The State of My Service Agreement Tuesday, April 30, 2013 · 2005 provides that an entity manager of a tax-exempt organization may be subject to an excise tax on prohibited tax shelter

1

The State of My Service Agreement Tuesday, April 30, 2013

Darren P. Holsey, ERPA, APA, QPA, QKA

Senior Plan Consultant, Premier Retirement

Services, Inc.

What information do I have to include?

• List services

• List cost of services

• Use generic language or client specific?

• Attorney or investment provider templates?

2

Should I have an attorney provide/review my service agreement?

• Advantages?

• Costs?

• Do I run any risks by not going this route?

Is there additional information I should include beyond what is required?

• Responsibilities of the employer

• Turnaround timeframes

• Repercussions of not meeting employer or provider

responsibilities

• Service warranty?

• Opportunity to show TPA fees are actually “too low”

• What TPA does

• How much follow-up is needed

• It’s more than a “key-stroke” to provide services

• Contribution studies

• Testing

• Accountant and attorney like services

• Continuing education required

3

Should I have a separate fee schedule or include fees within my service agreement?

• Customized agreement or generic template?

• Do you have language about fee increases?

• How are you handling your fee changes?

• New agreement or addendums?

• How is this going to impact all of your 404a-5 notices?

• How are you incorporating investment provider changes?

• Revenue sharing

• Advisor compensation

• Quoting for new business

Is it better to provide an annual engagement or have a single engagement with updates as needed?

• Annual engagement provides proof of disclosure

• One-time engagement is easier?

• Still have periodic updates

• What if providers are changed which change your fees?

• How are you proving disclosure if necessary?

4

How should I disclose revenue sharing?

• Generic language in my agreement

• Investment provider specific

• Use their disclosure or create your own?

• Formulas or specific amounts?

• Rebate or not?

• Quoting for new business

Anything else you can think of?

• Time tracking and its necessity

• Am I missing things to bill?

• Services outside of the normal TPA realm

• Coordinating 408(b)(2) and 404(a)(5) information

• Notice mailings

5

The State of My Service Agreement

Darren P. Holsey, ERPA, APA, QPA, QKA

Premier Retirement Services, Inc.

[email protected]

(503) 685-9191

1

Participant Fee Disclosure and Your Experience Tuesday, April 30, 2013

Robert M. Kaplan, CFP, APA, CPC, QPA

VP, National Training Consultant, ING

BACKGROUND

• 404a-5

• Annual Notice – August 30, 2012

• Benefit Statement – 3rd Q 2012 (no later than 11/14)

• The Chart

• Ongoing Web Information

2

BACKGROUND

• Goal

• Provide participants with valuable information when

selecting investment options in Participant Directed Plan

• All underlying fees and past investment performance

BACKGROUND

• Brokerage Accounts or Windows

• What if plan has only Brokerage Windows?

• Prudence/Loyalty?

• FAQ #39

3

Questions

• How involved were you in assisting your plan sponsors

with meeting their initial 404a-5 notice requirement?

• Did the record keeper do it all?

• What about eligible participants with a zero account balance?

• Who determined if fees were allocated pro rata or per capita?

Questions

• What role have you taken in supporting your clients in

meeting their annual notice requirements?

• Do you review the notices?

• Did you provide data?

• How many questions did you get?

4

Questions

• How did your firm handle different vendors and different

processes?

• Not all had same procedures – how different and how difficult

was it to adjust to all different ones?

• How about timing – did any vendors provide data late or

incomplete?

Questions

• How did you prepare your clients to respond to questions

from their participants? (e.g.: client meetings, webinars,

education sessions, etc...)

• Were clients interested in preparation?

• Did participants seemed concerned?

• And at the end of the day…….what was the feedback after the

information was released?

5

Questions

• What processes or systems (if any) have you put in

place to support plan sponsors with the advance

notification component of the regulation?

• What are you going to change from the initial release?

• Is there any concern or feedback from employers about changes

for the next version?

• Annual notice – what release timing is anticipated for 2013?

Questions

• - If you are taking an active role in assisting your clients,

are you charging them for this service? If so, how did

you determine how much to charge?

6

Final Thoughts

• - Any issues we did not cover

• Questions?

1

Ethics Part 1: Ethics and Ethical Organizations Tuesday, April 30, 2013 Michael P. Coyne, JD, Waldheger-Coyne Co. LPA

Proposed Changes to Circular 230

• Eliminate Section 10.35 rules governing

covered opinions.

• Expand the requirements for written advice

under Section 10.37.

