401(K) PROFIT SHARING PLAN
Administration Manual
Is this person eligible?
Is this an entry date?
Form 5500
Certified Audit
Form 1099R
Summary Annual Report
Participant Benefit Statements
Trustee's Report
Summary Plan Description (SPD)
Summary of Material Modification
Contribution Deadline
Timing of Distributions
Consent to Distribution
Required Distributions
Withholding
Federal Tax Deposit
Miscellaneous Requirements
Beneficiary Designation Forms
Qualified Domestic Relations Order
Claims Procedures
Bonding
Trust Identification Numbers
Prohibited Transaction
Loans To Participants
Hardship Distributions
Rollovers
Employee Meeting Method
Automated Phone System Method
ENROLLMENT
Before you offer an employee the opportunity to enroll in the company 401(k)
Plan, there are a few things you need to ask yourself.
1. Is this person eligible? If you are unsure,
please refer to your Summary Plan Description (SPD) or Plan Document. If ineligible
persons are let into the plan, they need to be removed which produces paperwork
for the plan sponsor and a shock to the participant. They now have to pay taxes
on the money that they invested in the plan before they were eligible.
2. Is this an entry date? Most plans have either
quarterly or semi-annual entry dates. If you are unsure, please refer to your
SPD or Plan Document.
If the employee is eligible and it is a valid entry date, the employee needs
to complete a Salary Deferral Form as well as a Beneficiary Form. If you, the
Plan Sponsor, are out of these forms, please contact our office and we will
be more than happy to replenish your supply. When these forms are completed,
please keep a copy for your records and forward a copy to our office.
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ANNUAL GOVERNMENT REPORTING REQUIREMENTS
1. FORM 5500. This Annual Report must be filed with
the Internal Revenue Service (IRS) each year. The deadline for filing this report
is the last day of the seventh month following the close of the Plan Year.
The deadline for filing the Annual Report may be extended up to two and one
half (2.5) months from the due date, if an extension has been approved. Form
5558 must be filed to request the extension. A copy of the approved extension
request must accompany the form 5500.
Our office prepares this report. The IRS and/or Department of Labor have the
authority to impose penalties for failure to file the Form 5500. Therefore,
it is imperative that the return be filed annually on a timely basis. ONLY
YOU CAN SIGN AND DATE THE REPORT AND FILE IT. Please send us a signed copy.
(a) Schedule A must accompany the Form 5500 if any insurance policies
are purchased with participant account balances. If these are not supplied automatically
by the insurance company or issuing agent, you should request them well in advance
of the filing deadline and send them to us for inclusion in the report.
(b) Schedule P, the annual return of the Plan's Trustees, must accompany
the Form 5500.
(c) Schedule SSA, deferred vested terminee data, must accompany the
Form 5500 if any participant terminated during the preceding Plan Year with
a vested benefit and did not receive a distribution of the benefit.
2. Certified Audit - An accountant's report must
be prepared if the plan has 100 (in most cases 119) or more participants at
the beginning of the Plan Year.
3. Form 1099R must be filed on behalf of each participant
who received a distribution (partial or total) during the year. Participants
must receive an individual Form 1099R by January 31. The 1099R forms
for all participants are consolidated and reported on Form 1096. Form
1096 and all individual Forms 1099R must be filed with the IRS by February
28 for distributions made during the prior calendar year.
We can prepare Forms 1096 and 1099R as an additional service.
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ANNUAL DISCLOSURE REQUIREMENTS
1. The Summary Annual Report summarizes the Form
5500 for the Plan. It must be distributed to Plan participants no later than
the last day of the ninth month following the close of the Plan Year. If the
plan receives an extension of time to file its Annual Report, the Summary Annual
Report must be distributed to Plan Participants no later than two months after
the extension deadline. The format for the Summary Annual Report is prescribed
by the IRS and included in our 5500 form to you.
2. Participant Benefit Statements - At a minimum
of once each year, every active participant should receive a statement which
outlines his account balance as of the end of the prior Plan Year. The statement
should indicate the balance of the participant's account as of the first day
of the Plan year , amounts credited to his account during the year, investment
earnings for the year and the balance of each account as of the last day of
the Plan Year.
3. Trustee's Report - The Trustees or other named
fiduciary must submit an annual financial report to the company detailing the
investment activity of the Plan. This report must be submitted within three
months of the end of the Plan Year. The company then has 90 days to reject this
report in writing.
