The end of the year is
fast approaching which signals important assignments for plan
administrators. First are the items that must be completed by
year-end, such as establishing a new plan or making required minimum
distributions. There is also a new in-plan Roth conversion option
that requires action before year-end if participants want to take
advantage of this special rule.
Second is the gathering of year-end employee census data which
will be used for plan contribution and testing purposes. Here are
the items that need to be addressed as the year comes to a close.
Establishment of a New Plan
In order to establish a new plan for 2010, the plan documents
must be executed by December 31. If the plan has a salary deferral
feature, deferrals cannot begin until the documents have been signed
and the plan is established. Thus, a 401(k) plan that intends to
start deferrals as of January 1, 2011, should have the documents
prepared so they can be signed no later than January 1.
Required Minimum Distributions
Participants who reach age 70½ must begin taking required minimum
distributions (RMDs) from the plan. Participants who are still
employed and who do not own more than 5% of the company can defer
their RMDs until actual retirement as long as the plan document
RMDs must be made by December 31, except for the initial RMD
which can be delayed until the following April 1. Congress waived
the RMD requirement for 2009 due to the struggling economy and 2008
downturn in the stock market, but it's back in effect as of 2010.
New In-Plan Roth Conversion Option
In recent years, a change in the law has allowed distributions
from pre-tax accounts to be rolled over to a Roth IRA or a Roth
account in another qualified plan, which are after-tax accounts.
These are taxable distributions and are treated like a Roth
conversion. Once in the Roth account, future distributions are
tax-free after a qualifying event (age 59½, death or disability) and
the account has been in existence for five years.
Congress provided a special incentive for Roth rollovers and
conversions during 2010 by allowing the tax to be deferred and paid
over two years, 2011 and 2012. This can potentially be a significant
savings, since the tax could be paid at a lower rate being spread
out over two years.
In September of 2010, Congress extended this benefit further by
letting plans provide "in-plan Roth conversions." This allows
eligible rollover distributions to simply be transferred to a Roth
account under the plan. The plan must provide for Roth deferrals by
participants and must allow in-service distributions, although such
distributions can be limited to Roth in-plan conversions only.
A Joint Tax Committee report states that it is intended that the
IRS provide a remedial amendment period so employers can implement
the change for 2010 and amend later (at this writing, no formal
guidance has been issued). This would enable interested participants
to take advantage of the special deferred taxation rule for Roth
rollovers discussed above.
Distributions that took place during the calendar year, as well
as defaulted loans, must be reported on Form 1099-R and be mailed to
participants by January 31. Copies of these forms must be filed with
the IRS by February 28 in paper form, or March 31 if transmitted
Employee Census Data Collection
At the end of each plan year, the employer must prepare a census
report so that annual testing can be performed, contributions can be
calculated and allocated, a valuation report can be prepared and
Form 5500 can be filed with the Department of Labor.
The census consists of the names, compensation, relevant dates
(hire, birth, termination) and number of hours worked for all
employees who were employed during the year, not just those actively
participating in the plan.
Compensation typically includes gross compensation reported on
Form W-2, unless the plan specifically excludes a certain type of
compensation for plan purposes. For partners and self-employed
individuals, compensation is net earnings with certain adjustments.
Owners and Officers
It's important to identify the owners and officers of the company
on the census report. This information is needed to help determine
highly compensated employees (HCEs) for purposes of the
nondiscrimination tests and key employees for the top heavy test. It
is also important to indicate which employees are relatives of any
owners, since they may be considered owners through stock
attributions rules. For example, if Brian works for a corporation
that is owned by his father, Brian will also be considered to own
the corporation, through stock attribution, for testing purposes.
If an owner of a company has ownership in another company, it
must be determined if the companies are "related" as a controlled
group. Companies could also be related as an "affiliated service"
group even if there is no common ownership. Related companies are
treated as one company for certain plan purposes, so it's important
that relationships with other businesses be shared with the service
provider performing required plan testing.
