income for their full retirement. They will need other income sources.

* Jack VanDerhei and Craig Copeland, “The Impact of PPA on Retirement Savings for 401(k) Participants,” Employee Benefit Research Institute, Issue Brief, No. 318, June 2008

Projected Median Account Balance at Age 65 for Employees Currently Ages 25 to 29

(As a multiple of final earnings)

Bottom 25% Second 25% Third 25% Top 25%
of Earners of Earners of Earners of Earners

Voluntary Enrollment 0.1 1.4 2.2 5.7

Automatic Enrollment 1.2 2.3 2.8 3.7

Automatic Enrollment with
Contribution Increases up to 6% 2.7 4.4 5.2 6.6

Automatic Enrollment with
Contribution Increases up to 10% 3.4 5.2 6.0 7.9

Source: Employee Benefit Research Institute, Issue Brief, No. 318, June 2008, www.ebri.org

Your retirement savings plan is an important employee benefit and, for the plan to be successful, your employees need to know and appreciate that fact. How can you communicate the value of the plan to employees and, ideally, get them all to participate? Here are some suggestions.

Boosting Meeting Attendance

If the attendance at your enrollment and other plan meetings is not what you’d like, you need to consider ways to entice employees to come. One approach some companies take is to make attendance at an initial enrollment meeting mandatory. With this approach, all employees are at least introduced to the plan when they become eligible to participate. Of course, such attendance doesn’t ensure every employee will join the plan.

Consequently, you may want to consider other ways to draw nonparticipating employees into subsequent enrollment meetings and all employees into any educational meetings you provide. Free food and giveaways have proven to be effective in sparking employee interest. While giveaways may not attract everyone you want at first, they can get a buzz going among employees and increase attendance at later meetings.

If possible, letting employees attend meetings on company time, rather than on personal time, can improve attendance. Some employees may feel resentful if they have to give up their lunch break, for instance, to attend a company meeting -- even if lunch is provided at the meeting. Also, using both in-person and online presentations may help you reach more employees.

Educating Employees

To fully appreciate your plan, employees need to understand how the plan works and what it can do for them -- personally. Look for ways to provide retirement planning and investment information in formats customized to the individual employee. For example, according to the Employee Benefit Research Institute, a majority of people (56%) say that they prefer retirement calculation tools that ask for seven to ten pieces of detailed information and give an answer tailored to their individual situations. Nearly three quarters (72%) say they like tools that give a range of answers based on different scenarios.

Also, an education approach that emphasizes retirement income -- how much income the employee’s plan account may provide during retirement and how long they could receive that income without exhausting their account balance -- may have more meaning for many employees than emphasizing asset accumulation. For instance, show them how increasing their plan contribution by 1% a year over the next several years could make their retirement income last X more years, rather than showing them how the additional contributions would increase their account balance at retirement.

Getting Behind the Plan

Employees also need to see that company management is behind your plan. Consider having senior management present any plan changes to your work force. You might also make a policy of having supervisors regularly discuss the benefits of plan participation and increasing plan contributions at employee performance and compensation reviews. You’ll reinforce the importance of the plan and get employees talking about it.

“To fully appreciate your plan, employees need to understand how the plan works and what it can do for them — personally.”

As we move into the final months of the year, employers should be aware of various notices they may have to provide to their 401(k) plan participants before year-end. To help, here’s a review of the notices most likely to be required.

Safe Harbor Plan Notice

If your 401(k) plan has a safe harbor design, you must provide eligible employees with a written notice at least 30 days and not more than 90 days before the beginning of every new plan year. The notice must describe your plan’s safe harbor provisions and the employees’ rights and obligations under the plan. For employees who become eligible to join the plan after the start of the year, notice must be provided not more than 90 days before but no later than the date the employee becomes eligible.

The safe harbor notice can be a standalone notice or combined with the automatic enrollment notice and/or with the qualified default investment alternative notice. For employers that want to combine notices, the IRS has a sample notice available on its website (www.irs.gov/pub/irs-tege/sample_notice.pdf).

Automatic Enrollment Notice

If your plan has automatic enrollment features, you must provide employees with an automatic enrollment notice when they are hired, when they become eligible to participate in your plan, and annually at least 30 days before the beginning of the plan year. That way, employees have time to make any deferral or investment changes they want and to return the form before the new plan year starts.

The notice must explain the employee’s right to decline automatic enrollment, to make changes to the election amount, and to opt out of the plan altogether. For example, the sample notice mentioned above meets the automatic enrollment notice requirements by explaining:

o To whom a plan’s automatic enrollment features apply,

o What amounts will be deducted from an employee’s compensation and contributed to the plan,

o What other amounts the employer will contribute to the employee’s plan account,

o When the plan account will be vested, and

o How the employee can change his or her contributions.

Qualified Default Investment Alternative Notice

Do you use a qualified default investment alternative (QDIA) for investments made on behalf of employees and plan beneficiaries who fail to direct the investment of their 401(k) plan account balances? If so, you must provide a QDIA notice.

All employees and beneficiaries must receive the notice at least 30 days before (1) they are eligible to participate in the plan or (2) the first investment in a QDIA is made on their behalf or on or before the date of eligibility if they have the opportunity to withdraw investments from the QDIA within 90 days of the first deposit. They also must receive an annual QDIA notice within a reasonable period of at least 30 days before the beginning of each plan year.

The QDIA notice must explain the employee’s rights under the plan to designate how his or her contributions will be invested and, if he or she doesn’t make any investment election, how the contributions and earnings will be invested. The notice also must describe the QDIA, including the investment objectives, risk and return characteristics, and any fees and expenses involved. Employees must be given a reasonable period after receiving the notice and before the beginning of the plan year to make investment choices.

The notice may not be provided in a summary plan description or a summary of material modification. However, employers can provide the required fee and expense information in a separate, simultaneously furnished document, such as the default investment’s prospectus.

All three notices must be written so that they can be understood by the average employee.