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PERIODIC DISCLOSURE REQUIREMENTS
1. An initial Summary Plan Description (SPD) must
be distributed to all participants within 90 days of becoming a participant
or a beneficiary under the plan. An updated SPD must be distributed to employees
every 5 years if any substantial changes have been made during the previous
5 years. If no substantial changes have been made, a new SPD must be prepared
every 10 years.
2. Summary of Material Modification. If a material
modification (amendment which changes the benefit formula, vesting schedule
or a change of similar import) is made to a Plan, employees must be notified
of this change in writing within seven months of the last day of the Plan Year
in which the amendment was adopted.
3. Copies of the SPD and/or Summary of Material Modification must be filed
with the Department of Labor. We do this filing if you are on Retirement Alliance,
Inc. documents.
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CONTRIBUTION DEADLINE
Employee deferrals must be deposited by the fifteenth business day following
the end of the month in which the deferrals were withheld.
Contributions which are to be deductible to the Company must be made to the
Trust before the deadline or extended deadline, if applicable, for filing the
Plan Sponsor's federal income tax return.
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REQUIREMENTS RELATING TO DISTRIBUTIONS UPON TERMINATION
OR DEATH
If a participant needs to be paid out, (due to termination, death, disability
or retirement) you, the Plan Sponsor, need to reference your Plan Document to
determine when distributions are allowed (i.e. end of the plan year, as soon
as administratively feasible etc.)
If it is an approved distribution period, you need to give the participant
an Application for Benefits, as well as a copy of the Special Tax Rules. The
Special Tax Rules are simply a reference guide for the participants to use while
completing the application. If you are out of either of these forms, please
call our office and we will send you more.
When the participant completes the application, they need to return it to you.
You then need to sign the back as Plan Administrator, make a copy for your files
and forward the form to Retirement Alliance for processing.
1. Timing of Distributions - Distributions from
the Plan may be made as soon as administratively possible after retirement,
death or disability, but in no event later than 60 days after the end of the
Plan year in which the participant retired, died or became disabled. In the
event that a participant terminates employment other than on account of reaching
his Normal Retirement Date, death or disability, distributions from the Plan
are to be made no later than 60 days after the end of the Plan Year following
the Plan Year in which the participant terminates.
2. Consent to Distribution - When a participant
terminates employment and his account balance is less than five thousand ($5,000.00),
a lump sum distribution may be made without a participant's consent. If a participant's
distributable account balance is more than $5,000.00 the written consent of
the participant and his spouse must be obtained before distribution.
3. Required Distributions - All key shareholders
must begin taking distributions by April 1st following the year they reach 70
1/2, even if still employed.
4. Withholding - The Unemployment Compensation Amendments
of 1992 requires that 20% of a Plan distribution made after December 31, 1992
be withheld for federal income taxes. This automatic withholding can be avoided
if the distribution is an eligible rollover distribution which is directly
rolled over to an Individual Retirement Account or another qualified plan.
A participant must be given written notice regarding (i) rollover rules, (ii)
special tax treatment available to lump-sum distributions, (iii) the direct
rollover option and (iv) mandatory income tax withholding on distributions not
directly rolled over. This notice must be given to the participant at least
thirty (30) days, but not more than ninety (90) days, prior to the distribution.
With the participant's written consent, such thirty (30)day period may be waived
to permit a distribution prior to the end of the thirty (30) day period. The
direct rollover option need not be offered to any participant whose distribution
is less than $ 200.00.
5. Federal Tax Deposit - Income tax withheld on
distributions from qualified plans must be reported and deposited. The process
is outlined in our distribution memo.
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MISCELLANEOUS REQUIREMENTS
1. Beneficiary Designation Forms - All death benefits
payable under the Plan must be paid to a participant's spouse unless the participant
elects in writing to name an alternate beneficiary. This election must acknowledge
the spouse's understanding of the effect of such election and must be executed
by the spouse and notarized by an authorized Plan representative.
The Beneficiary Designation Form must be completed by all Plan participants
upon entering the Plan. This form must be kept on file in your office in case
of the death of a Plan participant.
2. Qualified Domestic Relations Order - Pursuant
to IRS Code Section 414(p)(1), qualified plans must honor a Qualified Domestic
Relations Order ("QDRO") as it relates to pension assets. A QDRO is
an order issued by a court recognizing the right of an alternate payee, who
can be a spouse, former spouse, child, or other dependent of a participant to
share in the benefits of an individual who participates in a qualified pension
or profit sharing plan.
