Back to the Basics of 401(k) Administration: A Review and Update on Compensation, Loan and Hardship Withdrawal Issues. Presented by: Heidi A.

Transcription

1 Back to the Basics of 401(k) Administration: A Review and Update on Compensation, Loan and Hardship Withdrawal Issues Presented by: Heidi A. Lyon

2 Compensation What We ll Cover Review of compensation concepts How it is used under plans Types of definitions Elements of compensation definition Recent changes Best practices

3 Compensation How It Is Used Calculating contributions ADP/ACP testing Identifying HCEs Determining benefits limits (e.g., annual additions, deduction limits, etc.)

4 Compensation Types of Definitions Compensation period Calendar year or plan year Participating or entire year Compensation elements Safe harbor (avoid non-discrimination testing requirements) Non-safe harbor (must test annually)

5 Compensation Safe Harbor Definitions W-2 FICA 415 wages two versions Statutory Simplified

6 Compensation Safe Harbor Definitions W-2 most common, FICA least W-2 not just Box 1 or Box 5 wages Remember to add back salary deferrals, but not Roth deferrals Watch for things that are excluded from definition, but show up in Box 1, e.g., post-termination pay 415 Simplified least restrictive

7 Compensation Non-Safe Harbor Definitions Can customize compensation definition by excluding/including specific items, e.g., bonuses Excluding an item just for HCEs does not take definition outside safe harbor Key to passing non-discrimination test - exclusions must limit HCE compensation as much as they limit NHCE compensation

8 Compensation Elements Wages earned from employer (earned income for self-employed) Add back pre-tax salary deferrals May exclude or include other elements, but limitations apply if want to remain in safe harbor Attached chart compares elements of safe harbor definitions

9 Compensation - Recent Changes Code Section 415 Final Regulations Post-termination pay excluded, except compensation may include the following if the plan permits it: 1. Regular, sick leave, vacation leave or other payments that would have been made regardless of separation, if paid before the later of 2½ months or end of the year 2. Payments to disabled participant 3. Payments to participant on military leave Accrued compensation Heroes Earnings Assistance and Relief Tax ( HEART ) differential pay

10 Compensation - Best Practices Contributions and testing only as accurate as your underlying compensation data Do you know what definitions your plan document says you use? Are you tracking types of pay in a way that matches your document? If you have multiple locations, do they use the same categories of pay?

11 Compensation - Best Practices Use same definition for all plan purposes Confirm document definition and payroll practices are consistent Preventative audit IRS Voluntary Compliance Program

12 Loans What We ll Cover Loans: A plan investment option where a participant may borrow from his/her own account and repay the amount borrowed over a fixed term with interest Review of loan administration Elements of loan transaction Loan processing challenges Recent changes Best practices

13 Loans Elements of Transaction Optional: Plan document must permit Steps: Participant applies (electronic application permitted) Determine amount available for loan Promissory note and loan approval (spousal consent may be required) Repayment of principal and interest in level payments through payroll deduction or other periodic payments Maximum term 5 years (except principal residence loan) Default is a deemed distribution and taxes and penalties apply to amount distributed

14 Loan Processing Challenges Calculating Amount Available Cannot exceed $50,000 and is limited to the greater of 50% of vested account balance, or $10,000 $50,000 limit reduced to account for other outstanding loans Multiple loan situations

15 Loan Processing Challenges Participants on Leave Unpaid leave Paid leave Suspension does not extend original loan due date Following suspension: Reamortize, or Balloon payment

16 Loan Processing Challenges Repayment Issues Cure period for missed payments No payment within cure period = default Plan administrator cannot waive default Must treat as deemed distribution Terminated participants Accelerate due date, or Collect payments at least quarterly Refinancing Different methods for handling, but cannot extend repayment deadline

17 Loans - Recent Changes IRS Voluntary Compliance Program available for correcting plan loan compliance failures Truth-in-lending disclosure no longer required under federal law May suspend repayments of participants on military leave for over a year

18 Loans - Best Practices Know the rules in your documents (plan, SPD, loan procedures and note) Ensure the documents match Awareness If loans are automated, do you know if they are being done correctly? Plan administrator generally liable even if not handling loan approvals IRS Voluntary Compliance Program

19 Hardship Withdrawals What We ll Cover Overview Immediate and heavy financial need Limits Tax consequences Processing steps and challenges Recent changes Best practices

20 Hardship Withdrawals - Overview Early distribution if: Immediate and heavy financial need Withdrawal necessary to satisfy need Exhausted other resources No repayment to plan Optional feature, but only allowed if authorized by plan document

21 Hardship Withdrawals - Immediate and Heavy Financial Need Rules for 401(k) v. other accounts 401(k) safe harbors Medical expenses Eviction or foreclosure Purchase principal residence Tuition payments Funeral expenses Casualty loss (in some cases this would be damage to a principal residence) Facts and circumstances

22 Hardship Withdrawals - Limits Amount Limited to vested account balance Must not exceed amount of need May gross up amount for taxes and penalties Origin Elective deferrals No elective deferral earnings, except in plans that permit inclusion of pre-89 earnings Pre-tax and Roth deferrals eligible Profit-sharing contributions and earnings Regular match contributions and earnings Safe harbor, QMAC and QNEC accounts ineligible

23 Hardship Withdrawals Taxes Distribution subject to income tax 10% penalty if participant < 59½ Voluntary withholding (standard 20% withholding is not required) Ineligible for rollover

24 Hardship Withdrawals - Processing File written application Ensure it is an eligible hardship and document hardship reason Notice of foreclosure Tuition bill Calculate amount available Should not approve if know other resources are available Distribution from plan and issue 1099 Suspend elective deferrals for six months

25 Hardship Withdrawals - Recent Changes Expansion of safe harbor reasons Funeral expenses Casualty losses Available for primary beneficiaries

26 Hardship Withdrawals - Best Practices Know your documents Ensure documents do not conflict Communicate with participants Keep good records IRS Voluntary Correction Program

27 Back to the Basics of 401(k) Administration: A Review and Update on Compensation, Loan and Hardship Withdrawal Issues Presented by: Heidi A. Lyon hlyon@wnj.com Phone: (616)