Presented By: Terry Smith CPC, QPA, QKA Assistant Vice President, Account Manager Amanda Wielk CEBS Assistant Vice President, Account Manager

Transcription

1 Presented By: Terry Smith CPC, QPA, QKA Assistant Vice President, Account Manager Amanda Wielk CEBS Assistant Vice President, Account Manager

2 Today s Agenda Eligibility Trends and Considerations Roth 401(k) & 403(b) Provisions Qualified Default Investment Alternatives (QDIA) Safe Harbor Plans Automatic Enrollment Arrangements Employer Contribution Alternatives Non-Qualified Deferred Compensation Plans (NQDC) 2 Page

3 Eligibility Trends and Considerations 3 Page

4 Eligibility Trends* 75% of plans allow employees to begin contributing to the plan within the first three months of employment Most allow employees to begin contributing to the plan immediately upon hire About 40% of plans have no minimum age requirement for participation Employers are synchronizing plan eligibility with other benefit offerings *Source: PSCA Page

5 Issues to Consider Convenience and increased participation Impact on non-discrimination testing The IRS allows exclusion of employees with less than the statutory eligibility requirements of one year of service, age 21 and semi-annual plan entry Impact on plan costs Employee turnover Administrative process 5 Page

6 Roth 401(k) & 403(b) Provisions 6 Page

7 Key Roth Provisions After-tax Contributions Qualified withdrawals, including investment earnings, are not subject to federal income tax if two conditions are met: Account is open at least 5 years Age 59½ or older at distribution Employer may match Rollovers may be allowed Today nearly 40% of all plans have Roth 401(k)* *Source: PSCA Page

8 Who May Benefit From a Roth Feature? Highly compensated employees (HCEs) who cannot participate in a Roth IRA Younger employees whose accounts may accumulate significant earnings that may be withdrawn tax-free Employees who believe tax rates will be higher in the future Employees who want to diversify the taxation of their retirement income 8 Page

9 Qualified Default Investment Alternatives (QDIA) 9 Page

10 Qualified Default Investment Alternatives (QDIA) Default investment for participants who do not make an affirmative investment election Provides fiduciary protection for plan sponsors Capable of meeting a worker s long-term retirement savings needs 10 Page

11 Types of QDIA Product with a mix of investments taking into account characteristics of the group of employees as a whole, rather than each individual Example: a balanced fund Product with a mix of investments that takes into account the individual s age or retirement date Example: a target date retirement fund Investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual s age or retirement date Example: a professionally managed account, such as Managed by Morningstar SM 11 Page

12 Key Requirements for QDIA Participants and beneficiaries must be given opportunity to provide investment direction Initial and annual participant notices Investment prospectuses provided Plan must offer a broad range of investment alternatives as defined under ERISA 404(c) 12 Page

13 Safe Harbor Plans 13 Page

14 Benefits of Safe Harbor Plans Allows HCEs to contribute maximum annual deferral amount Allows HCEs to receive full employer matching contribution Reduces many of the hassles and limitations associated with non-discrimination testing 14 Page

15 Traditional vs. Safe Harbor Plans Key Differences Traditional Plan Annual ADP Testing Top Heaving Testing Annual Deferral Limit ($17,000 in 2012) Annual Catch-Up Limit ($5,500 in 2012) Employer Contributions are optional Safe Harbor Plan No ADP Testing No Top Heavy Testing Same Same Employer Contributions are required (either Safe Harbor Match or Safe Harbor Non- Elective) Vesting May Be 6-Year Graded Or 3-Year Cliff Safe Harbor Employer Contributions 100% Immediately Vested 15 Page

16 Safe Harbor Requirements Employer Contribution Contribution Options Non-Elective Basic Match Enhanced Match 3% of pay 100% of first 3% of pay plus 50% of next 2% of pay Vesting 100% 100% 100% Allocation Requirement* Withdrawal Availability Employees eligible to participate Not available for hardship or in-service withdrawals before age 59-1/2 Participants who actually defer Not available for hardship or in-service withdrawals before age 59-1/2 Must be at least as generous as Basic formula Participants who actually defer Not available for hardship or in-service withdrawals before age 59-1/2 *Option to exclude those who have not attained age 21 and completed 1 year of service 16 Page

17 Implementing Safe Harbor Adoption of Safe Harbor provisions Adopted prior to beginning of Plan Year Employee notification Annual Safe Harbor Notice required no later than 30 days prior to beginning of each Plan Year 17 Page

