For Business Owner, Partners, and Spouse(s) Only Individual 401(k) Plan

Transcription

1 Administration Manual For Business Owner, Partners, and Spouse(s) Only Individual 401(k) Plan Delaware Charter Guarantee & Trust Company d/b/a Principal Trust Company

2 Mailing Address: P.O. Box 8963 Wilmington, DE Fax: Welcome to (Principal Trust Company). For nearly 30 years, we have focused exclusively on servicing retirement and savings plans. As an independent subsidiary of the Principal Financial Group, Principal Trust Company offers a depth of industry knowledge, administration expertise, exceptional technological resources, and a long-term commitment to the marketplace. As a small business owner, you have options when planning for retirement. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made significant changes to tax laws governing 401(k) plans. Now, individual 401(k) owner-only businesses can contribute more than ever before for their owners retirement. Principal Trust Company Product Features: IRS-approved prototype plan document Availability of loans (Hardship withdrawals are not permitted) Maximization of retirement savings, including employee deferrals and employer contributions Additional catch-up deferrals for people over age 50 Inclusion of your spouse or your partners and their spouses in the plan NOTE: If you currently have common-law employees other than your spouse or partners and their spouses (spouses must be employed by the company to participate), this product cannot be used. If you hire common-law employees in the future, you must contact us immediately to discuss other products that may be more suitable for your retirement planning needs. Our Service Package: Virtually signature-ready Adoption Agreement Directed trust services Recordkeeping of contributions, distributions, and loan repayments Preparation of loan packages and loan compliance services Required Minimum Distribution (RMD) notices to participants age 70 ½ and older and calculations upon request Internal Revenue Code (IRC) 402(g) and 415 limit tests IRS Form 1099-R preparation Compliance support IRS Form 5500-EZ preparation if needed Spirit of Excellence Principal Trust Company is committed to a Spirit of Excellence, ensuring our team is provided with the training and tools it needs to deliver the highest quality customer service. Our employees average over 13 years of experience with, and knowledge of, tax advantaged accounts. Technology We welcome you to visit our website at There, you will find useful tools to help you manage your retirement plan, including the most current version of this Administration Manual and forms. In addition, you can review information regarding IRS and DOL requirements as well as links to educational and regulatory information. TR /2007

3 Table of Contents Introduction Access to Principal Trust Company... 1 Service Package... 1 Responsibilities... 2 Allowable Plan Investments... 2 Plan Administration Document File... 3 Compliance Overview... 3 Participation... 4 Changing Beneficiary Information... 4 Deposits to the Account (Contributions)... 4 Brokerage Firm Changes... 5 Distribution Processing Periodic Distributions... 6 Death Distributions... 6 Divorce Distributions... 7 Hardship Distributions... 7 Disability Distributions... 7 Required Minimum Distributions... 7 Loan Processing Loan Information... 8 Requesting a Loan... 9 TR /2007

4 Mailing Address: P.O. Box 8963 Wilmington, DE Fax: Introduction Access to (Principal Trust Company) Our Client Contact Center representatives are available from 8:00 a.m. to 6:00 p.m. Eastern Time to assist you with any questions you have. Access by Phone Our Phone Number is or If all of our representatives are busy, you can leave a message. Access by Facsimile Our Fax Number is Our fax machine is available 24 hours a day, 7 days a week for your convenience. Access by Mail Our address for regular mail is: Principal Trust Company P.O. Box 8963 Wilmington, DE Our address for private delivery service is: Principal Trust Company 1013 Centre Road Wilmington, DE Access via the Internet Tools to help manage your retirement plan are available on our website, which is continually being updated with forms, retirement plan calculators, and current industry news. Our website address is: You can also contact us via Comments@principaltrust.com Service Package Our primary function is to provide administrative and compliance services. We write and maintain IRS-approved prototype plans and we provide government reporting services. The following pages include summaries of services provided and an outline of the responsibilities of Principal Trust Company, the Plan Sponsor and the Investment Advisor. Please note that in the event that any of this information conflicts with the plan documents or rules and regulations that govern qualified plans, the plan documents and rule and regulations will govern the administration of the plan. The following list highlights our service package: IRS pre-approved prototype retirement plan and trust documents Virtually signature-ready Adoption Agreement On-going tracking of contributions, loan payments, and withdrawals Loan recordkeeping services Notification to participants age 70 ½ or older of required minimum distributions, calculating required distribution amounts upon request, and processing distribution requests Tax withholding and reporting to IRS (Form 1099-R) of distributions Compliance testing for IRC 402(g) and 415 limits IRS Form 5500-EZ preparation, if required On-going maintenance of plan and trust documents to ensure compliance with government requirements Periodic updates regarding government rules that affect retirement plans TR Page 1 of 9 12/2007

