401k cross training

Prepared by Tracy VanDenBerg

March 28, 2012

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AgendaWhat is a 401(k)?Types of 401(k) Plans401(k) loansTypes of distributionsWhat is HR’s major responsibilities?

What is a 401(k) Plan?A retirement accountOnly available through an employerAn easy way for an employee to contribute a portion

of his/her paycheck to savingsLower’s the participant’s current taxable income if

contributing to a pre-tax planDefers taxes until distributionAny gains are considered ordinary income at the time of

withdrawal (if retirement age) vs. capital gainsProvides the option for employers to match employee

contributionsFree income

The PlayersPlan Sponsor (the employer)TrusteeThird Party Administrator (TPA)Financial InstitutionFinancial Advisor (FA)Payroll Administrator & Benefits Admin (if

applicable)

Types of 401(k) PlansTraditional 401(k)

Employee contributions made on a pre-tax basisTaxes are paid at the time of withdrawalMaximum allowed for 2012 is $17,000$5,500 additional (catch-up) for participants 50 years +

Roth 401(k)Employee contributions made on a post-tax basisTaxes on contributions are paid before contributionMaximum allowed for 2012 is $17,000$5,500 additional (catch up) for participants 50 years +

Annual Contribution Limits2012 contribution limits - $17,000 max,

$22,500 max if age 50+Maximum is for combined 401(k) and Roth 401(k)Does not include the employer matching contribution

(if any)Annual maximum of $50,000 combined employer and

employee contributions + $5,500 catch up (if applicable). How is this possible?

Limits were increased in 2012 for the first time in 4 years

DistributionsDistributions - to avoid penalties, you may not

withdraw funds until age 59 ½ and before 5 years following your 1st contribution.

Exceptions include:Leaving your current employer at the age of 55 or

higherBecoming disabled (as defined by the Internal Revenue

Code)Facing a qualified financial hardship

Early DistributionsSubject to income taxSubject to 10 % penalty with payment due upon tax

return filing

LoansLoans may be allowed and vary by planLoan maximum – 50% of vested balance to a max of

$50kMust be repaid on an after-tax basis at a predefined

interest rate.Is this double taxation? Or Not?

Must be repaid within 5 years, or 15 if taken to purchase a primary residence.

Loan defaults – amount of loan and accrued interest become a taxable distribution in the year of default and tax penalties are imposed, as applicable

Loans (continued)Why is taking a 401(k) loan a bad idea?

If your employment is terminated you must repay the full balance in a limited time (generally within 1 quarter)

May result in significantly lower rates of return Why? Decreases your ability to save for retirement Disrupts dollar cost averaging May lower your rate of return on compounded interest

Interest on the loan is not tax deductible, even if you borrow to purchase your primary residence

Little to no flexibility in changing the payment terms of your loan.

Loans (continued)Why might it make sense to take a loan from

your 401(k)?Better than taking a taxable hardship

withdrawal from the planThe interest rate may be lower than through a

bankInterest payments go back to yourself instead

of a lending institution No restrictions on what you can borrow money

for

HR Admin/ResponsibilitiesWork with Financial Institution or Third Party

Administrator (TPA) to set-up the Plan, complete IRS compliance testing, process & approve loans & distributions

Manage payroll deductionsRemit payment of deductions and employer

matching contributions to Financial Institution

Determine and implement remedies if the Company fails compliance testing.

Important ClassificationsHighly Compensated Employees (HCEs)

Gross income for prior year is $110,000 or more

2012 gross income is $115,000 or more will be considered HC for 2013.

Owner of at least 5% of the Company, or an immediate relative of an owner (child or spouse)

Non HCEs – all other employees

The ADP Test (Actual Deferral Percentage test)Compares the deferral rates of HCE and

NHCE of all qualified employees. Average deferral % of all HCEs cannot be

more than 2% higher than NHCEs

ADP TestWhat if the Plan Fails? 2 Options

Return excess $ to HCEs to bring the ADP lower to a passing level (taxable distribution by March 15 to avoid company penalties) TPA manages the refund process and Financial

Institution issues 1099Process a “qualified non-elective contribution”

QNEC to some or all of the NHCEs to bring to ADP passing level QNEC must be 100% vested immediately

The ACP Test (Actual Contribution Percentage Test)Compares the employer matching

contribution rates of HCE and NHCE of all qualified employees.

ACP ratio is determinedThe ACP test is met if the average matching

contribution % of all HCEs does not exceed 2%

ACP TestWhat if the Plan fails the ACP test?

Excess aggregate contributions are distributed back to one or more HCEs in accordance with IRS regulations

Employer can make a one-time QMAC (Qualified Matching Contribution) to NHCEs QMAC must be 100% vested immediately

Top-Heavy Test Compares % of plan assets maintained by “key”

employees (5% owners, their immediate relatives (child or spouse), and 1% owners whose compensation exceeds $160,000 for the current year)Key employees cannot maintain more than 60% of

plan assets or it is Top HeavyBased on current year as opposed to prior year

If Top Heavy, it triggers a required contribution to all non key employees up to a maximum of 3% of the individuals gross compensation for the year.Subject to vesting schedules

Are ACP/ADP Always Required?If all participants of the 401(k) plan are NHCEs

or all are HCEs, the test is automatically passed.Employer matches contributions of 100% of the

first 3% plus 50% of the next 2% of employee compensationImmediate vesting is required on these

contributionsAlternatively, a contribution of 3% of employee

compensation to all eligible NHCEs with immediate vesting may be made for automatic passing.

ERISA Participant Rights ProtectionsERISA sets standards for, among other things...

Participant eligibilityInvestment choicePlan funding/bondingVesting of employer contributions Disclosure of plan and investment and investing-related

information to current and prospective plan participants and their beneficiaries

ERISA aims to ensure that retirement monies actually exist at employees' retirements by preventing fund mismanagement by administrators, trustees and others.Employer’s must purchase an ERISA bond

Questions?

401k cross training

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