“For employers that want to combine notices, the IRS has a sample notice available on its website . . . .”

QDIA Technical Corrections

The DOL has issued technical corrections to the qualified default investment alternative (QDIA) final regulations and issued Field Assistance Bulletin 2008-03, which provides guidance in an FAQ format on issues that were raised after the final regulations were published. Among the issues addressed:

o The grandfathering relief for stable value funds,

o The capital preservation investment option,

o The scope of investment managers for a QDIA,

o Multiple QDIAs,

o QDIA notice requirements, and

o “Round-trip” restrictions: The DOL clarified that plan sponsors may impose a restriction that prohibits a participant from reinvesting in the QDIA for a limited time after affirmatively electing to transfer out of the QDIA default fund.

The HEART Act

The Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART) is designed to provide income-tax relief to members of the military serving combat duty. Several of the Act’s provisions affect employee benefit plans. One of these provisions permanently allows reservists called to active duty for more than 179 days or for an indefinite period to make penalty-free withdrawals from 401(k) and 403(b) retirement plans and IRAs. Under prior law, this provision didn’t apply to individuals called to active duty after 2007. Another provision permits recipients of military death benefits to roll over such amounts to a Roth IRA or a Coverdell education savings account. HEART also liberalizes the rules for distributing any unused benefits in flexible spending accounts (FSAs) of reservists called to active service for more than 179 days or an indefinite period.

A 401(k) plan is a valued employee benefit. However, sponsoring a plan can be complicated. One area that may be especially confusing is the deadline for depositing employee contributions into the plan’s trust account. The U.S. Department of Labor (DOL) recently issued a proposed safe harbor rule for depositing contributions that should prove helpful.

Past Confusion

Generally, the money employees contribute to the plan must be deposited into their accounts as soon as possible. In the past, however, it was unclear exactly when a deposit would be considered late. There was much uncertainty among employers and a high degree of noncompliance resulting from the lack of clear guidance.

New Guidance

The DOL has now proposed regulations that provide an unambiguous deposit deadline for small plans. Under the proposed regulations, employers have a safe harbor period of seven business days after contributions are withheld or received to deposit the funds. Employers will be in compliance if deposits are made within the seven-business-day window. However, the safe harbor only applies to plans with fewer than 100 participants at the beginning of the plan year.

Larger plans must continue to deposit contributions as of the earliest date the contributions can reasonably be segregated from the employer’s general assets. In no event can that time be later than the 15th business day of the month following the month the contributions are received or withheld.

Starting Now

The proposed regulations won’t be finalized until sometime in the future. However, small-plan sponsors may take advantage of the safe harbor immediately by following the seven-business-day rule for depositing employee contributions.

Complying with the deposit rules is very important. Late contributions can lead to penalties and liability for lost investment returns. As a result, employers will want to make timely deposits and keep accurate records of those deposits. Give us a call if you would like to discuss the new safe harbor for depositing contributions.

Starting this year, employees may roll over distributions from 401(k) and other tax-qualified plans to a Roth IRA. Distributions from 403(a) and 403(b) annuity plans and from governmental 457(b) plans also may be rolled over to a Roth IRA. The IRS recently issued guidance on these Roth rollovers.*

Previously, a Roth IRA could accept a rollover contribution only from a “non-Roth” IRA (traditional or SIMPLE), a designated Roth account under a 401(k) or 403(b) plan, or another Roth IRA. Now, the Roth rollover option has been expanded. Rollovers can be made through a direct rollover from the plan to the Roth IRA, or an amount can be distributed from the plan and rolled over to the Roth IRA within 60 days.

Eligibility Requirements

Plans must permit employees to elect to have their eligible rollover distributions paid in a direct rollover to a Roth IRA. However, plans are not responsible for ensuring that an employee is eligible to make a rollover to a Roth IRA. Before 2010, employees are eligible only if they have modified adjusted gross income of $100,000 or less and file a joint return if they are married.

Tax Consequences

An employee who makes a qualified rollover contribution to a Roth IRA must include any previously untaxed part of the contribution in his or her gross income for the year the rollover is made. As with other eligible rollover distributions, mandatory 20% federal income-tax withholding is required if the distribution is paid to the employee and the employee rolls the money into the IRA. There is no withholding requirement with a direct trustee-to-trustee transfer, even if the distribution is includable in gross income. However, voluntary withholding is permissible.

Rollovers by Beneficiaries

Plan beneficiaries also may make qualified rollover contributions to Roth IRAs, provided they meet the income and filing status requirements. A surviving spouse may elect to treat the Roth IRA as his or her own account or establish a new Roth IRA in the deceased spouse’s name with the surviving spouse as the beneficiary. A nonspouse beneficiary doesn’t have the option to treat the Roth IRA as his or her own account.

A retirement plan is not required to permit nonspouse beneficiaries to make Roth IRA rollovers. But, if it does, the rollovers must be direct trustee-to-trustee transfers. There is no mandatory withholding on these transfers.

10% Penalty Waived

The 10% early withdrawal tax penalty that generally applies to distributions before age 59½ does not apply to qualified Roth IRA rollovers. However, if a taxable amount rolled into a Roth IRA from a retirement plan is distributed within five years, the 10% penalty applies to that distribution as if it were includable in gross income.

If you have questions about implementing rollovers to Roth IRAs, please don’t hesitate to contact us.

* Notice 2008-30

“However, plans are not responsible for ensuring that an employee is eligible to make a rollover to a Roth IRA.”

It’s Form 5500 time again. To help you prepare for your plan’s annual report filing, here’s what’s new for the 2007 plan year and what’s ahead in future years.

New for 2007

Changes for 2007 include a voluntary alternative reporting option that allows certain plans to take advantage of simplified reporting requirements. To qualify, a plan must have fewer than 25 participants as of the beginning of the plan year, among other requirements.