• Amend Section 10.36 to create

“institutional” responsibility for compliance

with Circular 230.

2


• “Covered Opinions” are a very specific form of

written advice.

• Complex covered opinion rules can be avoided

by a disclaimer that the opinion cannot be used

to avoid tax penalties.

• The end result is that every communication from

a tax lawyer, including invitations to lunch,

include a written disclaimer.


• New Rule under Section 10.35:

• Practitioner must possess the necessary

competence to practice before the IRS.

• Competent practice requires the

knowledge, skill, thoroughness, and

preparation necessary for the matter for

which the practitioner is engaged.

3


• New Requirements for Written Advice

Under Section 10.37:

• Base all advice on reasonable factual

and legal assumptions.

• Exercise reasonable reliance.

• Consider all relevant facts the

practitioner knows or should know.


• “Reasonable Reliance”

• Cannot rely on facts or assumptions that

are incomplete or known to be

inaccurate.

• Cannot rely on another practitioner if you

know or should know that he is

incompetent or has a conflict of interest.

4


• Important Change to Written Advice Rule:

• Retains rule that a practitioner cannot consider

that return may not be audited or that issue

may not be raised on audit, BUT

• Eliminates rule that prohibits a practitioner

from taking into account the possibility of an

issue being resolved through settlement.


• Change to Section 10.36 imposes

new and expanded responsibility for

overseeing firm’s compliance with

Circular 230.

• Failure in supervision may expose

firm or responsible party for liability for

Circular 230 violations of employees.

5


• Oversight extends to:

• Duty of confidentiality.

• Duty to avoid conflicts of interest.

• Duty of due diligence.

• Duty concerning client omissions or errors.

• Duty to promptly dispose of pending matters.

Creating an Ethical Organization

• Ethical and Unethical Organizations

• Johnson & Johnson and the Tylenol

Scare

• Bausch & Lomb and “Disposable

Contact Lenses”

6


• The Four Stage Model of Ethical Businesses

• Theory is that organizations move through stages of ethical

development.

• Stage 1 - Lack of intent or desire to behave ethically.

• Stage 2 - Passive approach to ethical decision making.

• Stage 3 - Actively promotes and encourages ethical decision

making.

• Stage 4 – Consistent and integrated culture of ethical decision

making over an extended period of time.


7


• How to Create an Ethical Organization

• In house code of conduct?

• Ethics committee?

• Hotlines for whistleblowers?

• Extensive training?


• A Different View

• Set a good example.

• Keep promises and commitments to

employees.

• Support others who are adhering to

ethical standards.

8


• Some Surprising Findings:

• Communicating the importance of ethics

is less frequently associated with

improved ethical outcomes.

• Ethics training is not terribly effective for

upper level managers.


• A Different View

• Set a good example.

• Keep promises and commitments to

employees.

• Support others who are adhering to

ethical standards.

9

Making the Complex Simple

• How Complicated Should Ethics Be?

• Circular 230 is 48 pages long.

• Lawyers Model Code of Professional

Responsibility is 83 pages.

• NIPA Code of Conduct is 14 one-

sentence rules.


• Weinstein’s Five Principles of Ethical

Intelligence:

• Do No Harm.

• Make Things Better.

• Respect Others.

• Be Fair.

• Be Loving.

10


• Some Practical Steps:

• Maintain a good example.

• With regard to client matters.

• With regard to non-client business behavior.



• Be aware of circumstances that can lead to

unethical behavior:

• Business pressure and risk of economic loss.

• Embarrassment.

• A misplaced desire to “help” a client.

11



• Support and reward ethical behavior.

• Let employees know that you appreciate

honesty in dealing with mistakes.

• Thank employees for doing the right thing.



• Develop systems to minimize ethical crises:

• Remind clients frequently, and in writing, of

your need for good data and for their review.

• Explain your ethical duties to your clients and

the importance of those duties.

12

Ethics and Ethical Organizations

Thank you for your time!

1

Janice M. Wegesin, CPC, EA, form5500help.com

Form 5330 Tuesday, April 30, 2013

What is Form 5330?

