The end of the year is fast
approaching which signals important assignments for plan administrators.
First are the items that must be completed by year-end, such as establishing
a new plan or making required minimum distributions. There is also a new
in-plan Roth conversion option that requires action before year-end if
participants want to take advantage of this special rule.
Second is the gathering of year-end employee census data which will be
used for plan contribution and testing purposes. Here are the items that
need to be addressed as the year comes to a close.
Establishment of a New Plan
In order to establish a new plan for 2010, the plan documents must be
executed by December 31. If the plan has a salary deferral feature,
deferrals cannot begin until the documents have been signed and the plan is
established. Thus, a 401(k) plan that intends to start deferrals as of
January 1, 2011, should have the documents prepared so they can be signed no
later than January 1.
Required Minimum Distributions
Participants who reach age 70½ must begin taking required minimum
distributions (RMDs) from the plan. Participants who are still employed and
who do not own more than 5% of the company can defer their RMDs until actual
retirement as long as the plan document allows it.
RMDs must be made by December 31, except for the initial RMD which can be
delayed until the following April 1. Congress waived the RMD requirement for
2009 due to the struggling economy and 2008 downturn in the stock market,
but it's back in effect as of 2010.
New In-Plan Roth Conversion Option
In recent years, a change in the law has allowed distributions from
pre-tax accounts to be rolled over to a Roth IRA or a Roth account in
another qualified plan, which are after-tax accounts. These are taxable
distributions and are treated like a Roth conversion. Once in the Roth
account, future distributions are tax-free after a qualifying event (age
59½, death or disability) and the account has been in existence for five
Congress provided a special incentive for Roth rollovers and conversions
during 2010 by allowing the tax to be deferred and paid over two years, 2011
and 2012. This can potentially be a significant savings, since the tax could
be paid at a lower rate being spread out over two years.
In September of 2010, Congress extended this benefit further by letting
plans provide “in-plan Roth conversions.” This allows eligible rollover
distributions to simply be transferred to a Roth account under the plan. The
plan must provide for Roth deferrals by participants and must allow
in-service distributions, although such distributions can be limited to Roth
in-plan conversions only.
A Joint Tax Committee report states that it is intended that the IRS
provide a remedial amendment period so employers can implement the change
for 2010 and amend later (at this writing, no formal guidance has been
issued). This would enable interested participants to take advantage of the
special deferred taxation rule for Roth rollovers discussed above.
Distributions that took place during the calendar year, as well as
defaulted loans, must be reported on Form 1099-R and be mailed to
participants by January 31. Copies of these forms must be filed with the IRS
by February 28 in paper form, or March 31 if transmitted electronically.
Employee Census Data Collection
At the end of each plan year, the employer must prepare a census report
so that annual testing can be performed, contributions can be calculated and
allocated, a valuation report can be prepared and Form 5500 can be filed
with the Department of Labor.
The census consists of the names, compensation, relevant dates (hire,
birth, termination) and number of hours worked for all employees who were
employed during the year, not just those actively participating in the plan.
Compensation typically includes gross compensation reported on Form W-2,
unless the plan specifically excludes a certain type of compensation for
plan purposes. For partners and self-employed individuals, compensation is
net earnings with certain adjustments.
Owners and Officers
It’s important to identify the owners and officers of the company on the
census report. This information is needed to help determine highly
compensated employees (HCEs) for purposes of the nondiscrimination tests and
key employees for the top heavy test. It is also important to indicate which
employees are relatives of any owners, since they may be considered owners
through stock attributions rules. For example, if Brian works for a
corporation that is owned by his father, Brian will also be considered to
own the corporation, through stock attribution, for testing purposes.
If an owner of a company has ownership in another company, it must be
determined if the companies are “related” as a controlled group. Companies
could also be related as an “affiliated service” group even if there is no
common ownership. Related companies are treated as one company for certain
plan purposes, so it’s important that relationships with other businesses be
shared with the service provider performing required plan testing.