Also, the filing threshold for Form 5500-EZ has changed. Form 5500-EZ is used for plans benefiting one individual or one individual and his or her spouse who wholly own a trade or business or for plans benefiting only partners (and their spouses). Starting with reports filed in 2008 for the 2007 plan year, the threshold is plan assets in excess of $250,000, up from $100,000. Plans with assets between $100,000 and $250,000 no longer have to file Form 5500-EZ.

What’s Ahead

Form 5500 and its instructions are being redesigned to facilitate e-filing as part of the transition to electronic filing as the exclusive filing method. The U.S. Department of Labor (DOL) had mandated electronic filing beginning with the 2008 plan year. However, e-filing has now been postponed until the 2009 plan year. The redesigned Form 5500 will be effective for all annual report filings for plan years beginning on or after January 1, 2009. Small plans -- generally those that currently file Form 5500-EZ -- will have their own new Form 5500-SF (short form) for 2009.

Also starting in 2009, many 403(b) tax-sheltered annuity plans will be subject to full 5500 filing requirements -- including annual audits. Currently, 403(b) plans are subject to only limited -- or no -- Form 5500 annual reporting obligations. These plans are retirement plans for employees of public schools and nonprofit organizations that are exempt from tax under Internal Revenue Code Section 501(c)(3).

Completing Form 5500 is a complicated undertaking. Please feel free to contact us to see how your plan may be affected by the changes, for help completing the appropriate forms and attachments, or to determine whether your plan needs to be audited.

In a landmark case, the United States Supreme Court has unanimously ruled that an employee can sue 401(k) plan administrators for reimbursement of individual account losses resulting from the failure of the plan’s fiduciaries to follow the employee’s investment directions.*

The Case

LaRue participated in his employer’s 401(k) plan. As is true with most 401(k) plans, he had the ability to choose his plan investments from a variety of alternatives offered by the plan. LaRue asserted that he directed the plan administrator to make various investment changes to his account. However, he later learned that those instructions were never carried out. As a result, his account lost $150,000.

LaRue sued the plan and its administrator, alleging that, under pension law (ERISA), the administrator’s failure to follow his instructions amounted to a fiduciary breach. ERISA holds employers and other plan fiduciaries to strict standards. LaRue’s employer countered that, even if such a breach had occurred, he couldn’t recover his losses under ERISA because only his account, not the plan as a whole, had been affected. Federal district and circuit courts agreed.

The Supreme Court, however, had a different view. It found that the solvency of the entire plan did not have to be threatened for LaRue to be allowed to seek redress. Further, the court held that employers, as plan sponsors, would have no fiduciary responsibility under pension law if they could never be liable for losses to individual plan accounts.

Implications for Employers

Employees no longer have to prove plan-wide losses to claim individual losses that result from alleged breaches of fiduciary duty. As a result, fiduciaries of 401(k) and other individual account plans that may consider themselves protected from liability for investment losses under ERISA Section 404(c) could, instead, find themselves the target of lawsuits brought by disgruntled employees. Section 404(c) provides employers with fiduciary liability protection for investment losses sustained by employees with respect to their own individually directed accounts.

If account losses are suffered, employees might argue that their losses weren’t caused by their own poor investment choices, but by some action on the part of the fiduciary. Consequently, employers have an even greater need to operate their retirement plans in the best interests of all participating employees at all times.

Steps To Take

As a plan sponsor, you should make sure that you have individuals with appropriate expertise administering your plan and that the necessary financial controls are in place. All plan and legal requirements must be followed. Some steps that you may want to take include:

o Reviewing your plan’s Section 404(c) compliance and fiduciary practices,

o Complying with the default investment safe harbor requirements for qualified default investment alternatives,

o Implementing a written investment policy statement that clearly sets out the process for selecting plan investments and the schedule for monitoring investments,

o Documenting all fiduciary decisions and showing how they are in the best interests of your employees,

o Reviewing your fiduciary insurance coverage, and

o Seeking professional assistance with your plan’s investments.

* LaRue v. DeWolff, Boberg & Associates, Inc., S Ct, 2008

“As a result, fiduciaries of 401(k) and other individual account plans . . . could . . . find themselves the target of lawsuits brought by disgruntled employees.”

Plan Participation Levels

Using U.S. census data from 2007, the Employee Benefit Research Institute has analyzed some of the trends and differences in participation levels of workers in employment-based retirement plans. Among the findings: Although men had higher participation rates than women among all workers, among full-time year-round workers, women participated in their employers’ plans at higher rates than their male counterparts -- 54.4% to 51.4%, respectively. At all earnings levels except the lowest, women were generally more likely than men to participate in a plan. Younger workers were less likely than older workers to participate in a plan, even when earnings were the same. Geography made a difference as well, with workers in the South and West generally having the lowest participation levels and workers in the Midwest and Northeast having the highest levels.

Expanded FMLA Leave

The Family and Medical Leave Act (FMLA) has been expanded to allow the spouse, daughter, son, parent, or next of kin to take up to 26 weeks of leave to care for a family member in the U.S. Armed Forces who is undergoing medical treatment, therapy, or recuperation as an outpatient, or is on the temporary disability retired list, due to a serious illness or injury. In addition, an employee can take FMLA leave for “any qualifying exigency” arising out of the fact that the spouse, son, daughter, or parent of the employee is on active duty or has been ordered to active duty in the Armed Forces in support of a contingency operation. This provision isn’t effective until the U.S. Department of Labor prepares final regulations defining “qualifying exigency.” In the interim, employers are encouraged to grant such leave to eligible employees.

As a recent U.S. district court case* illustrates, failing to provide a retirement plan participant with certain documents in a timely manner when asked can be costly for the plan and its sponsor. To avoid similar consequences, you may want to review your plan’s procedures for providing plan documents and notices to participants.

The Case

Dr. C worked for Dr. T and participated in T’s retirement plan. During her employment, Dr. C never received any written information about the plan. When Dr. C decided against purchasing T’s practice, he terminated her. Later, she learned that several of Dr. T’s former staff had received benefit distribution information from T’s plan. Dr. C and her attorney requested similar information.

