Employer Frequently Asked Questions Contributions How much can a participant defer? The IRS limits the amount a participant can defer in a given calendar year. This is the 402(g) limit which is an indexed amount. For 2012, the maximum allowable salary deferral contribution is $17,000. Participants at least 50 years of age can defer an additional $5,500. The amount a participant can defer may also be further limited by the plan sponsor through a provision in the adoption agreement by imposing a maximum deferral percentage or adopting a SIMPLE 401(k) Plan. The deferrals are also subject to the 415 limit described under compliance testing. What is a catch-up contribution? Participants who are at least age 50 can defer an additional $5,500 of their compensation during 2012. How soon do I have to send the contributions to be timely? As per the Department of Labor regulations, all 401(k) elective deferrals and loan payments need to be deposited into the plan's account as soon as administratively possible, but in any case no later than 7 business days following the day on which the amounts would have been payable to the participant. Plan sponsors are required to disclose late contributions and loan payments on the Form 5500 filed with the DOL. Also, a 15% excise penalty is imposed on late contributions and loan payments. What is the difference between an employer matching contribution and an employer non-elective contribution? Employer non-elective contributions, also known as profit sharing contributions, and employer matching contributions are contributions made by the employer to eligible participants. The profit sharing contribution is not contingent upon a participant deferring but is based upon the allocation formula in the adoption agreement and the compensation of the participant. Employer matching contributions are only given to participants who are deferring and are based on a matching formula. The matching formula would define the amount of compensation to be considered and the rate of match. For example, under a matching formula of 50% up to 6% of compensation, a participant deferring 8% would receive a matching contribution of 3% of his or her compensation. Is there a deadline to send profit sharing contributions and matching contributions? The employer contributions of profit sharing and matching should be deposited by the due date of the employer s corporate return. If the employer has filed for an extension, the employer automatically receives an extension for depositing the employer contributions as well. For a calendar year plan the contributions will be due by March 15th (corporation only). However if the employer files for an extension, the employer contributions will be due by September 15th. If the plan has a safe harbor matching contribution on a per payroll period basis, the safe harbor matching contributions should be received by the plan no later than the last day of the next quarter.
What are Roth contributions? Roth contributions are elective deferrals made on an after tax basis within a 401(k) plan and must be allowed in the plan. Since these contributions are elective deferrals, they are subject to the 402(g) limit the same as elective deferrals made on a pre-tax basis. If certain withdrawal restrictions are met, the contribution basis and associated earnings are not subject to income taxation at the time of distribution. Census Data Request Why do I have to provide the census information? Sheakley Pension Administration (SPA) uses the census information to complete compliance testing and the Form 5500 required by the IRS each plan year. When is the deadline to return the census? SPA requests that the census information be returned within the month following your plan year-end. This deadline ensures that all IRS required testing is completed in a timely manner. If any corrective distributions are needed due to test failure, the corrective distributions can be completed within the 2 ½ month period following plan year-end to avoid your company incurring a 10% excise penalty. The 10% excise penalty is assessed for corrective distributions processed more than 2 ½ months following plan year-end. Do I have to report all employees who worked during the year including those who terminated, are part-time, or are eligible but elected not to defer? Any employee receiving W-2 compensation is considered a common law employee of the company and is required by the IRS to be reported on the census. Why do I need to report hours worked for the participants? Hours worked during the year are needed to determine eligibility, vesting, and employer contribution requirements. Generally, an employee is credited with a year of service for eligibility and vesting if he or she works at least 1,000 hours during the plan year. A plan may require an employee to be employed 500 or 1,000 hours to receive an employer contribution. Estimated hours using the appropriate code on our census request allow us to determine if the employee worked 1,000 hours or less. What is compensation from date of eligibility? It is the compensation starting from the date the employee becomes eligible to enter the plan until the last day of the plan year. What is a receivable and why is this information needed? A receivable is any contribution received by your fund company for a plan year after the close of the plan year. This is used to reconcile the plan assets, perform testing, and complete the Forms 5500.