Consider the following example: Zachary owns 100% of a
construction company and 90% of a nail salon along with Jennifer,
who owns the other 10%. The two companies are considered a
controlled group, and any plans sponsored by either employer must
consider the employees of both companies for coverage, top heavy and
possibly contribution discrimination testing. If Zachary owned less
than 80% of the nail salon, a controlled group would not exist.
It is important to compile complete and accurate census
information as it is used for performing the following tests:
Average Deferral Percentage/Average
Contribution Percentage Tests (ADP/ACP)
These tests must be performed to make sure that non-safe harbor
deferral plans do not unfairly discriminate in favor of HCEs. HCEs
are generally more than 5% owners of the employer or employees who
earned over a specified level in the prior plan year (currently
The ADP test compares the average deferral percentages of HCEs
with non-HCE percentages while the ACP test compares matching and/or
voluntary contribution rates. A failed test usually requires
corrective distribution(s) by March 15, or by June 30 in some plans
with automatic contribution arrangements.
The total amount deferred by each employee must be checked to
ensure that the annual dollar limit was not exceeded. If it was,
then a corrective refund is required by April 15. This also applies
to an employee who over-contributed to plans of two different
employers during the year.
To demonstrate that the plan does not unfairly cover a much
larger percentage of HCEs than non-HCEs, the plan must pass one of
the coverage tests. The standard test is based on a 70% rate,
meaning that if all the HCEs will be covered under the plan (after
satisfying the eligibility requirements), then at least 70% of the
non-HCEs must be covered. An alternative test can also be used,
which compares the projected benefits of these two groups.
Top Heavy Test
If more than 60% of the adjusted plan assets belong to key
employees, then the plan is considered top heavy and must provide
certain minimum contributions. A key employee is basically a more
than 5% owner, a more than 1% owner earning over $150,000 or an
officer earning over a specified limit (currently $160,000). Certain
safe-harbor plans are exempt from the top heavy rules.
Annual Additions Test
In account balance plans, the annual additions limit is the
maximum contributions and forfeitures that can be allocated to an
individual. For 2010 and 2011 the limit is the lesser of 100% of
compensation or $49,000. An additional $5,500 catch-up contribution
is allowed in salary deferral plans for those age 50 and older.
All plans must provide benefit statements to participants showing
accrued and vested benefits. They must also explain any permitted
disparity or other offset arrangement used in determining accrued
benefits. In account balance plans the statements must be provided
at least once a year, except where participants direct their own
investments, in which case they must be provided quarterly.
Defined benefit plans must provide statements once every three
years, or upon written request (not more often than annually).
Alternatively, defined benefit plans can provide an annual notice
informing participants how they can obtain a benefit statement.
Good Time to Update Beneficiary Forms
The new year is a good time to give participants an opportunity
to update their beneficiary forms. Their circumstances may have
changed due to divorce, remarriage, etc., necessitating a change to
their prior elections.
No Cost of Living Increases for 2011
Many plan limits are subject to cost-of-living adjustments. For
2011, there will be no increase in these limits from the 2009/2010
levels because the applicable cost of living index has not been
increased. Many of the limits are based on the "plan year." The
elective deferral and catch-up limits are always based on the
calendar year. See the table below for the limits which are
applicable to the 2008-2011 plan years.
The end of the year is the time to take care of unfinished plan
business as well as prepare for annual testing and reporting.
Complete employee data must be collected in order to perform the
numerous administrative tasks required of a qualified plan. Proper
planning along with accurate information are the most effective
tools for the smooth operation of a retirement plan.
IRS and Social Security Annual Limitations
|Maximum compensation limit
|Defined contribution plan maximum
|Defined benefit plan maximum benefit
|401(k), 403(b) and 457 plan maximum elective
| Catch-up contributions*
|SIMPLE plan maximum elective deferrals
| Catch-up contributions*
|IRA maximum contributions
| Catch-up contributions*
|Highly compensated employee threshold
|Key employee (officer) threshold
|Social security taxable wage base
*Available to participants who are or will be age 50 or older by
the end of the calendar year.