Dr. T eventually informed Dr. C that she did not have any vested interest in the plan when, in fact, she was 100% vested. Dr. C sued. Four and a half years later, Dr. T provided her with a vesting schedule. At that time, Dr. T offered to pay her plan benefits, but only if she agreed to sign a general and complete release of all claims. Dr. C declined.

The court found that Dr. T’s failure to provide Dr. C with either vesting information or any required disclosures, such as a summary plan description, prevented Dr. C from determining whether or not she had vested benefits. The court imposed the maximum fine of $110 per day on Dr. T (a total of $179,960), awarded Dr. C reasonable attorney’s fees, and held that she was entitled to a full distribution of her account.

Dr. C’s case was extreme. Employers are more likely to inadvertently or unknowingly fail to provide required information. To make sure you don’t make such a mistake, here’s a review of the requirements.

The Summary Plan Description

Some information, such as the Summary Plan Description (SPD), must be provided automatically. With new plans, an SPD must be distributed to all plan participants and beneficiaries within 120 days after the plan becomes effective.

For ongoing plans, new participants have to receive an SPD within 90 days of joining the plan. An updated SPD, which incorporates all interim plan amendments, must be furnished no later than 210 days after the end of the fifth plan year after the previous SPD. If the plan hasn’t changed, a new copy of the SPD must be distributed every 10 years.

Other Documents

You must also automatically provide participants and beneficiaries with the following plan documents:

Summary of Material Modification (SMM) has to be provided within 210 days after the end of a plan year in which modifications were adopted.

Summary Annual Report (SAR) must be furnished within nine months after the end of each plan year.

Notification of changes in vesting schedules must be sent to participants with three or more years of service.

Rollover notice must be given to any employee receiving an eligible rollover distribution within a reasonable time before making the distribution from the plan. The notice must explain the tax effects of the distribution, including an explanation of the rollover rules, direct rollovers, the tax treatment of lump-sum distributions, the 20% mandatory withholding, and how distributions from a rollover plan may be different from distributions from the original employer plan.

Blackout notice generally must be sent no later than 30 days before a blackout period begins and must include the reasons for the blackout, the investments and other rights that will be affected, the expected beginning and end of the blackout period, and certain other information.

Benefit statements must be provided quarterly if your 401(k) plan or other defined contribution plan lets employees direct the investment of their accounts. Otherwise, you need to send statements at least once a year. Defined benefit plan participants with vested benefits generally must receive a statement at least once every three years.

Upon Request

Other documents must be provided on written request. These include the latest updated SPD; a statement of the employee’s total accrued benefits; the most recent annual report; and the plan document, trust agreement, collective bargaining agreement, and any other document under which the plan is established or operated.

Available for Inspection

Some documents must be made available to participants for inspection at reasonable times and places, such as the plan administrator’s office. These include copies of the plan description, the latest annual report, and documents under which the plan is established or operated.

* Cromer-Tyler v. Teitel, DC-Al., 2007

“You must . . . provide participants and beneficiaries with . . . plan documents . . . .”

Federal pension law (ERISA) generally requires retirement plans to have an annual audit as part of the Form 5500 return/report process. Independent audits of your plan’s financial statements can help you fulfill your reporting obligations and avoid costly penalties.

An Audit’s Value

In addition to fulfilling federal reporting requirements, securing a professional audit can help protect your plan’s financial integrity and ensure that it will have the funds to pay employees’ benefits. An audit can reveal problems your plan may have, and your auditor may suggest ways to improve your plan’s controls and operations.

Large Plans Require Audits -- Small Plans May Not

Plans with 100 or more participants at the beginning of the plan year -- so-called “large plans” -- are generally subject to the annual audit requirement. In general, the audit requirement also applies to a plan with fewer than 100 participants -- a “small plan” -- unless the plan satisfies three waiver conditions:

o At least 95% of the plan’s assets must be “qualifying plan assets.” Qualifying plan assets include assets held by certain regulated financial institutions, mutual fund shares, investment and annuity contracts issued by an insurance company, qualifying employer securities, and certain other assets that the regulations define. If the qualifying plan assets are less than 95% of the total, any individual handling nonqualifying assets must be bonded for at least the value of the non-qualifying assets.

o The plan’s Summary Annual Report (SAR) must disclose more information to the plan’s participants and beneficiaries than is ordinarily required, such as the identities of the financial institutions holding qualifying plan assets and of the bonding company.

o Upon request, the plan administrator must provide a participating employee or beneficiary with no-charge copies of statements received from the financial institutions holding or issuing qualifying plan assets and evidence of any required fidelity bonds.

A plan may be able to file Form 5500 as a small plan and qualify for the audit waiver if the number of participants covered is between 80 and 120 at the start of the plan year and the plan filed Form 5500 as a small plan for the prior year.

What Questions Can a Plan Audit Answer?

Auditors look at important aspects of plan finances and operations. Among other issues, an audit addresses:

o The proper valuation of plan investments

o Plan obligations

o Whether contributions have been sent to the right party, received, and credited to the right accounts

o Issues that may affect the plan’s tax status

o Whether benefit payments were made in accordance with plan terms.

Controls Are Examined, Too

Also, the relevant internal controls within the plan’s accounting system are assessed by the CPA. If the employer outsources certain plan-related functions, the review of internal controls includes functions performed by the third party service provider that affect the plan’s financial statements. Providers may have their own “SAS 70” reports that the plan’s auditor can rely on to some extent. The employer, as plan administrator, is still responsible for monitoring the overall process, despite the fact that professionals may have been hired to handle day-to-day administrative functions, such as distribution calculations.

Limiting the Audit’s Scope

Federal law allows the plan sponsor/administrator to limit the scope of the plan’s annual audit if banks or insurance companies hold the plan’s assets and provide written certifications. We can advise whether limiting the scope of your plan’s audit would be appropriate in your situation.