5 Other Services Services Not Provided by Principal Trust Company Statements of plan assets Listing of all assets Investment, tax, or legal advice Who Can Assist Your investment firm is responsible for providing you with asset statements Your investment firm is responsible for maintaining current information about your plan investments Please consult with your legal counsel, tax advisor, or investment advisor to determine if this plan or a specific investment is right for you and your retirement goals. Responsibilities Principal Trust Company s Responsibilities Review the Adoption Agreement for completeness Establish the plan on our records Recordkeep contributions and distributions Track loan activity Remit tax withholdings to the IRS as required Issue IRS Form 1099-R as required Test contributions for compliance with IRC 415 and 402(g) Prepare annual IRS Form 5500-EZ, if required Employer s (the Plan Sponsor ) Responsibilities Be the Plan Administrator and Named Fiduciary of the plan Ensure that accounts are properly and timely set up with/by the investment firm for self, partner(s), and spouse(s), if applicable Provide Principal Trust Company the required paperwork to properly establish the plan Forward contributions and loan payments to your investment advisor Authorize loan payout or distribution transactions Provide the necessary information to Principal Trust Company to prepare required government reporting and compliance testing Administer and operate the plan in compliance with IRS and DOL requirements Investment Advisor s Responsibilities Assist the Plan Sponsor in establishing individual accounts with the investment firm Assist the Plan Sponsor by ensuring that all contributions and loan payments are properly recorded on the brokerage firm records Allowable Plan Investments Only investments that are held within an investment/brokerage account, by the designated broker dealer, and that are valued on the investment/brokerage statement are permitted in the plan. In addition, foreign investments, life insurance, limited partnerships, and investments that generate Unrelated Business Taxable Income (UBTI) are prohibited under this plan. Please call our Client Contact Center area, at , if you have questions about a particular investment. Principal Trust Company, as a third party recordkeeper, does not practice law, and does not and cannot provide legal, tax, or investment advice. TR Page 2 of 9 12/2007

6 Mailing Address: P.O. Box 8963 Wilmington, DE Fax: Plan Administration At the time you set up your plan, you should set up files containing all of the important documents and forms needed for the proper operation of your plan. You should also retain copies of completed documents and forms in those files. Document File Plan Set Up File Basic Defined Contribution Plan Document Trust Agreement Plan Sponsor Service Agreement (copy) Original Adoption Agreement with all addenda, including the GUST - Operational History Addendum, if applicable EGTRRA Model Amendment All model or unilateral amendments All plan amendments and restatements Administration Manual Includes information on the operation of your plan Copies of all forms needed for the proper operation of your plan Completed Transaction File Contribution and Loan Payment Submission Forms Participant Information Form used to establish the account(s) Beneficiary Forms Distribution Forms Loan Package, if applicable. This package includes: Sample Loan Policy statement Loan Application & Agreement (promissory note) Loan Withdrawal Request Brokerage Firm Statements Compliance File Annual Return/Report of Employee Benefit Plan (Form 5500-EZ) Annual Compliance Tests (IRC 415 and 402(g)) Compliance Overview The IRC imposes limits on contributions to your plan. Plans and participants must comply with these limits in order to maintain the qualified status of the plans and to retain the tax deferrals enjoyed by the participants. The chart below outlines the limits for various years. Please visit our website ( for the most current information. 415 Limit Type of Limit $41,000 or 100% of pay $42,000 or 100% of pay $44,000 or 100% of pay $45,000 or 100% of pay $46,000 or 100% of pay Deferrals IRC 402(g) $ 13,000 $ 14,000 $ 15,000 $ 15,500 $ 15,500 Catch-up Deferrals $ 3,000 $ 4,000 $ 5,000 $ 5,000 $ 5,000 Employer Deduction 25% of pay 25% of pay 25% of pay 25% of pay 25% of pay Compensation limit used for contributions $205,000 $210,000 $220,000 $225,000 $230,000 TR Page 3 of 9 12/2007

