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Below are certain current issues related to qualified retirement plans:
1. Annual Plan Limitations for 2009 and 2010
The annual limitations for retirement plans are identical for 2009 and 2010. The annual calendar year limitation for 401(k) deferrals is $16,500 ($22,000 for anyone age 50 or older by the end of the applicable year). The maximum contribution to a profit sharing (i.e., including any 401(k) deferrals) or money purchase plan for any individual is $49,000 per plan year ($54,500 for any individual age 50 or older in a 401(k) plan). The maximum compensation which can be used for retirement plan purposes is $245,000.
2. Roth Conversions and Roth 401k Contributions
All individuals in 2010, regardless of thier respective income levels, will be permitted to convert their traditional IRAs into Roth IRAs. Such individuals will have the option of recognizing the income on such conversions all in 2010 or over a two-year period (i.e., 2011 and 2012). Prior to making any such conversion, you should speak to your accountant regarding the tax consequences. In addition to such conversions, if you presently sponsor a 401(k) plan, that plan can be amended to allow 401(k) deferrals to be treated as Roth contributions. Generally Roth contributions are made "after tax." If certain requriements are met, distributions made from Roth accounts (i.e., including any appreciation attributable to such accounts) are not subject to taxation.
3. 401(k) Deferral and Loan Repayment Deadlines
Sponsors of 401(k) plans must make sure that all employee 401(k) deferrals (including the deferrals made by shareholder employees) are deposited no later than the seventh business day following the day such deferrals are withheld from pay. It should be noted that the seven-day requirement applies to plans with 100 or fewer participants as of the beginning of the applicable plan year. The deadline is “as soon as possible” for plans with more than 100 participants, which could be interpreted by the IRS to mean sooner than within the aforementioned seven-day requirement. Please also note that all plan loan repayments made from payroll must also be deposited within these time frames.
4. 401(k) Deferral Election Forms
Plan Sponsors of 401(k) plans must provide eligible employees with “Deferral Election” or “Salary Reduction Agreement” Forms prior to the beginning of each plan year. It is important that the completed forms are collected by the Plan Sponsor. The Plan Sponsor can then prove (e.g., to the IRS and DOL, if necessary) that each eligible employee has had the opportunity to commence or alter his or her election.
5. Reinstatement of Required Minimum Distributions for All Plans
Pursuant to the Worker, Retiree and Employer Recovery Act of 2008, participants of defined contribution plans (including money purchase, profit sharing and 401(k) plans) and IRAs over age 70 ½ who would normally be required to take annual minimum distributions were not required to take such distributions for 2009. Commencing in 2010, participants of all types of retirement plans and IRAs must recommence taking such required minimum distributions.
6. Unintended Deferred Compensation Plan
Given these tough economic times, some employers are reducing employee compensation. However, if an employer that reduces employee compensation promises to make up such reduction in at a future time, the employer may have inadvertently established a non-qualified deferred compensation plan. These types of plans have many rules, especially with respect to the timing of the taxation to their participants. If you have made any such arrangements with your employees, please make sure to consult with your attorney regarding the applicable issues.
7. Safe Harbor 401(k) Plan Deadlines
For sponsors of profit sharing plans, the deadline to convert your plan to a safe harbor 401(k) plan is three months prior to the end of the applicable plan year. For example, if the plan year ends December 31, in order to convert a profit sharing plan into a Safe Harbor 401(k) Plan for the 2010 plan year the deadline is generally October 1, 2010. For sponsors of “traditional” 401(k) plans, the deadline to convert your plan to a safe harbor 401(k) plan is 30 days prior to the commencement of the applicable plan year. For example, if the plan year ends December 31, the deadline to convert your plan to a safe harbor 401(k) plan for the 2010 plan year was December 1, 2009. In addition, if you want to remove the nonelective safe harbor contribution from an existing safe harbor 401(k) plan, the deadline to do so is the December 1 prior to the commencement of the applicable plan year.
8. Higher Contribution Limitations
For certain plan sponsors, there may be ways to increase the level of contributions for the owners of the plan sponsors. One such way is to add a 401(k) feature to your existing profit sharing plan, which may also reduce the required contributions for non-owner employees. Another way is to adopt a defined benefit pension plan in addition to your existing plan, which would allow owners to contribute very high levels of contributions. Depending on the age of the owner, the owner’s deductible contribution can be substantial (e.g., in many cases over $100,000). However, the cost for the owner’s employees could be high, and depends on the number of such employees and their respective ages. Please contact us if you would like to discuss either of the options described herein.
9. Plan Investments
Plan sponsors of defined contribution plans (e.g., profit sharing, 401(k) and money purchase plans) have a choice of allowing the plan trustees to invest all of the plan’s assets or to allow participants to direct their own investments. There are benefits to either such choice. For example, plans with trustee-directed investments generally require less administrative duties from the applicable plan sponsor. However, these plans are only valued once per year, and all subsequent plan distributions for the entire next plan year are based on that previous annual valuation. Therefore, the amounts of distributions in such plans can vary significantly from the investment account values on the dates of distribution. Accordingly, plan sponsors may want to consider amending their plans to provide for multiple valuations dates, whereby the plan is revalued as of a specific date for purposes of plan distributions (e.g., the end of the month prior to the distribution). There are additional fees for each such valuation. On the other hand, plans that offer participant-directed investments provide reduced potential fiduciary liability to the plan trustees, especially if certain rules are followed.
10. Plan Restatements and Amendments
Recent changes to applicable law now require that all retirement plans be restated with the IRS at least every six years. In between each such six-year cycle, interim “snap-on” amendments are also required. We will always automatically send you all such plan restatements and amendments on a timely basis. Please recall that the fees for such restatements and amendments are included in the invoices sent to plan sponsors each year and are not billed separately.
11. Plan Distributions
It is important that employers do not permit distributions to be made to participants without the input of Heller Pension Associates, Inc. Employers should contact us if any participant requests a distribution of his or her plan benefits. There are many rules to be followed with regard to plan distributions. If these rules are not complied with, the plan sponsor can be subject to substantial penalties.
12. Aggregation of Section 401(k) and Section 403(b) Plans
When calculating the maximum amount that an individual can have withheld from pay as either a Section 401(k) deferral or a Section 403(b) contribution, the individual must take into account all Section 401(k) and Section 403(b) plans in which the individual participates in a given calendar year, regardless of whether such plans are with the same or different employers. For example, if an employee is a participant in a Section 401(k) plan and a Section 403(b) plan, he or she can generally only defer a total between the two plans of up to $16,500 for the 2009 and 2010 calendar years ($22,000 if the employee is age 50 or older).
13. Prohibited Transactions
The law prohibits retirement plan fiduciaries (including the plan sponsor, its owners and plan trustees) and certain individuals who are related to plan fiduciaries or have other relationships with the plan, from participating in certain transactions with the plan or its assets. For example, these rules prohibit a plan fiduciary or certain family members from serving as an investment advisor or broker with respect to the plan’s assets, if they receive any direct or indirect compensation for providing such services. Substantial penalties and possible plan disqualification could occur if these rules are not followed. If there is a question with respect to a contemplated transaction, please contact Heller Pension Associates, Inc. prior to the commencement of such transaction.
14. IRS and DOL Audits
The IRS and Department of Labor (DOL) occasionally perform audits of qualified retirement plans. Generally, they contact the plan sponsor directly without providing us notification of the audit. If you are contacted by the IRS or DOL regarding an audit, please contact us before you respond to any notification by the IRS or DOL.