Employers shouldn’t overlook the importance of securing a quality plan audit if one is required. Please call our firm if you would like to discuss your plan’s auditing needs.

Did you know that some of your employees may be eligible for a federal tax credit for making contributions to your retirement plan? More importantly, do your employees know? The “saver’s tax credit” essentially repays a percentage of the contributions that eligible employees make to their 401(k) or other retirement savings plan accounts.

For those who qualify, the saver’s tax credit is “free money.” It also could be just the thing to persuade nonparticipating employees to join your plan -- and motivate employees who already participate to increase their contributions.

Credit Amounts Vary

The credit is a percentage -- 50%, 20%, or 10% -- of up to $2,000 in contributions. The percentage depends on the employee’s adjusted gross income (AGI) and filing status. The credit can increase an employee’s refund or reduce the amount of tax owed to the IRS.

Here’s an example: Carter, a single employee, earns $17,000 in 2008 and contributes $1,000 pretax to his employer’s retirement savings plan. Assuming no additional taxable income or other income adjustments, Carter’s AGI is $16,000. Carter qualifies for a 50% saver’s credit ($500), dropping the actual cost of his $1,000 contribution to $500. In addition, if Carter’s contribution is eligible for a 50% employer match, the total amount deposited in his account is $1,500 -- three times Carter’s actual out-of-pocket cost.

Spread the Word

Sharing information about the value of the saver’s tax credit could benefit your employees. It would also provide an opportunity to increase awareness of the benefits your retirement plan offers.

Saver’s Credit Amounts for 2008

Employee must be at least age 18, not claimed as a dependent on another person’s return, and not a full-time student.

Credit Rate With Adjusted Gross Income (AGI)
Married Joint* Head of Household Single

50% of contribution Up to $32,000 Up to $24,000 Up to $16,000
up to $2,000

20% of contribution $32,001-$34,500 $24,001-$25,875 $16,001-$17,250
up to $2,000

10% of contribution $34,501-$53,000 $25,876-$39,750 $17,251-$26,500
up to $2,000

* Each spouse may make a credit-eligible contribution.

No credit is allowed with adjusted gross income of more than: $53,000 (married joint), $39,750 (head of household), or $26,500 (single).

Certain retirement plan distributions reduce the contribution amount used to figure the credit.

Employee Retention

Employees who participate in an employer-sponsored retirement plan appear to be more likely to stay with that employer. A 2007 survey found that among the surveyed workers, 20% of nonparticipants left their employers in the previous year versus 9% of employees who participated in their employers’ plans. A similar study conducted in 2006 found that 25% of nonparticipants left their employers compared to 10% of plan participants.

401(k) Assets

From 1990 through 2006, total 401(k) assets grew from $385 billion to an estimated $2.7 trillion, according to information from the Investment Company Institute, U.S. Department of Labor, and Federal Reserve Board. On average, this was an increase of about 13% a year.

Investor Education

A 2007 FINRA survey on investor education found that most investors have a high interest in basic investor education and information that is free and unbiased. Retirement plan sponsors may be able to use some of the survey’s specific findings to fine-tune employee education programs.

o 86% of those surveyed were interested in information about common investment scams and fraud.

o 83% wanted a checklist of steps they should go through when making investment decisions.

o 82% wanted a list of questions to ask an investment advisor.

o 80% were interested in definitions of common investment terms and products.

401(k) Plan Assets (in billions)

1990 $385

1995 $864

2000 $1,725

2002 $1,573

2004 $2,189

2006 $2,698

Employers that sponsor 403(b) tax-deferred retirement arrangements will likely have to make several changes to their plans as a result of new IRS regulations issued recently. Below are some highlights of the regulations and actions 403(b) plan sponsors may need to take.

Only public schools, including colleges and universities, and nonprofit organizations that are exempt from tax under Code Section 501(c)(3) can offer these plans. The new regulations eliminate many of the operational differences between 403(b) plans and 401(k) and 457(b) plans.

A Written Plan Is Required

One change that will affect many 403(b) plan sponsors is a requirement to have a written plan document that includes all of the plan’s material provisions (regarding eligibility, benefits, contribution limits, distributions, etc.). The plan document also must describe how the plan is funded and include the allocation of responsibilities between the employer, the service providers, and participants. Other documents (annuity contracts, for example) may be incorporated into the plan document by reference. Employers that do not currently have a written 403(b) plan document will need to adopt one, generally by January 1, 2009.

Nondiscrimination Rules

Under the new rules, employer contributions (contributions other than a participant’s elective deferrals) and after-tax employee contributions must satisfy certain requirements similar to the nondiscrimination rules for tax-qualified plans. Employers that make discretionary plan contributions should check now to see if their plan would pass nondiscrimination testing under the new rules. That way, there will be enough time to amend the plan if it doesn’t. These new rules generally do not apply to governmental plans or 403(b) contracts purchased by churches.

The “universal availability” rule continues to apply to employee elective deferrals. With some exceptions, this rule provides that, if one employee is offered the opportunity to make elective deferrals to the plan, that opportunity must be available to all employees. The final regulations narrowed the exceptions allowed, reducing the categories of those who can be excluded. Employers will want to review their excluded employees to make sure the new exclusion rules aren’t violated.

Exchanges, Transfers, and Distributions

Under existing rules, participants in 403(b) plans generally had the ability to transfer assets out of their plan accounts on a tax-free basis to another investment provider. The new regulations eliminate these so-called “90-24” nontaxable transfers by employees (after September 24, 2007) without the employer’s specific consent. Now, such transfers are allowed only if the employer and the vendor have a written agreement that plan and employee information will be shared. The purpose of this requirement is to ensure that eligibility and distribution rules are properly applied.