• Return of Excise Taxes Related to Employee Benefit

Plans

• Filed by person liable for the tax

• Not the plan itself

• Generally the employer

2

Due 7 months after end of ER tax year

1. Code §4972 10% tax on nondeductible contributions

(Schedule A)

2. Code §4973(a)(3) 6% tax on excess annual additions to

403(b) custodial account (Schedule B)

3. Code §4975 tax on prohibited transactions

A. 15% initial penalty (Schedule C)

B. 100% failure to correct

4. Code §4976 100% tax on disqualified funded welfare

benefit plan

5. Code §4978 10% tax on certain ESOP dispositions

6. Code §4979A 50% tax on certain ESOP allocations

Due 8 ½ months after end of plan year

• Lines 8 – 10 all relate to funding issues

• Deadline is the later of the last day of the 7th month after

the end of the employer’s tax year or 8½ months after the

last day of the plan year that ends within the filer’s tax

year

• Schedules D, E, and F

• Penalty if contribution is not made within 8½ months to

the DB plan

• Can apply to IRS to get funding waived based on substantial

business hardship

• 10% excise tax if funding is not met or do not get waiver

• Other plans may have fixed contribution but no minimum

funding penalty

• But IRS may disqualify plan for failing to follow terms

3

Due July 31 after fringe benefits paid

• Code §4977 30% tax on excess fringe benefits

• Complete Schedule G

15 months after end of plan year

• Code §4979 10% penalty on failure to distribute excess

contributions or excess aggregate contributions within 2½

months

• ADP/ACP corrections

• Complete Schedule H

• Example: Plan corrects ADP failure for calendar year 2012 by

distributing $1000 excess contributions + $60 interest by August

1, 2013

• Tax is $100 (10% X $1000)

• Due date is March 31, 2014

4

One month after reversion/failure

• Code §4980 reversion tax

• Schedule I

• Reversion: returning excess DB assets to employer

• Subject to ordinary income tax

• Also subject to 50% reversion penalty

• Can reduce to 20% if:

• 25% of surplus transferred to replacement plan or

• 20% of surplus allocated to participants

• In bankruptcy

• Exemption for plans of tax-exempt organizations

• Code §4980F $100/person/day penalty for failure to

provide notice of amendment reducing future accruals

under ERISA 204(h)

• Schedule J

15th day of 5th money after manager’s year end

• Code §4965 $20,000 penalty for entity manager

engaging in prohibited tax shelter transaction

• The Tax Increase Prevention and Reconciliation Act of

2005 provides that an entity manager of a tax-exempt

organization may be subject to an excise tax on

prohibited tax shelter transactions under section 4965. In

the case of a plan entity, an entity manager is any person

that approves or otherwise causes the tax-exempt entity

to be a party to a prohibited tax shelter transaction. The

excise tax is $20,000 and is assessed for each approval

or other act causing the organization to be a party to the

prohibited tax shelter transaction.

5

6 month extension possible for all of these

• File 5558

Penalties

• Late filing: 5% of amount due per month (maximum 25%)

• Late payment: 0.5% of amount due per month (maximum

25%)

6

Signature block

• Signed by person or entity liable for tax

• Generally the employer

• Signed by person preparing return

• MUST include PTIN

• Do not need special tax status to prepare

• Unenrolled preparer who signs return can represent taxpayer at

audit of that return

Nondeductible contributions

• Nondeductible amounts carried forward

• Deductible in future years subject to limitations for those years

• Example:

• Calendar plan and tax year; PS plan

• In each year, total participant comp = $1,000,000; deduction limit =

$250,000

• In 2011, ER contributes $300,000

• $50,000 nondeductible in 2011

• In 2012, ER contributes $150,000

• ER can deduct $200,000 in 2012

• ER can deduct unused nondeductible contributions after

plan terminates

• Deduction limit = 25% of the comp of EEs who benefited under

plan in its last 12 months

7

Nondeductible contribution penalty

• Excise tax = 10% of nondeductible contribution

• Excise tax is nondeductible

• Amount based on sum of:

• Current year’s ER contribution – Amount deductible under 404 +

• Prior year’s carryforward – (Amount returned to ER + Amount

deductible under 404)

• Report and pay tax on Form 5330

Exceptions to excise tax

• Tax-exempt organization

• Must not be subject to unrelated business income tax

• Governmental ER

• Self-employed individual contributes minimum funding

even though it exceeds earned income

• Self-employed individual insurance premiums if otherwise

deductible

• Matching contributions which would cause plan to go

over 404(a)(7) limit

• SIMPLE IRA contributions for domestic workers

8

Can plan return nondeductible contributions?

