Newsletter Articles

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.

The benefits accumulated under qualified pension and profit sharing plans are often one of the largest assets a married couple owns. If the couple divorces, sometimes their retirement benefits must be divided. Since 1984, federal pension law has provided special procedures enabling family courts to divide pensions in a divorce or separation.

Regardless of the size of your business, or whether it is a sole proprietorship, partnership, LLC or a corporation, there are several types of retirement plans to choose from that can reduce your tax liability and increase the retirement savings of you and your employees.

A qualified retirement plan can provide many benefits to employees as well as the sponsoring employer. Employees are ultimately provided with income to help sustain their lifestyle in their post-retirement years. Employers are given a tax deduction for contributions made to the plan, which helps them provide a valuable fringe benefit and boost employee morale.

Ben, after many years of working for a contractor that did not sponsor a retirement plan, decided to start his own construction company. Due to his many contacts in the industry, his business grew very quickly. In order to attract and retain quality employees, Ben realized that he must offer a comprehensive benefits package that includes a 401(k) plan.

Despite the care taken by plan sponsors and their pension advisors, errors occur in qualified plan administration. It is to no one’s advantage to have such errors disqualify a plan or to create penalties so onerous that plan sponsors are discouraged from having plans altogether.