The new rules for 403(b) distributions are similar to the 401(k) distribution rules. The 403(b) regulations also require 20% federal income-tax withholding on any eligible rollover distribution that is not directly rolled over to another 403(b) plan or to a rollover IRA. In addition, 403(b) plans must provide any employee receiving a distribution with a “402(f)” notice explaining the tax options for the distribution.

Other Provisions

The regulations also address the application of the tax law’s contribution limits and clarify that designated Roth contributions are considered elective deferrals for purposes of the limits. The regs confirm that, if an employee is eligible to make both an age-50 catch-up contribution and a 15-years-of-service catch-up contribution, the 15-years-of-service catch-up applies first. And they provide rules for determining when tax-exempt entities are treated as a single employer for purposes of certain plan limits and plan administrative requirements.

The regulations generally become effective in 2009, although some exceptions are provided.

Of course, these are only some of the many provisions included in the comprehensive new 403(b) regulations. If you would like to discuss how they will affect the administration of your 403(b) plan, please contact us.

“One change . . . is a requirement to have a written plan document . . . .”

The long-awaited and much-debated final regulation governing default investment alternatives is here. For plans that allow employees to direct their own investments, following the regulation’s rules will relieve an employer of fiduciary liability for investing an employee’s account assets in a default investment if the employee has not given investment directions.

General Requirements

To qualify for fiduciary relief, the employee’s account must be invested in a qualified default investment alternative (QDIA) as defined by the U.S. Department of Labor (DOL). In the regulation, stable value funds, money market funds, and guaranteed investment contracts (GICs) generally do not meet the definition. So, many employers may need to choose a different default investment to take advantage of the protection.

The regulation outlines several additional conditions that must be met for a plan fiduciary to be relieved of liability for losses that are the “direct and necessary result” of a plan’s default investment for a participant. For example, the plan must offer a “broad range of investment alternatives.” The plan participants must have been given the opportunity to provide investment direction, but failed to do so. Participants also must have the opportunity to direct investments out of the default investment at least quarterly or with the same frequency as from other plan investments, if more frequent.

The plan generally must furnish a notice to employees before the first investment in the default investment occurs and annually thereafter. The regulation describes the information that must be included in the notice. The plan also must provide employees with any materials, such as investment prospectuses, provided to the plan for the default investment.

Qualified Default Investment Alternatives

A QDIA must be managed by an investment manager, plan trustee, or plan sponsor who is a named fiduciary or by an investment company registered under the Investment Company Act of 1941. A QDIA generally cannot invest employee contributions in employer securities, and it must be diversified so as to minimize the risk of large losses. A QDIA may be offered through variable annuity contracts or other pooled investment funds. Plan fiduciaries are still liable for prudently selecting and monitoring QDIAs.

The regulation lists the following investment options as possible QDIA choices:

o Lifecycle funds, targeted retirement date funds, and similar products that take into account the individual’s age or retirement date

o Balanced funds and similar products with a mix of investments that take into account the characteristics of the group of employees as a whole, rather than each individual

o Professionally managed accounts and similar investment services that allocate contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date

o Short-term capital preservation products, such as stable value products, but only for the first 120 days of participation in the plan

Current Default Investments

According to the DOL, the regulation is effective December 24, 2007. Default investments made in stable value products prior to the effective date are “grandfathered” for purposes of liability protection. If you have any questions about the new regulations or whether your current default investment meets the QDIA requirements, please contact us.

“. . . many employers may need to choose a different default investment to take advantage of the protection.”

Now that the provisions allowing employees to make designated Roth contributions to 401(k) plans are permanent, more employers are considering adding this feature to their plans. If your company already offers or you are considering offering Roth contributions, the following overview of IRS regulations regarding taxation, rollover, and reporting of Roth 401(k) distributions should be useful.

“Qualified” Distributions

The tax treatment of Roth distributions depends on whether the distribution is “qualified.” With a qualified distribution, none of the Roth deferral contributions and earnings are included in an employee’s income for federal tax purposes. Generally, a distribution is qualified if it is made (1) after the employee reaches age 59½ or on account of the employee’s disability or death and (2) after a five-tax-year period has elapsed. If a distribution is not qualified, the portion of the distribution allocable to account earnings is subject to income tax and possibly to a 10% early withdrawal penalty.

The five-tax-year period necessary for a Roth distribution to be considered qualified begins on the first day of the employee’s tax year in which the employee first makes a designated Roth deferral contribution to the employer’s plan and ends when five consecutive tax years have been completed.

An exception applies to reemployed veterans. For these employees, the five-tax-year period starts on the first day of the tax year for which the contributions are being made. In addition, the regulations clarify that a contribution that is returned to prevent an average deferral percentage (ADP) test failure or is a “permissible withdrawal” from an automatic contribution arrangement (after 2007) does not begin the five-year period.

Rollovers of Designated Roth Accounts

A rollover of an “eligible rollover distribution” from a designated Roth account can be made to either a designated Roth account within another employer’s plan or a Roth IRA. However, rollovers of otherwise nontaxable amounts -- either the full amount of a qualified distribution or the after-tax contribution portion of a nonqualified distribution -- to another designated Roth account must be directly transferred between the two designated Roth accounts. According to the regulations, if an eligible rollover distribution is instead paid to the employee, the employee can still roll over the entire amount (or any portion of it) to a Roth IRA within 60 days.

If an employee receives a nonqualified distribution and rolls over less than the entire amount, the part that is rolled over is deemed to consist first of the portion of the distribution attributable to income (account earnings). It is possible for an employee to roll over the taxable portion of a distribution from a designated Roth account into a designated Roth account under another plan within 60 days. However, the recipient plan would have additional reporting requirements.