If you have employees who are divorced or are in the process of being divorced,
the spouse of such employees will not be entitled to receive anything under
the terms of the plan until you, the Plan Administrator, have received a QDRO.
You should be very careful before giving out any information with respect to
the participant's account balance or accrued benefit, etc. and making distributions
if you have knowledge of a divorce or separation.
If you do receive a QDRO with respect to any Plan participant, it is the responsibility
of the Plan Administrator to ensure that it is a qualified order, that it conforms
with all of the requirements of the law and that the benefits which will become
payable to the alternate payee conform in all respects with the provisions of
your Plan. If the QDRO does not comply, or you have reason to question any of
its provisions, your objections should be presented to the court and an amendment
to the QDRO should be sought.
The affected participant and alternate payee, or their representatives must
be notified immediately upon your receipt of the QDRO. Further notice of the
determination that the QDRO is (or is not) qualified must be given to the participant
and alternate payee, or their representative within a reasonable period after
such determination is made.
If you receive a QDRO and have any questions with respect to any of the provisions
contained therein, please contact our office.
3. Claims Procedures - Once a participant submits
a claim for benefits under the Plan, the following procedures apply:
(a) Written notice must be given within 90 days of receipt, accepting or denying
the participant's claim.
(b) In the event a claim is being denied, the notice must include the specific
reason for denial, reference to specific Plan provisions, a description of necessary
information to fulfill the claim and an explanation of the Plan's claim review
process.
(c) The participant has 60 days after receiving a denial to either supply necessary
information or to submit a written appeal of the denied claim.
(d) A final decision on an appeal must be made within 60 days of receiving
the written request for review. If a hearing is required, a written decision
must be made in 120 days.
4. Bonding - It is incumbent upon the Company to
see that "EVERY FIDUCIARY...AND EVERY PERSON" of the plan "WHO
HANDLES FUNDS OR OTHER PROPERTY OF SUCH A PLAN" be bonded against loss
due to fraud or dishonesty. Such persons have been defined as "those who
have access to the employer's and employee's contributions or power to disburse
them."
The Department of Labor requires that the amount of the bond for a given calendar,
plan or fiscal year be 10% of the funds handled during the preceding year. The
amount of the bond may, but need not, exceed $500,000.00. In the case of a plan
without previous experience, the amount of the bond is based upon the estimated
value of the trust fund assets for the current year.
We suggest that you advise your insurance broker of this requirement and of
the fact that an eligible surety company holding a grant or authority from the
Treasury Department must be issued. In some cases, existing surety bonds covering
employees of the Company may be used or extended by endorsement at little or
no extra cost.
5. Trust Identification Numbers - The corporation
should file for a separate identification number for the trust by filing Form
SS-4 with the IRS. The Trust Identification Number is required for use on any
transaction that involves only that Trust, including all investment accounts
in the name of the Trust, 1099-R filings on distributions, Form 945 (Annual
Return of Withheld Federal Income Tax) and Form 5500, Schedule P (Annual Return
of Fiduciary Employee of Employee Benefit Trust). Please ask our office for
help in filing.
6. Prohibited Transaction - In addition to the general
administrative requirements, all Plan Trustees and other interested parties
have a duty to deal with Plan assets efficiently while avoiding any prohibited
transactions. The term "prohibited transaction" includes certain acts
of self-dealing by a fiduciary of the Plan.
ERISA provides that a fiduciary may not cause a plan to engage in a transaction
if that fiduciary knows, or should know, that the transaction constitutes a
direct or indirect:
(a) sale or exchange or leasing of any property between the Plan and a party
in interest;
(b) lending of money or extension of credit between the Plan and a party in
interest;
(c) furnishing of goods, services or facilities between the Plan and the party
in interest;
(d) transfer to a party in interest or use by or for the benefit of a party
in interest of any of the Plan assets.
In addition, an act of self-dealing would include the acquisition or holding
by a fiduciary or employer securities or employer real estate if the fiduciary
knows, or should know, that it would be a violation of ERISA to hold qualifying
securities and real property of the employer if the fair market value of the
property exceeds 10% of the fair market value of the plan's assets.
A party in interest to the Plan may be:
- Any fiduciary, counsel or employee of the plan;
- A person who provides services to the plan;
- An employer whose employees are covered by the plan;
- Any owner of a 50% interest in the employer;
- A union whose members are covered by the plan;
- Certain relatives of the above parties in interest may also be deemed parties
of interest.