Compliance Testing ADP and ACP Testing What are the ADP and ACP tests? The ADP and ACP tests are nondiscrimination tests which compare the contributions of the highly compensated employees (HCEs) to the non highly compensated employees (NHCEs) for the plan year. The elective deferral contributions for the plan year are tested in the ADP test (Actual Deferral Percentage test). The employer matching contributions are tested in the ACP test (Actual Contribution Percentage test). The group average of the individual percentages of the NHCEs sets the passing limit for the group average of the individual percentages of the HCEs. If the ADP test or the ACP test fails, correction can be refunding contributions to the HCEs or making contributions to the NHCEs. Who is considered to be a highly compensated employee (HCE)? An employee is considered an HCE due to either ownership or compensation. An employee who earned in excess of $110,000 (as indexed by the IRS) in the prior plan year is considered to be an HCE. An employee who is a more than 5% owner in the current or prior plan year is considered to be an HCE. Due to family attribution rules, the spouse, children, parents, and grandchildren of a more than 5% owner are attributed with ownership and are considered to be HCEs. How is the compensation test to determine HCEs used in the first year a company starts up? Since the company was not in existence in the lookback year, none of the employees would have any compensation in the lookback year. No one would be considered an HCE based on the compensation test. There may be HCEs due to the ownership test in the year the company starts up. If an owner and spouse work together and divorce during the plan year, is the divorced non-owner still considered an HCE? If the spouse was married to the owner at any time during the plan year, the spouse would be attributed with ownership under the attribution rules of Code Section 318 for that plan year. Since the spouse is a more than 5% owner in the current plan year or in the lookback year under attribution rules, he or she would be considered an HCE. What is the top paid group, and what does it mean to make the top paid group election? A plan can limit the number of employees to be considered an HCE by making a top paid group election. The top paid group election states that if more than 20% of the employees earn over $110,000 (as indexed for 2010), only the top paid 20% will be considered highly compensated under the compensation test. The top paid group election is made through a plan amendment, and the election would remain in place until removed through a plan amendment. If an owner does not have any earned compensation in a given plan year, would he or she be considered an employee and be included in the ADP and ACP Tests for that plan year? In any year an owner has no earned compensation, he or she would not be considered to be an employee and would not be included in the ADP and ACP tests. Are employee after-tax contributions exempt from nondiscrimination testing? After-tax contributions are subject to nondiscrimination testing.
How does the IRS 2 ½ month deadline following the close of the plan year affect the ADP and ACP Tests? If the failed ADP and ACP Tests are corrected after the 2 ½ month deadline by making corrective distributions, the employer incurs an excise tax of 10% of the amount of the excess contribution. No penalty applies if the tests are corrected by making a qualified non-elective contribution. How are excess contributions in a 401(k) plan taxed to the participant? Excess contributions arise when the ADP test fails. If refunds for a failed ADP/ACP test are made within the 2 ½ month period or 6 month period (in the case of Eligible Automatic Enrollment arrangement) after the plan year ends, the corrective distribution will be taxed to the participant in the year distributed. When is the 1099-R issued for corrective distributions? The 1099-R for corrective distributions is issued the January following the end of the calendar year the corrective distribution was processed. Top Heavy Testing What is a top heavy test? 401(k) plans need to meet what are called "top-heavy plan rules". These rules are found in section 416 of the Internal Revenue Code. The top-heavy rules are designed to ensure that lower paid employees receive at least a minimum benefit in plans where most of the assets are owned by higher paid employees (referred to as "key employees" and defined below). When a plan is top-heavy, certain minimum vesting and allocation requirements must be satisfied. Plans with fewer than 100 participants are the most likely to be come top-heavy and thus affected by the top-heavy rules. What makes a plan top heavy? A defined contribution plan is top-heavy when, as of the last day of the preceding plan year (the determination date), the aggregate value of the plan accounts of key employees exceeds 60% of the aggregate value of the plan accounts of all employees under the plan. For top-heavy purposes, aggregate - not yearly - contributions and earnings are counted to ensure the top paid group does not benefit disproportionately. Note: It s even possible for a plan to become top-heavy after a year in which no contributions are made. Who is considered to be a key employee? An employee is considered to be a key employee if he or she meets at least one of the three tests. An employee owning more than 5% of the employer is a key employee. Attribution rules apply so family members of a more than 5% owner would be key employees. An employee owning more than 1% of the employer and having an annual compensation exceeding $150,000 is a key employee. An employee satisfying the officer test of being an officer with annual compensation of at least $165,000 (as indexed) would be a key employee. Who is considered an officer in determining key employees? An officer is an administrative executive who is in regular and continuous service with an organization. The determination is based on facts and circumstances, including, but not limited to the source of the individual s authority, the term for which elected or appointed, and the nature and extent of the individual s duties. A person may hold the title of an officer but under the relevant facts not actually be an officer in substance.