Applying the Five-year Rule to Rollover Accounts

The type of rollover determines the starting date of the five-year period of participation for the account receiving the rollover. For example:

o With a direct rollover to another employer’s plan, the starting date of the five-year period generally carries over to the new plan account. When the direct rollover is made to an alternate payee’s or spouse beneficiary’s designated Roth account, the employee’s starting date carries over unless the receiving account had an earlier starting date.

o With an indirect rollover of taxable amounts to a designated account under another plan, the employee’s period of participation under the distributing plan generally does not carry over. Instead, for any employee who has not previously made Roth contributions to the receiving plan, a new five-year participation period for that plan begins in the taxable year the rollover is completed.

o With a rollover to a Roth IRA, the starting date depends on whether the employee has an existing Roth IRA. If the employee does not, the five-year participation period begins with the year the rollover is completed. If the employee already has a Roth IRA, the five-year participation period for the amounts attributable to the rollover contribution has the same start date as the period for the previously established Roth IRA.

2008 COLAs

The annual inflation adjustments for plan limitations are in. For 2008, limits on 401(k), SARSEP, 403(b), and 457 plan deferrals remain at $15,500 (maximum catch-up contribution, $5,000). SIMPLE deferrals are $10,500 (maximum catch-up contribution, $2,500), the same as in 2007. Other limitations have increased:

o Maximum annual additions to a defined contribution plan account from $45,000 to $46,000

o Maximum annual benefit from deferred benefit pension plans from $180,000 to $185,000

o Maximum annual compensation used to determine benefits or contributions from $225,000 to $230,000

o Compensation limit for determining “highly compensated employee” from $100,000 to $105,000

o Compensation limit for determining whether officers are “key employees” for top-heavy plan purposes from $145,000 to $150,000

o Social Security Taxable Wage Base from $97,500 to $102,000

Fiduciary Bonding Reminder

Generally, plan fiduciaries -- including the sponsoring employer, plan trustee, investment manager, and plan administrator -- and any other person who handles a retirement plan’s assets have to be bonded. For most plans, the face amount of the bond must be 10% of the plan assets handled (minimum $1,000) up to a $500,000 maximum. However, for plans holding employer securities, the maximum is generally increased to $1,000,000 starting with the 2008 plan year. A plan that holds employer securities only in mutual funds and other broadly diversified funds is not considered to hold employer securities for purposes of the higher bonding limit.

Employers that sponsor 401(k) plans have long had the opportunity to avoid the required annual nondiscrimination tests and top-heavy rules by adopting a safe harbor plan design. Now, starting in 2008, plans that have an automatic enrollment feature or are willing to add automatic enrollment have a choice of safe harbor designs.

Choice #1: Basic Safe Harbor Plan Design

For many employers, the major benefit of a safe harbor design is that owners and other highly compensated employees can contribute the maximum amount allowed by law to their 401(k) plan accounts. Without a safe harbor design, if the plan fails one of the nondiscrimination tests, “overcontributions” by highly compensated employees have to be refunded to the employees or recharacterized as after-tax contributions, or additional employer contributions have to be made.

However, there’s a tradeoff for bypassing the nondiscrimination tests. You have to make either 3%-of-compensation nonelective contributions on behalf of each nonhighly compensated employee who is eligible to participate in your plan or dollar-for-dollar matching contributions of elective deferrals up to 3% of compensation plus matching contributions of 50 cents for every dollar on elective deferrals between 3% and 5%. An enhanced matching formula is also available.

Choice #2: New Automatic Enrollment Safe Harbor Design

As with the basic safe harbor design, the automatic enrollment safe harbor rules relieve employers of the burdens of conducting annual nondiscrimination testing. Unlike the older rules, this new safe harbor design requires your plan to have a “qualified automatic contribution arrangement.”

With this arrangement, eligible employees who don’t elect otherwise are enrolled in the plan at an initial deferral rate of at least 3% of pay for the first full plan year of participation. The minimum deferral rate is 4% for the second year, 5% for the third year, and 6% after the third year. It can’t exceed 10%.

Employers have to make contributions for nonhighly compensated employees. These contributions can be either nonelective contributions or matching contributions. Nonelective contributions must be at least 3% of compensation and must be made on behalf of all nonhighly compensated employees who are eligible to participate in your plan whether or not they participate. For matching contributions, you must match 100% of the first 1% of salary deferred by nonhighly compensated employees and 50% of the next 5% deferred, for a maximum match of 3.5% of compensation.

Compared to the matching formula of the basic safe harbor design, the matching contribution safe harbor available with a qualified automatic contribution arrangement is generally less expensive for employers.

New Default Investment Protection

To go along with the new automatic enrollment safe harbor, the Pension Protection Act of 2006 also introduced new default investment rules. For plans that allow employees to direct their own investments, these rules relieve employers of fiduciary liability for investing an employee’s account assets in a default investment. Employees and beneficiaries are considered to have exercised control over a default investment for protection under Section 404(c) where they were notified of their rights to direct investments but chose not to do so.

Default investments proposed by the U.S. Department of Labor (DOL) include lifecycle funds, targeted retirement date funds, balanced funds, and professionally managed accounts. The DOL may sanction other options in final regulations. At press time, these had not yet been released.

Required Notices

With a basic safe harbor plan design, you generally must provide all eligible employees with a written notice describing the safe harbor provisions between 30 and 90 days before the beginning of each plan year. Similarly, to take advantage of the new automatic enrollment and default investment safe harbors, you have to provide employees with notices explaining the qualified automatic enrollment arrangement and default investment alternative before the first investments are made and within a reasonable time before the start of each plan year.

“Employers have to make contributions for nonhighly compensated employees.”

The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) recently issued guidance that answers many questions employers have asked about qualified domestic relations orders (QDROs).

QDRO Review

A QDRO is a judgment, decree, or order made pursuant to state domestic relations law relating to child support, alimony payments, or marital property rights that creates or recognizes the right of an “alternate payee” to all or part of an employee’s retirement plan benefits. It must include specific information and must meet various pension law requirements to be considered qualified.

For example, a domestic relations order will fail to qualify as a QDRO if it requires a plan to provide any benefit or payment option not already provided under the plan, to increase benefits (as determined actuarially), or to pay benefits that an earlier QDRO required to be paid to a different alternate payee. Plan administrators are responsible for determining whether an order received by a plan is a QDRO.

