FAQs


EMPLOYEE CLASSIFICATIONS

Who is a key employee?
Who is a highly compensated employee?
What is the significance of highly compensated employees?

COMPLIANCE

What is a fidelity bond?
What is a top heavy plan?
What is a prohibited transaction?
What is the deadline for making my employer contributions to the plan?
When do I have to deposit 401(k) deferrals by employees?
How much can I add to my 401(k) plan?

DISTRIBUTIONS

When can a participant receive a distribution after termination?
How and when do I report distribution of excess deferrals or excess contributions?

ANNUAL DATA REQUEST

Why is it important to get 401(k) information to Compensation Planning Inc. promptly?
Why does CPI ask for information each year about ownership in other entities?

 

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What is a fidelity bond?
A fidelity bond is an insurance policy that protects the plan from fraud or dishonesty by fiduciaries. All fiduciaries and anyone who has control of or handles plan assets must be bonded. The minimum bond is $1,000, or 10% of the plan assets, if larger. The maximum required bond is $500,000. The IRS and Department of Labor are getting very particular about bonding, and we advise all clients to secure this protection. As an additional matter, an accountant’s audit of the plan will be required if adequate bonding is not in place. Any non-qualifying assets, which includes real estate, art work, collectibles, etc., must be bonded for 100% of value. Most insurance companies charge a minimum premium of $75 to $100. New plans should purchase the largest bond they can for the minimum charge. Sometimes savings can be realized if a 3 year bond is purchased. If you have trouble securing a bond, we will be glad to recommend people who can give you proper guidance in this area.

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What is the deadline for making my employer contributions to the plan?
Your contribution is due by the time the plan sponsor tax return is due, including extensions, in order for the contribution to be deductible for the current year. Companies that sponsor a pension plan, like a defined benefit or cash balance plan, as opposed to a profit sharing or 401(k) plan, must make their contributions by 8½ months after the end of the plan year to satisfy minimum funding standards.

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When do I have to deposit 401(k) deferrals by employees?

The Department of Labor (DOL) says that deposits must be separated from the employer assets as soon as administratively feasible. The DOL has now interpreted this to mean that monies should be remitted no later than 7 business days from the end of the payroll period for which monies are deferred. This is a change from the prior standard. DOL is getting very strict about this. Late deposits are subject to IRS penalties and the employer should make up the earnings that those funds would have earned if they had been invested timely.

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Why is it important to get 401(k) information to Compensation Planning Inc. promptly?
If there is a problem with passing salary deferral (401(k)) and match (401(m)) testing and refunds are to be made, corrective distributions must be made within 2½ months after the end of the plan year to avoid paying a 10% excise tax.

Who is a key employee?
A key employee is someone who owns more than 5% of the employer or a member of his family (spouse, child, parent, grandparent). It will also include any officer who makes more than $160,000 in 2009 or someone who owns more than 1% of the employer and makes more than $150,000. The category of key employee is important only for top heavy testing and for discrimination testing for cafeteria plans.

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What is a top heavy plan?
A top heavy plan is one in which key employees have more than 60% of the account balances or accrued benefits held under the plan. A test is performed as of the last day of the plan year and will determine the top-heavy status for the subsequent year. Top heavy plans must adhere to a specific vesting schedule and provide for minimum contributions. The minimum contribution is the lesser of 3% or the highest percent of pay added to the account of any key employee. Note that salary deferrals under a 401(k) will count as account additions, so top heavy 401(k) plans may have required contributions if owners defer.

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How much can I add to my 401(k) plan?
You can defer $16,500 out of your wages in 2009. This is known as the 402(g) limit. If you are 50 or older in 2009, you can defer an extra $5,500 as a catch up. The deferral limit will remain the same for 2010. There is also a limit on how much you can have added to your account overall, from all sources. For 2009, the annual addition limit is $49,000. This number will include salary deferrals, the employer profit sharing and employer match as well as any reallocated plan forfeitures. It will not include the amount of any catch up contribution. Check out our Annual Plan Limits page for more details. If you are a highly compensated employee, you might be limited as to what you can defer by what the non-highly compensated group defers.

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Who is a highly compensated employee?
A highly compensated employee includes more than 5% owners and family members (see “Who is a Key Employee” above). An individual is highly compensated for 2009, if he earned more than $105,000 from the employer in 2008. For 2010, anyone who earns more than $110,000 in 2009 will be highly compensated. The test is a retrospective one. Check out the Annual Plan Limits section of this website for specific dollar amounts that apply to other years.

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What is the significance of highly compensated employees?
Highly compensated employees might be limited as to what they can defer in 401(k) plans. Also, qualified retirement plans cannot illegally discriminate in favor of highly compensated employees for contributions, and certain coverage testing must be satisfied. We test each plan every year to insure that discrimination testing and coverage testing are satisfied.

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Why does Compensation Planning Inc. ask for information each year about ownership in other entities?
There are several reasons we ask about ownership in other companies. We need to determine if there is a controlled group or affiliated service organization, which might require us to aggregate your company with the other related company for purposes of several tests. It is advisable to give us all the information and let us determine if there is an issue you must be concerned with. If your company is to be sold or acquired, or you in turn plan to acquire another company, it is best we be informed as soon as possible so that we can assist you with any retirement planning issues. There are certain decisions that might be made with respect to any of these transactions, but some of your options may be lost due to a failure to act promptly.

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What is a prohibited transaction?
A prohibited transaction is some direct or indirect activity by a party in interest or a disqualified person that involves plan assets. Disqualified persons and parties in interest include fiduciaries, plan sponsors, certain owners of the plan sponsor and their family members. Prohibited transactions include any sale, exchange, or lease of property, use of plan assets, or extension of credit. The intent or financial merit of a transaction is not an issue. The very fact that the prohibited transaction is entered into will trigger an excise tax. If any potential out of the ordinary transaction is even contemplated, it is best to contact us immediately so that we can discuss its propriety. A fiduciary must bear in mind that plan assets are not corporate assets, and the two must be kept separate and distinct. Prohibited transactions will generate a 15% excise tax, with the possibility of a 100% tax if the transaction is not corrected or reversed to make the plan whole, and deny any benefit to the party in interest.

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When can a participant receive a distribution after termination?
It depends on the distribution policy expressed in the plan document. Many plans state that participants will not receive a distribution until administratively feasible after the end of the year in which they terminate. This will allow us sufficient time to review all plan data and insure that a participant receives exactly what he is entitled to.

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How and when do I report distribution of excess deferrals or excess contributions from my 401(k) Plan?
If your plan fails 401(k) testing, meaning that a Highly Compensated Employee (HCE) deferred too much according to testing rules, there must then be a corrective distribution of the excess deferral in order for the plan to remain qualified. Under current rules for 2009, corrections made in 2010 are taxable in the year of distribution. Distribution made later than 2½ months after the end of the Plan Year, will also be subject to a 10% excise tax.

If a participant has deferred more than the dollar limit under 402(g) then the excess contribution must also be distributed. The threshold was $16,500 for 2009, with an additional catch up contribution of $5,500 for participants who had attained age 50 during calendar 2009. This distribution is also taxable in the year of receipt. This correction must be made by April 15 following the year of contribution. Failure to do so could impact the qualified status of the Plan.

Note that in no event is any adjustment supposed to be made to the W-2 of the participant. The distribution is taxed in the year of receipt with a 1099-R issued after the end of the Plan Year.

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