18 Automatic Enrollment Arrangements 18 Page

19 Automatic Contribution Arrangement (ACA) Provision to increase employee participation Set deferral percentage applies to newly eligible employees Opt-out period Default investment QDIA recommended Notice requirement 19 Page

20 Eligible Automatic Contribution Arrangement (EACA) Similar to ACA Set deferral percentage Default investment (QDIA recommended) Notice requirement Extension of time to distribute excess amounts from non-discrimination test failures Must apply to all eligible employees Must be in effect for the full Plan Year 20 Page

21 Qualified Automatic Contribution Arrangement (QACA) Requirements: Automatic enrollment Starting rate not less than 3% Scheduled deferral percentage increases Default investment (QDIA recommended) Notice requirement Required employer contribution Must be in effect for the full Plan Year Safe harbor plan design ADP and Top-Heavy exemption 21 Page

22 QACA Safe Harbor Requirements Employer Contribution Contribution Type Non Elective Basic Match Enhanced Match 3% of pay 100% of the first 1% of pay plus 50% of the next 4% of pay Must be at least as generous as Basic formula Vesting 2 year cliff 2 year cliff 2 year cliff Allocation Requirement* Employees eligible to participate Participants who actually defer Participants who actually defer Withdrawal Availability Not available for hardship or inservice withdrawals before age 59-1/2 Not available for hardship or in-service withdrawals before age 59-1/2 Not available for hardship or in-service withdrawals before age 59-1/2 *Option to exclude those who have not attained age 21 and completed 1 year of service 22 Page

23 Why Offer Automatic Enrollment? Increase participation rates Assist employees in saving for retirement Improve non-discrimination test results Eliminate certain non-discrimination tests (QACA) Extend correction period for ADP tests (EACA) 23 Page

24 Employer Contribution Alternatives 24 Page

25 Permitted Disparity Alternative Profit Sharing allocation IRS safe harbor allocation option Also known as integrated allocation Provides greater contribution at higher compensation levels Typically based on social security taxable wage base Participants can receive greater allocation above integration level 25 Page

26 Permitted Disparity Plan document provides base and excess contribution percentages Base is amount up to integration level Excess is amount over integration level Disparity is amount between excess and base percentages Regulations establish maximum permitted disparity 26 Page

27 New Comparability Alternative Profit Sharing allocation Sometimes referred to as cross-tested plan Allocation written in plan document Provides for different contribution levels for different rate groups Can provide substantially greater benefit to certain targeted employees or groups Can be included as part of 401(k) plan, including safe harbor 27 Page

28 New Comparability Must carefully consider employee demographics in designing a new comparability formula Most effective for groups with older target employees and younger staff Annual compliance testing required To satisfy requirements, certain minimum levels of contributions are required to be provided to all eligible employees Family attribution can have a significant impact on results 28 Page

29 Non-Qualified Deferred Compensation Plans (NQDC) 29 Page

30 Non-Qualified Deferred Compensation Plans Plan may cover only a select group of managers or certain HCEs Often referred to as top hat plans Exempt from most ERISA rules unfunded benefit Subject to forfeiture and general creditors Plan assets are considered general assets of employer Income generated from investments will be taxable to the employer when earned Avoid constructive receipt Cannot be rolled over into an IRA or qualified plan 30 Page

31 Advantages of NQDC Plans No limit on employee deferrals or employer contributions Participant deferrals and investment returns are exempt from federal and most state income taxes until distributed Participants may be allowed to direct the investment of their deferral balances Distribution timing and form of benefit can be tailored to the needs of employees 31 Page

32 NQDC Plan Considerations Contribution alternatives Employee income deferral only Supplemental Executive Retirement Plan (SERP) through employer dollars Wrap arrangement Distribution form and timing Attainment of age and service goals College tuition specific years Vesting Normal or early retirement 32 Page

33 Funding Alternatives Establish a deferred tax asset on the books to recognize the future benefit of a tax deduction when the benefit is actually paid Establish a Rabbi Trust to protect assets from being used for purposes other than paying benefits Assets can be invested in any mix of securities Corporate-owned insurance (COLI) is commonly used because of the tax advantages to the employer 33 Page

34 How USICG Can Help With NQDC Consider design alternatives Draft the plan Establish informal funding mechanism Develop administrative procedures and forms (enrollment and election) Communicate to executives Comply with IRS and DOL requirements ( 409A) 34 Page

35 Summary Next Steps Identify which plan design features would benefit you and your employees Speak with your USICG Account Manager or Representative for more information Develop an appropriate timeframe for implementation 35 Page

36 Questions? If you have any additional questions, please direct them to your USI Consulting Group Account Manager or representative or by to 36 Page