• Only if:

• Failure to initially qualify,

• IRS acknowledged failure to be deductible,

• Actuary may be able to certify for de minimis amounts

• No IRS procedure for DC plan

• Mistake of fact,

• Nondeductibility isn’t mistake of fact

• Multiemployer plan: mistake of law or return of withdrawal liability

payment

• Deadline to avoid penalty: Last day of deduction grace

period

Prohibited transaction rules

• Designed to prevent plan fiduciaries from causing plan to

engage in transactions which involve a possible conflict

of interest

• Plan could get hurt by such transactions

• Not required that plan suffer actual harm for transaction to be

prohibited

• Code §4975 and ERISA contain PT rules

• Similar but not identical rules

• Code addresses transactions with ―disqualified persons‖ and

ERISA with ―parties in interest‖

• We’ll focus on tax rules

9

Who and what

• PT rules require identification of the plan’s disqualified persons (WHO)

• Also must identify the transactions which are prohibited (WHAT)

• Direct and indirect transactions are covered

• Cannot escape using a ―straw-person/entity‖

• If transaction is prohibited, possible escape if exemption

• If not, and transaction goes ahead, the disqualified person must pay excise tax under §4975 and a plan fiduciary must ―unwind the transaction‖

• Failure to unwind results in additional excise tax and possible fiduciary sanctions

• Generally IRS will not disqualify the plan; is a tax/fiduciary issue

WHO ( are disqualified persons)

• Plan fiduciaries

• Plan service providers

• Employer sponsoring the plan

• Employee representative (e.g.,

union) of EEs covered by plan

• 50% or more owner of employer

or EE representative; attribution

rules apply

• Family member (spouse,

ancestor, lineal descendant and

spouse of lineal descendant) of

fiduciaries, service providers,

employer, or 50% owner

• Corporation , partnership, trust

or estate which is 50% or more

owned by fiduciary, service

provider, employer, employee

organization or ―50% owner‖;

attribution rules apply

• Officers, directors, 10% or more

owners or HCEs (meaning

earning 10% or more of annual

wages paid by ER) of employer,

employee organization,

―50%owner‖ or ―50% owned

entity‖

• 10% or more partners of

employer, employee

organization, ―50% owner‖ or

―50% owned entity‖

10

Ownership Attribution

• I am deemed to own my pro rata share of stock held by

corporation, partnership, estate, or trust. No threshold.

• I am deemed to own stock held by:

• My wife

• My descendants

• My ancestors

• Spouse of descendants

• My partner!

1

9

These are the

broadest

attribution rules

WHAT (is prohibited)

• Sales, exchanges, leases of property

• Loans or other extensions of credit

• Furnishing goods, services, facilities

• Transfer to, use by a disqualified person of plan assets or

income

• Fiduciary self-dealing or ―kickbacks‖

• Act by a disqualified person who is a fiduciary whereby

he deals with the income or assets of a plan in his own

interest or for his own account; or

• Receipt of any consideration for his own personal account

by any disqualified person who is a fiduciary from any party

dealing with the plan in connection with a transaction

involving the income or assets of the plan.

11

Nature of prohibition

• Intent of parties and economic outcome of the transaction

to either the plan or the other parties not relevant

• It doesn’t matter that the plan wasn’t hurt

• It doesn’t matter that the plan got a good deal

• Example:

• Company owner serves as trustee and takes a $1000 fee from

the plan for doing so

• Fee is reasonable

• It doesn’t matter: It is self-dealing

PT correction

• Undo the transaction to the extent possible

• Not put plan in worse position than if transaction did not occur,

applying highest fiduciary standards

• Correction depends on transaction type

• Rescind a sale, terminate a lease, pay-back a loan

• Sometimes correction may result in another separate PT

• In some cases, DOL says these corrections are exempt

12

Excise tax calculation

• Initial tax is 15% of ―amount involved‖

• Applies to each year or partial year the transaction is in place;

taxable year of the disqualified person

• ―Amount involved‖ depends on transaction type

• Sale: is greater of sale price or Fair Market Value (FMV)

• Loan/lease: is greater of FMV interest or rent OR interest/rent paid

• Late deferral deposit: fair market interest for use of the $; use

§6621(a) underpayment rate

• Continuing transactions (loans, leases) create new PT each year

resulting in pyramiding of excise tax

• 100% tax on amount involved if PT uncorrected

• Can abate 100% tax if corrected within 90 days after IRS gives

notice as to 100% tax; 15% tax cannot be reduced

Calculation of excise tax/correction

• On 10/01/13, plan X loaned corporation X $50,000

• At the time of the loan, fair market value loan interest rate

was 8%

• Plan made the loan to X at an interest rate of only 5%

• On 3/31/15, X repaid the loan, plus interest of $3,750

• On 1/01/15, fair market value of the loan interest rose

from 8% to 9%

• Compute the excise tax by completing Form 5330 for

2013, 2014 and 2015 with respect to the prohibited loan

transaction

13

2013 (Form 5330 Sch. C — Tax on Prohibited Transactions)