7 Compliance Overview (continued) Section 415 Testing IRC 415 limits the total contributions that can be credited to a participant per Limitation Year. The limit is the lesser of $46,000 (as indexed) or 100% of the participant s compensation. Section 402(g) Testing IRC 402(g) limits the employee salary deferral contributions to a maximum amount ($15,500 for 2008) that is indexed annually. An eligible participant over 50 years of age or older during the plan year may also make catch-up deferrals up to a maximum amount ($5,000 for 2008) that is indexed annually. Form 5500-EZ must be filed each year with the Department of Labor (DOL) if total plan assets exceed $250,000. Assets from all plans of the same employer must be combined to determine the $250,000 threshold. A questionnaire will be sent to you at the end of each plan year. This questionnaire asks for specific information that we need to perform the annual compliance tests for your plan and to prepare Form 5500-EZ, if required. It is important that you return the questionnaire to us by its deadline. Participation You, your partner, and spouse(s) (if applicable) are eligible to enter the plan on the first monthly date on or after the later of the plan s effective date or the date of hire. Spouse(s) can only enter the plan only if they are employed by the company. You, your partner, and spouse(s) (if applicable) must complete the Participant Information Form and Beneficiary Designation Form. Send the completed forms to Principal Trust Company and keep a copy in your Completed Transaction File. If you hire common-law employees in the future, you will need to transfer your plan to another service provider or restate your plan to another type of plan. Please call a Client Contact Center representative, at , immediately for assistance. The Service Agreement you entered into with Principal Trust Company provides certain directed trust and recordkeeping services designed to cover only you, your partner, and spouse(s) (if applicable). Changing Beneficiary Information To change the existing beneficiary information, you, your partner, and/or your spouse(s) will need to complete a new Beneficiary Designation Form. You will need to keep the original form with signatures in your Completed Transaction file, and you will need to forward a copy of this form to Principal Trust Company. Deposits to the Account (Contributions) There are three types of contribution that may be deposited to your plan: Employee deferral contributions Employer contributions Catch-up deferrals Contributions Employee deferral, Employer, and Catch-up deferral contributions for your plan must be made in cash. The following are procedures for making a deposit to your plan: Step Action 1 Make the check payable to Principal Trust Company. (Your investment firm has a letter of authorization to deposit the check). Note: Send a separate check for your partner and/or spouse(s), if applicable. 2 Send your check(s) to your investment firm with the Contribution & Loan Payment Submission Form (included in the forms section of this Administration Manual). The contribution for the participant should indicate how much is attributable to: Employee deferrals Employer contributions Catch-up deferrals 3 Keep a copy of the Contribution & Loan Payment Submission Form in your Completed Transaction File. TR Page 4 of 9 12/2007

8 Rollovers A rollover is a deposit of cash and/or securities received as a distribution from another qualified employer sponsored plan or IRA. Please work with your investment advisor to ensure the contribution is recorded as a rollover contribution by the investment firm. Your prior trustee is required to withhold 20% from distributions made payable to participants. The 20% withholding can be avoided by having your prior trustee process a direct rollover to this plan. Brokerage Firm Changes The transfer of accounts between brokerage firms is fast and easy with the Automated Customer Account Transfer System (ACATS). However, to be able to process through the ACATS system, there are some requirements that must be met. We have outlined these requirements for you below: ACATS Transfer Requirements The entire plan must transfer. Principal Trust Company must be listed as the trustee on both accounts. We must receive a copy of the ACATS Transfer form. The plan must transfer to a firm with whom Principal Trust Company has a business relationship Your investment advisor will help you complete the ACATS Transfer Form. Contact our Client Contact Center representatives at with any questions. Please follow these steps to ensure that the change takes place smoothly. Step Action 1 Make sure the box at the top of the form that indicates Broker Change Only is checked. 2 Provide the new account number at the new firm. 3 Do not complete a new Principal Trust Company Adoption Agreement. 4 Make sure you obtain a new fee schedule, as your fees depend on the brokerage firm that services your account. TR Page 5 of 9 12/2007