What is the determination date for the top heavy test? The last day of the preceding plan year is the determination date used to perform the top heavy test. As an exception for new start-up plans, the determination date used for the first plan year is the last day of that year. Is a contribution required for a top heavy plan? If a plan is top-heavy, the employer must provide non-key employees a top heavy minimum contribution equal to 3% of compensation. If the highest allocation rate to any key employee is less than 3%, the employer would only have to provide a percent of compensation equal to the highest allocation rate received by a key employee for the top heavy minimum contribution. Which employees must receive a top heavy minimum contribution? The top heavy minimum contribution must be given to all eligible non-key participants employed on the last day of the plan year. No hour of service requirement can be required to receive a top heavy minimum contribution. How is the top heavy minimum contribution calculated? The top heavy minimum contribution is calculated using the entire plan year compensation regardless of whether the participant entered the plan mid year. Which contributions can be used toward satisfying the top heavy minimum contribution? Top heavy minimum contributions can be satisfied by the following types of contributions: employer profit sharing, forfeiture reallocation, qualified non-elective, employer matching, safe harbor non-elective, and safe harbor matching. Do any special vesting requirements apply to a top heavy plan? Please check your plan document to determine the Top Heavy Vesting Schedule. What happens if the employer does not make a top heavy minimum contribution? The plan could have a qualification failure resulting in the plan losing its qualification for tax purposes. Coverage Testing What is coverage testing? Under section 410(b) coverage testing is required. The plan must pass coverage under either the ratio test or the average benefits test. Coverage testing identifies the coverage testing group which does not include the excludable employees. Employees can be excludable due to not satisfying the age and service requirement to enter the plan, terminating employees with no more than 500 hours of service, being union employees, or being nonresident aliens. Coverage testing compares the highly compensated employees and non highly compensated employees to determine the percentage benefiting in the coverage testing group. 415 Limit Testing What is 415 limit testing? Contributions to the plan are known as annual additions and are limited under section 415. Annual additions include employer contributions, employee contributions, and forfeiture reallocations. Section 415 limits the annual additions a participant may receive in a limitation year to the lesser of 100% of section 415 compensation or $50,000 (as indexed for
2012). The limitation year is defined in your adoption agreement and generally coincides with the plan year. The 415 limit testing reviews each participant's annual additions for potential excesses. Deductibility Testing What is deductibility testing? Deductibility testing reviews the plan contributions made to the plan and the eligible compensation to determine if the contributions are within the deduction limits. All elective deferral contributions made to the plan during the employer s taxable year are deductible. The employer contributions of non-elective and matching contributions are limited to 25% of all compensation paid or accrued to participants during the employer s taxable year including 401(k) elective deferrals and cafeteria plan contributions. Government Reporting Forms 5500 Does the IRS have a filing deadline for the Form 5500? The IRS filing deadline for the Form 5500 is seven months after the plan year ends. For a plan year ending December 31st, the filing deadline would be July 31st. Can the IRS filing deadline be extended for the Form 5500? The filing deadline can be extended by a corporate extension (only if the fiscal and/or plan year are the same) or by request via Form 5558 Application for Extension of Time to File Certain Employee Plan Returns. If your company has a corporate tax extension, then the filing deadline is automatically extended one and a half months. The Form 5558 requests an extension of two and a half months specifically for the Form 5500. Who should sign the Form 5500? The plan administrator, plan trustee, or employer must sign the Form 5500. My plan requires an independent audit; does the audit have to be completed prior to filing the Form 5500? A plan typically having at least 100 participants at the beginning of the plan year is considered to be a large plan requiring an audit by a qualified independent public accountant. The auditor s opinion report must be attached to the Form 5500. Who should be reported on the Schedule 8955-SSA? Schedule 8955 reports information concerning separated participants with deferred vested benefit rights. The information on this schedule is given to the Social Security Administration to provide to participants when they file for Social Security benefits. What is a Summary Annual Report (SAR) and who has to receive a copy of it? Annually, the plan trustee should furnish a copy of the SAR to each participant of the plan and to each beneficiary receiving benefits under the plan. Participants include all active participants, retired or separated participants that are entitled to receive benefits, and beneficiaries of deceased participants.
What information do I have to provide if a participant requests a copy of the annual report as referenced in the SAR? If requested, a participant is entitled to receive a copy of the Form 5500 and the accompanying schedules with the exception of the Schedule 8955. A participant is also entitled to a copy of the plan s financial statement or asset reconciliation for the plan year. This would not include financial detail at a participant level. What is Form 5330 and is there a filing deadline? Form 5330 Return of Excise Taxes Related to Employee Benefit Plans is filed to report Section 4975 Tax on Prohibited Transactions for non-timely submission of plan contributions and Section 4979 Tax on Excess Contributions for making corrective distributions after 2 ½ month deadline. Excise tax for Section 4975 is due within seven months from the tax year end of the employer. Excise tax for Section 4979 is due within fifteen months from the plan year end to which the corrective distributions relate. What is a fidelity bond and how do I go about getting one? A fidelity bond protects your plan against losses due to mishandling or misappropriation of funds. Fidelity bonds are available through a casualty agent. What amount does my fidelity bond need to be? The coverage amount is the greater of $1,000 or 10% of total plan assets as of the beginning of each plan year up to a maximum of $500,000. If it is the first plan year, estimate the value that will be handled for the year.