Retirement Plan FAQs
FREQUENTLY ASKED QUESTIONS
1. What are the types of retirement plans?
There are two major types of retirement plans: defined benefit plans and defined contribution plans. A defined benefit plan promises a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more often, it may calculate a benefit through a plan formula that considers such factors as salary and service - for example, 1 percent of average salary for the last 5 years of employment for every year of service with an employer. In defined contribution plans such as 401(k)'s, 403(b)'s and 457's, the ultimate retirement benefits depend on the dollar amount accumulated in the employee's account.
2. What are the essential elements of a plan?
A written plan that describes the benefit structure and guides day-to-day operations;
A trust fund to hold the plan's assets;
A recordkeeping system to track the flow of monies going to and from the retirement plan; and
Documents to provide plan information to employees participating in the plan and to the government.
3. How long before my employees become eligible to participate in the retirement plan?
Generally, a plan may require an employee to be at least 21 years old and to have a year of service with the company before the employee can participate in a plan.
4. Who is a fiduciary of a plan?
- Many of the actions involved in operating a plan make the person or entity performing them a fiduciary. Using discretion in administering and managing a plan or controlling the plan's assets makes the person a fiduciary to the extent of that discretion or control. Thus, fiduciary status is based on the function performed for the plan, not just the person's title.
- A plan must have at least one fiduciary (person or entity) named in the written plan or through a process described in the plan, as having control over the plan's operation. The named fiduciary can be identified by office or by name. For some plans, it may be an administrative committee or a company's board of directors.
5. What are the responsibilities of a fiduciary?
- Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
- Carrying out their duties prudently;
- Following the plan documents (unless inconsistent with ERISA);
- Diversifying plan investments; and
- Paying only reasonable plan expenses
6. Am I required to get insurance for the plan?
Those who handle plan funds or other plan property generally must be covered by a fidelity bond. A fidelity bond is a type of insurance that protects the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond.
7. My 401(k) plan allows loans. Should I take advantage of this option?
There are several disadvantages to taking a loan from your retirement plan. The dollar amount "loaned" is no longer invested in stocks and bonds. Yes you are paying yourself interest, but you don't get ahead paying yourself interest, you do get ahead when someone else pays you interest. Think about it. The money you "borrow from yourself" is 401(k) money and thus pretax money. However, when you make 401(k) loan payments, you are making these loan payments from current pay which is after-tax money. Once your payment is in your 401(k) account, it is again considered pre-tax money, which will be taxed again when you take retirement distributions.
8. Can my creditors get at my 401(k) account balance? Could I be sued for money from my 401(k) plan?
No. Based on current law and recent court decisions, the money in your employer sponsored retirement plan is protected. Be it creditors of yourself, your employer or the financial institution handling your employer's plan, your account balance is protected. The only way part of your account balance could be "attached" would be in the case of a divorce. In a divorce situation, a court order known as a "Qualified Domestic Relations Order" could result in a transfer of part of your account balance to a former spouse.
9. When does the employer need to deposit employee contributions in the plan?
If you contribute to your retirement plan through deductions from your paycheck, then the employer must follow certain rules to make sure that it deposits the contributions as soon as it is reasonably possible to separate them from the company's assets. For small plans (those with fewer than 100 participants), salary reduction contributions deposited with the plan no later than the 7th business day following withholding by the employer will be considered contributed in compliance with the law.
1. Do I have to report all employees to you?
Yes. The form 5500 requires that all employees be reported, and not just those employees who are eligible to participate in the retirement plan.
2. Why do I have to report the hours worked for each employee?
IRS Discrimination testing divides employees into three groups. Those that work 1,000+ hours in a year, those that work between 500-999 hours and those that work less than 500 hours in a year. The hours each employee worked is necessary in determining accrual of benefits, as well as calculating time for vesting.
3. Why do we need to complete/return the Year End Packet to you every year?
If your plan has 401(k) deferrals, we must have the completed year end packet returned to us within 1 month after the end of the plan year, to have enough time to test your plan for excess contributions and notify you in time to refund the excess contributions prior to the penalty period (with 2 1/2 months following the end of the plan year). If excess contributions are returned after 2 1/2 months following the end of the plan year, your company will be required to pay an excise tax of 10% of the excess amount. If you want a contribution quote, we must have the completed Year End Packet returned to us with 30 days prior to when you want the quote. Remember, to be tax deductible, an employer contribution must be made by the date you file your company's tax return or if you go on extension to file your company's return. (Link for sample of a Census)
4. What is the preferred method of sending employee data to you?
Our preferred method of receiving employee data is via either email or CD in an Excel spreadsheet. Having the data in Excel format allows our administrators to handle the data more efficiently and minimizes errors.
5. When are employees eligible to participate in our retirement plan?
It depends on your plan specifications however, generally, a plan may require an employee to be at least 21 years old and to have a year of service with the company before the employee can participate in a plan. However, plans may allow employees to begin participation before reaching age 21 or completing one year of service. For administrative reasons, participation may be delayed up to 6 months after these age and service criteria, or until the start of the next plan year, whichever is sooner. The plan year is the calendar year, or alternative 12-month period, that a retirement plan uses for plan administration.
6. Why must a Qualified Plan be 'restated'?
The IRS requires that in order for a plan to maintain its tax qualified status, it must be restated every five (5) or six (6) years depending on the form of Document adopted by the Employer.
7. How can I obtain a copy of our Summary Plan Description?
If All Valley Administrators prepared your plan documents, all plan documents including the Summary Plan Description were provided to you as a hard copy in a black binder. You were also provided with a CD containing master copies of all plan documents. If you have misplaced your binder and CD containing the master copies of your plan documents please contact your plan Administrator.
8. When do I need to deposit employee contributions in the plan?
If you contribute to your retirement plan through deductions from your paycheck, then the employer must follow certain rules to make sure that it deposits the contributions in a timely manner. The law says that the employer must deposit participant contributions as soon as it is reasonably possible to separate them from the company's assets. For small plans (those with fewer than 100 participants), salary reduction contributions deposited with the plan no later than the 7th business day following withholding by the employer will be considered contributed in compliance with the law.
9. What are the annual contribution limits for retirement plans?
CLICK HERE to access the annual contribution limits for different types of retirement plans on the IRS website.
10. When can a terminated participant receive distribution of their benefits from the plan?
The plan documents will state the earliest date a terminated participant may receive their benefits from the plan. Once your Third Party Administrator receives a termination form from the employer, the participant will receive and complete the distribution election form indicating how they will receive their benefits - cash subject to tax, rollover to another qualified plan, rollover to an IRA, etc. Along with the election form, they will receive the applicable Tax Notice which will inform them of their options regarding distribution of their retirement benefits.
11. How do I make payments for Federal or State Taxes on distributions?
All Federal taxes can be paid using the Electronic Federal Tax Payment System (EFTPS). You can make payments via the below website, a voice response system, or special channels designed for tax professionals, payroll services, and financial institutions. Quick, secure and accurate, EFTPS is available by phone or online 24 hours a day, 7 days a week. You can schedule business and individual payments up to 365 days in advance.
Just visit the following links:
12. Why do I need to provide you with confirmation of distributions from the plan?
As your Third Party Administrator, All Valley Administrators will be preparing the required 1099R's for the IRS for any distributions made from the plan during the plan year. In order to provide the IRS with the most accurate information possible we will need to have copies of checks and/or confirmation of payment for all distributions. The deadline for filing 1099R's is March 31st following the reporting year.