Helpful Examples

The EBSA’s guidance contains several examples that may be helpful in determining whether an order is qualified. These examples show that timing or order of issuance alone won’t disqualify a domestic relations order. Here are the points illustrated:

o A domestic relations order won’t fail to be a QDRO simply because it is issued after, or revises, a QDRO that was previously issued to the same individual(s), even if it reduces the benefits payable under the first QDRO.

o A QDRO can be issued to an employee’s spouse from a second or subsequent marriage after the spouse from a previous marriage has already been issued a QDRO, as long as the new order doesn’t assign any of the benefits already payable under the original QDRO.

o A QDRO can direct that a former spouse be treated as a “surviving spouse” under the plan, even if the former spouse no longer meets the plan’s definition of surviving spouse.

o An order received after an employee’s death, divorce, or annuity start date can be a QDRO. For instance, a plan administrator determines that an order is not a QDRO. A second order is written to correct the defects, but the plan doesn’t receive it until after the employee’s death. The corrected order can be a valid QDRO.

o A QDRO issued after an employee has started receiving benefits can change a previously elected payment option. For example, an employee is receiving benefits as a single-life annuity. The spouse has waived surviving spousal rights. They divorce. A domestic relations order directing that the spouse receive half of future benefit payments can be a QDRO.

Note, however, that orders issued under these or similar circumstances could fail to be qualified under other requirements for determining QDROs.

“The EBSA’s guidance contains several examples that may be helpful in determining whether an order is qualified.”

Fall is the time for plan sponsors to review their plans in preparation for making required minimum distributions (RMDs) to retired employees and other beneficiaries. Below, we answer some common questions about RMDs and employers’ responsibilities concerning these distributions.

Who Receives RMDs?

In general, plans must make RMDs to retired employees who have reached age 70½ and to any current employees who own more than 5% of the company and are age 70½ and older. RMDs also must be paid to beneficiaries of a deceased employee’s qualified plan account.

When Do RMDs Have To Be Made?

RMDs must begin by the “required beginning date.” The tax law provides that the required beginning date is April 1 of the year after a retired employee or a more-than-5% owner turns age 70½. If an employee (other than a 5% owner) continues to work for the sponsoring employer after age 70½, the plan can allow the employee to wait until April 1 of the year after retirement to start taking RMDs.

For beneficiaries of employees who die before their required beginning date, minimum distributions usually must start on or before December 31 of the year after the year of the employee’s death. However, a surviving spouse who is the sole account beneficiary and leaves the money in the plan has the option to wait until December 31 of the year the employee would have turned age 70½.

Plans must make subsequent RMDs by December 31 of each year.

How Are an Employee’s RMDs Calculated?

Generally, an employee’s RMDs are calculated each year based on the employee’s age using the IRS’s Uniform Lifetime Table. The account balance at the end of the preceding year is divided by the applicable age-based factor found in the IRS table. However, the uniform table isn’t used if the account owner’s spouse is the sole beneficiary and he or she is more than 10 years younger than the owner. In that case, a joint life expectancy table is used instead. Using this table will result in a lower RMD than would be computed using the uniform table.

How Are Beneficiaries’ RMDs Calculated?

If the employee had designated an individual beneficiary and the employee dies before his or her required beginning date, RMDs generally are calculated based on the beneficiary’s life expectancy (unless the five-year rule applies). When the employee has designated more than one beneficiary, the life expectancy of the oldest beneficiary should be used. If the employee dies after his or her required beginning date, the remaining balance must be paid out over the longer of the beneficiary’s or the employee’s remaining table life expectancy.

What if a Trust Is Named as Beneficiary of the Plan Account?

Where a trust is named as the beneficiary, the beneficiaries of the trust will be treated as the designated beneficiaries for RMD purposes if (1) the trust is a valid trust under state law, (2) the trust is irrevocable or will become irrevocable at the employee’s death, (3) the beneficiaries can be identified from the trust instrument, and (4) required documentation is timely provided to the plan administrator.

What Happens if RMDs Are Not Made?

An excise tax will be imposed on the payee equal to 50% of the amount that should have been distributed but wasn’t. For example, if the plan was required to distribute $12,000 to a retired employee, but paid out only $10,000, the excise tax would be $1,000 ($12,000 – $10,000 = $2,000 × 50% = $1,000). The IRS can waive the excise tax if it can be established that the shortfall was due to reasonable error and reasonable steps were taken to correct the shortfall.

“In general, plans must make RMDs to retired employees who have reached age 70½ and to any current employees who own more than 5% of the company and are age 70½ and older.”

Normal Retirement Age for In-service Distributions

Historically, in-service distributions from defined benefit plans generally are prohibited. However, participants have been allowed to take in-service distributions if they worked past their “normal retirement age.” New IRS guidance makes it clear that a normal retirement age of 62 or higher is deemed to meet this definition. These final regulations define normal retirement age as an “age that is not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered work force is employed.”

401(k) Wrap Plans

Participants in nonqualified deferred compensation plans generally cannot change their contribution elections during the year. When a participant is making both 401(k) and nonqualified contributions to a 401(k) wrap plan, changing the participant’s 401(k) elective deferral could force a nonqualified contribution change in order to keep the participant’s total contribution within plan limits. New regulations exempt wrap plan participants from penalties in this situation -- as long as the participant’s total contributions to both plans don’t exceed the law’s annual contribution cap (for 2007, $15,500, or $20,500 with catch-up).

Sick Days Turn Sunny

A recent online survey by Kronos® Incorporated and Harris Interactive found that 39% of Americans who work full-time have called in sick simply to take a summer day off. Their most frequent explanations were: to have a mental health day, to enjoy great weather, and to take a break from a heavy workload. Yet, another recent Kronos study found that 98% of full-time employees have gone to work when they were sick.