Newsletter Articles

The Department of Labor (DOL) has finally provided much anticipated guidance for the timely deposit of elective deferrals in qualified 401(k) plans. The proposed regulation keeps the same basic framework for determining if contributions are timely deposited but adds a safe harbor rule that many plans can utilize.

One of the more frustrating aspects for the small business maintaining a 401(k) plan is satisfying the special nondiscrimination requirements. The tests require adequate participation by “non-highly compensated employees” (NHCEs) in order for the “highly compensated employees” (HCEs) to maximize their own salary deferrals. Failure to satisfy the tests requires a correction which often means the painful process of returning salary deferrals to the HCEs.

Retirement plans have been subject to “top heavy” rules for about 25 years. By now you’d think that their application would be fairly straightforward. But lately these provisions have affected some plans in unexpected ways, surprising plan sponsors who thought top heavy was a non-issue for their plan. This is due in part to regulations which exempt some plans from the top heavy requirements but only if certain conditions are met.

The 401(k) plan has emerged as the most popular form of retirement plan in the United States. This trend will likely continue for some time for a number of reasons. One is the cost savings to employers, since deferral contributions are paid by employees. Another is the fact that 401(k) plans are more easily understood than traditional retirement plans and consequently more appreciated by employees.

The increasing popularity of salary deferral plans has led to a rise in the number of retirement accounts that allow participants to self-direct their investments. Participants like it because it gives them control over their accounts which are at least partially funded by their own contributions. Employers like it because it reduces the investment responsibilities of plan fiduciaries.

One of the more complicated and confusing parts of qualified plan design and administration is determining the proper definition of compensation. It’s complicated for a number of reasons. First, the term is used in many contexts.

Qualified retirement plans are funded by contributions from employers and/or employees. These contributions are subject to a number of annual limitations. In defined benefit plans, some of the limits are based on the maximum benefit that can be provided at retirement. Adherence to these limitations is important since the qualification of the plan is at stake.

An annual report, Form 5500, is required to be filed with the Department of Labor (DOL) for almost all retirement plans. The report provides basic information about the plan, the plan sponsor, participation and financial information, in addition to certain plan activities.

The Pension Protection Act of 2006 (PPA) changed many of the rules affecting defined benefit and cash balance plans. Recent regulations have helped to make such plans more stable, and consequently more attractive to plan sponsors. New design opportunities now exist for these plans, individually and in combination with defined contribution plans. What follows is an overview of the new provisions along with some plan design illustrations.

Driven by an interest in attracting talented personnel and a natural aversion to the financial risks attached to traditional defined benefit pension plans, employers have embraced 401(k) plans, making them the dominant retirement savings vehicle in the United States. In the past ten years alone, participation has more than doubled.