Newsletter Articles

The Uniformed Services Employment and Reemployment Rights Act of 1994 (“USERRA”) protects the rights of employees who leave their employment to enter military service. Among its protections are a number of rules governing contributions to and the crediting of service under an employer’s retirement plan.

A qualified retirement plan can provide many benefits for an employer and its employees. In order for the plan to run smoothly so that its usefulness can be maximized, the employer should be aware of the ongoing responsibilities related to the administration of the plan.

The sponsor of a tax-qualified retirement plan and the plan’s fiduciaries have a number of obligations once a plan is established. Many of these obligations relate to the day-to-day operation of a plan. However, plan document maintenance issues are sometimes overlooked.

In 1997, the Internal Revenue Code was amended to permit individuals to make contributions to a new type of IRA called a “Roth IRA.”

Contributions to a Roth IRA are included in an individual’s income and, unlike distributions from a “traditional” IRA, distributions from a Roth IRA are not usually taxed. In 2005, an individual may contribute up to $4,000 ($4,500 if over age 50) to a Roth IRA.

The term “safe harbor” has a multitude of meanings in conjunction with the administration of qualified retirement plans. But in recent years the term has predominantly been associated with the provisions applicable to safe harbor 401(k) plans. These plans have become extremely popular, especially among smaller employers. And when you consider the overall benefits, it’s no surprise.

A 401(k) plan permits employees to defer a portion of their salaries on a pre-tax basis with the objective of accumulating assets for retirement. Additional assets are accumulated if the employer makes matching and/or profit sharing contributions to the participant’s account.

The Internal Revenue Service has at long last issued final regulations under sections 401(k) and 401(m) of the Internal Revenue Code. The regulations, issued on December 29, 2004, make some significant changes to the proposed regulations issued in 2003, and update the final regulations issued back in 1994. Since that time, numerous statutory changes have taken place, as well as revenue rulings and procedures which are all reflected in the new regulations.

Retaining account balances for terminated participants in a qualified retirement plan often increases the plan’s administration expenses and fiduciary responsibility. Therefore, many plans include what is known as a “mandatory distribution” or “cash-out” provision to force the distribution of small account balances to terminated participants who fail or refuse to make an election either to receive the distribution in cash or roll it over to an Individual Retirement Account (IRA) or another qualified plan.

A major trend in qualified plans, particularly 401(k) plans, is participant-directed accounts, which enable a retirement plan to give participants control over investment of their own plan accounts. Often times, plans are structured as participant-directed accounts to reduce company fiduciary investment responsibility under ERISA section 404(c) provisions.

Every so often, a pension consultant is asked the following question by a client: “How long do we have to keep documents and other records for our retirement plan?” A really safe answer might be “until every participant and all of their immediate family members pass away.” On the other hand, a more common reply would be “for seven years.” However, for most plan records, the prudent response lies somewhere in between.