7. Loans To Participants - If your Plan permits
loans to be made to individual Plan participants, other than shareholder employees
or owner employees who are not permitted to take out loans, you must be aware
of the limitations which are imposed by the IRS on the amount of any loan. The
limits on these loans are as follows:
The maximum amount a participant will be entitled to borrow will be the lesser
of (a) 50% of the vested amount of his account balance (or accrued benefit)
as of the Anniversary Date prior to the date a participant applies for the loan,
(b) $50,000.00; REDUCED BY the highest outstanding balance of his loans from
the Plan during the twelve month period ending on the day before the loan is
made. The consent of the spouse must be obtained within 90 days before the taking
of the loan. The company may require that the participants be responsible for
all fees incurred in drafting the appropriate loan documents.
The important points to remind participants if they contemplate taking out
a loan are as follows:
(a) The participant will pay the principal and interest back to themselves
through payroll deduction in after tax dollars. The interest rate is calculated
to be two points above the prime rate to ensure that their retirement savings
are not jeopardized by their short term withdrawal.
(b) The participant chooses the term of the loan for any amount of time contained
in a 1 to 5 year period, unless the loan is for the purchase of a primary residence.
Under these circumstances, the loan can be paid back over 25 years or until
the participant reaches age 65, (whichever is less).
(c) Most plans have a minimum of $1000.00 and a maximum of $50,000.00 However,
a participant can only borrow 50% of their vested balance.
If the participant would like to take out a loan, they need to complete a loan
application and return it to you, the Plan Sponsor. You need to review the application,
sign it, keep a copy for your files and mail a copy to Retirement Alliance,
Inc. with a check for the processing fee ($80). Typically, the participant pays
this charge.
8. Hardship Distributions - A hardship distribution
needs to be endorsed by the Trustee. The Trustee needs to affirm the hardship
criteria have been met by the participant. Hardships are a taxable distribution
and do not have to be paid back.
If your plan document allows for hardship withdrawals, you need to have the
participant complete the appropriate form and you, the Plan Sponsor needs to
sign it. However, there are very specific criteria that must be met in order
to qualify for a hardship withdrawal. The reasons are listed on the hardship
withdrawal form and the participant must provide proof of hardship. Please keep
a copy of the form on file for your records and forward the original to Retirement
Alliance, Inc.
It is important to remind the participant that they will receive a 1099 at
the end of the year. A hardship withdrawal is a taxable distribution.
9. Rollovers - If a participant has other qualified
plan money that they would like to roll into your plan you need to first check
your plan document to ensure that they are allowed. Some plans allow employees
to roll money into the plan before becoming eligible for deferrals. Others require
the employee to wait until they meet eligibility requirements. If they are eligible
to roll money into the plan, the participant must complete the rollover form
and return it to the Plan Sponsor.
It is the responsibility of the participant to get a check made out to the
plan from their past employer. The check and the form should then be given to
the Plan Sponsor. The Plan Sponsor needs to deposit the check to their account
and forward a copy of the check as well as the form to Retirement Alliance.
A copy of all materials should be retained for the employer's records.
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INVESTMENT CHANGES
Retirement Alliance suggests two methods for changing plan investments. The
employee meeting method is the preferred method when adding or deleting funds.
It has the added benefit of rebalancing each participant's portfolio. The Voice
Response Unit method takes much less time and effort but does not push the participants
into action. This method works well when swapping funds since it can be done
quickly and any action the participants take on their own account is after the
fund swap is completed.
In each case, prospectuses for each fund should be given to each participant.
1. Employee Meeting Method - The vehicle for this
method is the Salary Deferral Form which also lists the participant's individual
investment choices. Every plan participant including terminated employees who
have an account balance must fill out the form by a certain date or their entire
account balance will be placed in the money market fund. The advantage of this
method is that every employee fills out and signs a form recognizing the investment
changes and has their entire portfolio rebalanced according to their wishes.
Retirement Alliance charges for rebalancing, please consult your fee schedule.
2. Automated Phone System Method - In this method
the funds are added or swapped on a certain date and notice is given to the
participants by the Plan Sponsor. If funds are added or if a participant wants
to move out of the new fund that was swapped for the previously held fund, it
is up to each participant to call the 800 number and take advantage of the new
allocation possibilities.
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