Frequently Asked Questions
How long does it take to set up a qualified plan?
Plan setup typically takes anywhere from three to five weeks, although it can be faster if required. Much depends on how responsive the employer is in providing needed information during the setup phase.
How long does it take to convert a qualified plan from one investment vendor to another?
Our experience has been that it depends entirely on the vendor losing the account. If the data is in good order, the process can be relatively seamless. We will work with you, your legal team and the conversion unit of the new vendor to make this process as smooth as possible.
How much work does the employer do once the plan is in operation?
While Retirement Benefit Solutions, L.L.C. or the investment vendor’s record keepers handle most of the administrative work, a certain amount of responsibility does rest with the employer. Such tasks will normally include providing the new employees with enrollment materials, transmission of monthly payroll data to the record keeper or vendor, and forwarding year-end census confirmation data to us at year-end. Additional miscellaneous duties may arise from time to time and we would gladly assist you in any way we can.
Is there a way to give the owner and key employees extra benefits under the plan?
Yes, skillful plan design coupled with the right plan allocation formula can help to provide more benefits to the owner and/or key employees.
What kind of investments should be included in our plan?
These days more employees are educated investors. The investments offered in any self-directed plan should provide an adequately diverse choice for participants, including several variations of cash, bond and stock fund selections. For the non 401(k) Plan, you and your investment advisor should select a variety of investments that best fit the needs of the plan and its participants. This selection should be done in a manner that is considered prudent by IRS standards.
What are “lifestyle” funds?
Many investment vendors will offer a series of funds called “lifestyle” or “asset allocation” funds. These are blended allocation funds constructed according to “risk tolerance” profiles, completed by each of the employees. They give the participant an easy way to invest in one fund that is both diversified and reflects his/her attitude toward risk. Your investment broker will assist anyone who has questions about which funds are best for their situation, including any of the lifestyle funds.
Can we change the investments included in our plan after it starts?
The answer is usually yes in the case of a 401(k) plan. There may or may not be an administrative fee involved with this change. Many plans allow participants to change their fund elections on a daily basis although this is not recommended for practical reasons. In a plan that is not self-directed by the participants, any changes in the investment funds occur only at the direction of the plan trustee and his investment advisor.
How often will employees receive statements on their account?
Statements generate either quarterly or annually. If a plan includes participant investment direction, the statements are usually provided on a quarterly basis. If the plan does not allow for self-direction or is a “balance forward” plan, it is very common to have statements provided annually.
Will employees have any other access to their retirement plan account information?
In addition to the regular statements of account, most daily valuations or turnkey plans provide both web access and toll free telephone access to the participant accounts, usually through a service center.
What kind of help will employees get to understand the retirement plan benefit?
Your investment broker should provide either on-site educational seminars or individual counseling with regards to the retirement goals and objectives of the employee. It is of utmost importance to properly educate and motivate employees to utilize their 401(k) plan to the maximum extent possible. The pension administrator’s role is to keep the plan in compliance with the law. While we will speak to employees on the operation of the plan itself, and how it affects the participants, we will not and cannot discuss how someone should invest their funds. We are not licensed to discuss this and would refer any of these types of questions to the plan’s broker of choice. If you do not have a broker, we can provide you with a list of brokers that can provide this service.
What kind of tax reporting is involved with having a qualified retirement plan? Who takes care of it?
The primary tax filing for a qualified plan is the IRS Form 5500 and its related attachments. This filing must occur by the end of the seventh month after the close of the plan year, unless an extension is filed. For plans with over 100 participants, this filing is completed in conjunction with an independent audit of the plan. We will prepare the 5500 and related attachments for review by your audit team. Other reporting requirements may include 1099-r, 5330 and 945 forms, which need to be issued when a participant receives a distribution or over contributes to a qualified plan. Depending on the vendor you chose, and the type of plan you have, the 1099-r’s may be provided by outside sources. If your plan does not have a vendor that provides these filings, Retirement Benefit Solutions L.L.C. will prepare these filings with your approval.
Is it necessary to file with the IRS for a favorable determination letter when establishing a plan?
While the design of most plans is within the normal guidelines for qualification by the IRS, filing for a favorable determination letter makes certain curative programs available to the plan sponsor, if any problems arise down the road. The cost is usually reasonable and would include an IRS “user fee” and a processing fee charged by your legal team or Retirement Benefit Solutions L.L.C. Beginning in 2002, the IRS user fee may no longer apply in certain situations.
Is it necessary to file an SS-4 to obtain a separate trust identification number when establishing a plan?
A separate trust ID number is not a required step in the creation of a qualified plan. However, it can be useful in assuring that tax data and reporting for the plan is not confused with the underlying business entity. There is no cost to apply for the trust ID number and it is generally considered a good idea to do so.
What issues are involved if a company has problems passing the annual 401(k) discrimination test causing contributions to be returned to highly compensated employees? Can anything be done to avoid the problem in future years?
In a 401(k) plan, anti-discrimination guidelines exist for the purpose of assuring that “highly compensated employees” (HCEs) do not, as a group, defer on a pre-tax basis more than two percentage points above what the non-HCE participants defer as a group in the plan. If non-discrimination guidelines are exceeded, money must be returned to the affected HCE participants to bring the plan back into compliance. This must be done no later than 2 ½ months after the close of the plan year so that returned funds can be reflected on an individual’s current year tax return. If excess contributions are returned more than 2 ½ months after the plan year, the distribution to the participant will be reflected in the tax year received, but the company will incur a 10% excise tax for use of this option. There is another option available which requires the employer to contribute additional funds to the non-HCE group in order to bring the average deferral percentage back into line.
There are three primary measures we can employ to avoid this problem. First, Retirement Benefit Solutions, L.L.C. will prepare a “mid-year” 401(k) test to see where the HCEs stand in regard to deferrals. Another tool is the utilization of a “prior year” method of determining the acceptable HCE deferral percentage. In this scenario, last year’s non-HCE percentage is used as the operative testing parameter for the current year.
The most exciting design tool available to us is the use of “Safe Harbor” provisions. Utilization of this technique allows the employer to avoid deferral testing altogether. The employer has different design options available under safe harbor and this feature can be turned off in future years when it is no longer required. We will gladly discuss the pros and cons of this technique to determine whether this technique would be well suited for your company.
There are three primary measures we can employ to avoid this problem. First, Retirement Benefit Solutions, L.L.C. will prepare a “mid-year” 401(k) test to see where the HCEs stand in regard to deferrals. Another tool is the utilization of a “prior year” method of determining the acceptable HCE deferral percentage. In this scenario, last year’s non-HCE percentage is used as the operative testing parameter for the current year.
The most exciting design tool available to us is the use of “Safe Harbor” provisions. Utilization of this technique allows the employer to avoid deferral testing altogether. The employer has different design options available under safe harbor and this feature can be turned off in future years when it is no longer required. We will gladly discuss the pros and cons of this technique to determine whether this technique would be well suited for your company.