9 Mailing Address: P.O. Box 8963 Wilmington, DE Fax: Distribution Processing The plan document requires that one of the following events must occur in order to take a distribution: Severance from employment Termination of the plan Attainment of Normal Retirement Age as defined in the Adoption Agreement Attainment of age 59½ Disability Death If you meet one of the first five events, complete the Distribution Request Form, available on our website: Note: To process a Death Distribution, please refer to the Death Distribution section. There are additional requirements needed to process this type of distribution. Periodic Distributions Participants are eligible to take distributions without penalty when they reach age 59½ or when they separate from service at age 55 or older. The account may be set up to pay out regular periodic distributions. Please work with your tax and/or legal advisor to determine if you are eligible to take periodic distributions and to determine your periodic distribution amount. Death Distributions Distributions due to death are paid to the designated beneficiary. There are four common types of beneficiaries, please call our Client Contact Center for the requirements needed if the beneficiary designation is not as identified below: Spouse Non-spouse Trust Estate The requirements for distribution to each type of beneficiary are different. Please refer to the table below for the requirements needed to process a death distribution. All required forms are available on our website: TR Page 6 of 9 12/2007

10 If the Beneficiary is the Spouse Non-Spouse Trust Estate We need Certified copy of the death certificate Completed, dated, and signed Beneficiary Claim Form Certified copy of the death certificate Completed, dated, and signed Beneficiary Claim Form Guardianship paperwork and a letter of authorization from the guardian if the beneficiary is a minor Certified copy of the death certificate A copy of the fully executed Trust that clearly identifies all of the beneficiaries and the trustee A copy of the signature page of the Trust Tax ID No. of the Trust Completed, dated, and signed Beneficiary Claim Form signed by the trustee Certified copy of the death certificate Letters Testamentary or Letters of Administration Completed, dated, and signed Beneficiary Claim Form signed by the Executor or Administrator of the estate Divorce Distributions Divorce distributions are payments made to an alternate payee under a qualified domestic relations order (QDRO). The following is required to process the distribution: Copy of the QDRO A Distribution Request form completed with the participant s information and dated and signed by the Plan Administrator A letter of authorization from the alternate payee, that includes the date of birth, Social Security number, mailing address, and instructions for processing the distribution If the proceeds are being rolled over to another tax advantaged account we will need the name, address, and account number of the financial institution receiving the proceeds Hardship Distributions Hardship distributions are not allowed under this plan. Disability Distributions Totally disabled means that a participant is disabled, as a result of sickness or injury, to the extent that he/she is prevented from engaging in any substantial gainful activity and is eligible for and receives a disability benefit under Title II of the Federal Social Security Act. If not covered under Title II of the Federal Social Security Act, written proof that the disability exists and has continued for at least six months must be furnished to the Plan Administrator by the participant within one year after the date the disability begins. Totally disabled, in this instance, means that a Participant is disabled as a result of sickness or injury, to the extent that he is completely prevented from performing any work or engaging in any occupation for wage or profit, and has been continuously disabled for six months. The Plan Administrator, upon receipt of any notice of proof of a participant s total disability, shall have the right and opportunity to have a physician it designates examine the participant when and as often as it may reasonably require, but not more than once each year after the disability has continued uninterruptedly for at least two years beyond the date of furnishing the first proof. Required Minimum Distributions (RMD) In general, participants must begin taking distributions when they attain 70½ years of age. Participants who do not own 5 percent or more of the company and are still working may delay their RMD date until April 1 of the year following the year in which they retire. Principal Trust Company will send a Required Distribution Package each year to any participants that are 70½ years of age or older. The package includes: Letter outlining the IRS requirement for taking Required Minimum Distributions Required Minimum Distribution Form TR Page 7 of 9 12/2007