Consider the following example: Zachary owns 100% of a construction
company and 90% of a nail salon along with Jennifer, who owns the other 10%.
The two companies are considered a controlled group, and any plans sponsored
by either employer must consider the employees of both companies for
coverage, top heavy and possibly contribution discrimination testing. If
Zachary owned less than 80% of the nail salon, a controlled group would not
It is important to compile complete and accurate census information as it
is used for performing the following tests:
Average Deferral Percentage/Average Contribution Percentage Tests (ADP/ACP)
These tests must be performed to make sure that non-safe harbor deferral
plans do not unfairly discriminate in favor of HCEs. HCEs are generally more
than 5% owners of the employer or employees who earned over a specified
level in the prior plan year (currently $110,000).
The ADP test compares the average deferral percentages of HCEs with non-HCE
percentages while the ACP test compares matching and/or voluntary
contribution rates. A failed test usually requires corrective distribution(s)
by March 15, or by June 30 in some plans with automatic contribution
The total amount deferred by each employee must be checked to ensure that
the annual dollar limit was not exceeded. If it was, then a corrective
refund is required by April 15. This also applies to an employee who
over-contributed to plans of two different employers during the year.
To demonstrate that the plan does not unfairly cover a much larger
percentage of HCEs than non-HCEs, the plan must pass one of the coverage
tests. The standard test is based on a 70% rate, meaning that if all the
HCEs will be covered under the plan (after satisfying the eligibility
requirements), then at least 70% of the non-HCEs must be covered. An
alternative test can also be used, which compares the projected benefits of
these two groups.
Top Heavy Test
If more than 60% of the adjusted plan assets belong to key employees,
then the plan is considered top heavy and must provide certain minimum
contributions. A key employee is basically a more than 5% owner, a more than
1% owner earning over $150,000 or an officer earning over a specified limit
(currently $160,000). Certain safe-harbor plans are exempt from the top
Annual Additions Test
In account balance plans, the annual additions limit is the maximum
contributions and forfeitures that can be allocated to an individual. For
2010 and 2011 the limit is the lesser of 100% of compensation or $49,000. An
additional $5,500 catch-up contribution is allowed in salary deferral plans
for those age 50 and older.
All plans must provide benefit statements to participants showing accrued
and vested benefits. They must also explain any permitted disparity or other
offset arrangement used in determining accrued benefits. In account balance
plans the statements must be provided at least once a year, except where
participants direct their own investments, in which case they must be
Defined benefit plans must provide statements once every three years, or
upon written request (not more often than annually). Alternatively, defined
benefit plans can provide an annual notice informing participants how they
can obtain a benefit statement.
Good Time to Update Beneficiary Forms
The new year is a good time to give participants an opportunity to update
their beneficiary forms. Their circumstances may have changed due to
divorce, remarriage, etc., necessitating a change to their prior elections.
No Cost of Living Increases for 2011
Many plan limits are subject to cost-of-living adjustments. For 2011,
there will be no increase in these limits from the 2009/2010 levels because
the applicable cost of living index has not been increased. Many of the
limits are based on the “plan year.” The elective deferral and catch-up
limits are always based on the calendar year. See the table below for the limits
which are applicable to the 2008-2011 plan years.
The end of the year is the time to take care of unfinished plan business
as well as prepare for annual testing and reporting. Complete employee data
must be collected in order to perform the numerous administrative tasks
required of a qualified plan. Proper planning along with accurate
information are the most effective tools for the smooth operation of a
IRS and Social Security Annual Limitations
| Maximum compensation limit
| Defined contribution plan maximum
|Defined benefit plan maximum benefit
|401(k), 403(b) and 457 plan maximum elective deferrals
| Catch-up contributions*
|SIMPLE plan maximum elective deferrals
| Catch-up contributions*
|IRA maximum contributions
| Catch-up contributions*
| Highly compensated employee threshold
|Key employee (officer) threshold
|Social security taxable wage base
*Available to participants who are or will be age 50 or older by the
end of the calendar year.
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