11 Mailing Address: P.O. Box 8963 Wilmington, DE Fax: Loan Processing Loan Information The following general information is provided to assist the Plan Sponsor with the proper administration of the loan program. Please call our Client Contact Center at with any specific questions about loans. Internal Revenue Service Requirements Department of Labor Requirements Administrative Provisions Maximum Loan Amount Minimum Loan Amount Reasonable Rate of Interest In limited circumstances, the Internal Revenue Service (IRS) will allow a plan participant to take a loan from a qualified plan. The IRS allows loans if: the loan does not exceed the applicable dollar or percentage limits the loan is payable within five years (not limited for the purchase of a principal residence) the principal and interest are amortized in level amounts payable at least quarterly, and the loan is made under the terms of a legally enforceable agreement The Department of Labor (DOL) requires plan sponsors who offer loans in their plans to ensure the loans: are available to all participants on a reasonable and equivalent basis are not made available to highly compensated employees in amounts greater than those available to other employees are made in accordance with a specific loan policy bear a reasonable amount of interest are adequately secured DOL regulations require written loan provisions (or inclusion of a separate loan policy) in the plan document, and in the summary plan description. The provisions should include: authorization to allow the fiduciary to establish a loan program identification of the person administering the program procedures for applying for a loan procedures for determining a reasonable rate of interest a description of the collateral required to secure a loan the events constituting default and the steps that will be taken to preserve plan assets in case of default The IRS limits the loan amount that a participant can take to the lesser of 50 percent of the participant s vested account balance or $50,000. The highest outstanding loan balance in the preceding 12 months reduces the $50,000 limit, even if repaid. For example, if a participant had a vested balance of $100,000 and a high loan balance of $3,000 in the last year, he or she would be limited to $47,000 for a new loan. Note: For purposes of determining future loan amounts, loans that were defaulted and deemed distributed are considered outstanding until they are repaid. That means the available balance must be reduced by that amount, including interest. Regulations permit the plan to establish a minimum loan amount, if this minimum is not greater than $1,000. DOL regulations provide that a reasonable rate of interest is one that provides a return commensurate with the prevailing rate that is charged by independent lenders for similar loans. You must review this rate periodically and adjust it to reflect the current lending environment. The plan sponsor is responsible for determining the interest rate and for updating the rate in accordance with the prevailing rate. TR Page 8 of 9 12/2007

12 Payments Taxability of Defaults and Offset Distribution Payments must be made on a substantially level amortization schedule at least quarterly. Loans for which payments are not received by the 90th day after the end of the quarter in which they are due are deemed to be in default. A loan which goes into default because the participant fails to make payments when due becomes a deemed distribution on the 90th day after the end of the quarter in which the payment is due. An extension of the loan amortization schedule that goes beyond the effective time period permissible under IRC 72(p), is also deemed to be a default. An offset takes place when the participant s account is used to satisfy the outstanding loan obligation. This is considered an actual distribution. However, an offset cannot take place until there is a distributable event. If an eligible rollover of the offset amount is not made the amount of the offset plus any other amount being distributed is subject to the 20 percent withholding rules. The maximum amount that can be withheld is limited to the sum of the cash and fair market value of the other property distributed. Loan Documents You must fully document the loan. This includes a: loan policy statement application irrevocable pledge and assignment promissory note Plan Sponsor s Responsibilities Principal Trust Company s Responsibilities You have certain responsibilities as the Plan Sponsor. As part of those responsibilities you must: Obtain and review the information on the application Approve or deny a loan according to plan provisions Verify plan participant s account balance Send loan application, promissory note, pledge, and assignment, loan policy statement, and check for the loan processing fee to Principal Trust Company Forward loan payments to Principal Trust Company. As soon as we receive your completed loan package, we will: Direct the investment firm to send the amount of the loan to the participant Monitor payment and default situations Issue Form 1099-R when a loan is in default Requesting a Loan To request a loan, the participant will need to complete and return the Request for Loan Package form to Principal Trust Company. This form is included in the Forms section of this manual. Principal Trust Company will prepare the loan package which includes the following documents: Sample Loan Policy Statement Loan Application & Agreement (promissory note) Federal Truth-in-Lending Disclosure (provides payment information) Loan Withdrawal Request form The Plan Sponsor is responsible for reviewing the loan package and signing the Loan Policy Statement. The participant, as the borrower, will sign the Loan Application & Agreement, and complete the Loan Withdrawal Form indicating which assets are to be liquidated for the processing of the loan payout. These forms, along with the $125 loan processing payment must be sent to Principal Trust Company for processing. TR Page 9 of 9 12/2007

13 FORMS Access plan forms via our website:

14 WE LL GIVE YOU AN EDGE SM P.O. Box 8963, Wilmington, DE TR by Delaware Charter Guarantee & Trust Company 12/2007