Transaction

Number

Date of

transaction

Description Amount

Involved

Initial tax on

PT

(i) 10-1-13 Loan $1,000 $150

(ii)

(iii)

Tax due – Add amounts in column (d) $150


Transaction

Number

Date of

transaction

Description Amount

Involved

Initial tax on

PT

(i) 10-1-13 Loan $1,000 $150

(ii) 1-1-14 Loan $4,000 $600

(iii)

Tax due – Add amounts in column (d) $750

14


Transaction

Number

Date of

transaction

Description Amount

Involved

Initial tax on

PT

(i) 10-1-13 Loan $1,000 $150.00

(ii) 1-1-14 Loan $4,000 $600.00

(iii) 1-1-15 Loan $1,125 $168.75

Tax due – Add amounts in column (d) $918.75

Employee contribution deadlines

• Employee contributions become plan assets on ―the earliest date on which such contributions can reasonably be segregated from the employer's general assets‖ (ASAP)

• Safe harbor for plans with fewer than 100 participants on first day of plan year: 7 business days after payday

• 80/120 rule for Forms 5500 does NOT apply to safe harbor

• No safe harbor for large plans

• Large plan can probably get contribution in faster (we’ve seen DOL auditors enforce 3-5 days)

• Absolute deadline:

• General: 15th business day of following month

• SIMPLE IRA: 30th day of following month

• Welfare plan: 90 days after receipt or withholding

• Also applies to participant loans

15

Correcting late deferrals

• Repay deferrals (and loan repayments)

• Calculate and pay lost earnings

• If lost earnings not paid at time deferrals repaid, must pay lost

earnings on lost earnings

• Pay prohibited transaction excise tax

• Report late deferrals on Form 5500

http://www.dol.gov/ebsa/calculator/main.html

• IRS interest rates posted on DOL website

• Used in computing lost earnings

• Used in DOL calculator Start End Rate

4/1/2001 6/30/2001 8%

7/1/2001 12/31/2001 7%

1/1/2002 12/31/2002 6%

1/1/2003 9/30/2003 5%

10/1/2003 3/31/2004 4%

4/1/2004 6/30/2004 5%

7/1/2004 9/30/2004 4%

10/1/2004 3/31/2005 5%

4/1/2005 9/30/2005 6%

10/1/2005 6/30/2006 7%

Start End Rate

7/1/2006 12/31/2007 8%

1/1/2008 3/31/2008 7%

4/1/2008 6/30/2008 6%

7/1/2008 9/30/2008 5%

10/1/2008 12/31/2008 6%

1/1/2009 3/31/2009 5%

4/1/2009 12/31/2010 4%

1/1/2011 3/31/2011 3%

4/1/2011 9/30/2011 4%

10/1/2011 6/30/2013 3%

16

Late Deposits

• Online calculator tailor made for late deposits

• No need to go back and compute earnings participant by participant

• Theory: Calculator available only for VFCP

• Practice: Calculator good enough for some DOL investigators • Small % of late deferrals use VFCP

• Difference between calculator and computation under old rules very small

Examples

• SmallCo 3 months late in depositing $10,000 deferrals

• Calculator says interest = $180

• SmallCo deposits $10,180, doesn’t file VFCP

• Has to file 5330 and pay about $27 penalty tax

• DOL audits

• Says SmallCo must compute actual loss = $300

• SmallCo must deposit additional $120

• SmallCo potentially liable for $24 penalty

• But, if BigCo is 3 months late depositing $500,000, VFCP

could be worth it (could save $8,550)

17

Late deposit is a PT (prohibited transaction)

• DOL treats late deposit as ―transfer to, or use by or for the benefit of a party in interest, of any assets of the plan‖, a prohibited transaction

• PTE 2002-51: No prohibited transaction if file VFCP submission and: • repay late deferrals within 180 days

• provide notice to interested parties within 60 days of the submission, and

• the employer has not sought this relief within the last 3 years

• Otherwise, file Form 5330 and pay prohibited transaction excise tax

PT tax: 15% of ―amount involved‖

• Example: Employer 1 month late in depositing $60,000.

• Reasonable interest rate = 5%

• IRS deficiency rate on date of failure works here: Rev. Rul. 2006-

38

• But it’s simple interest with annual changes

• So you can’t use calculator

• Amount involved for ―use‖ of money = 5% X $60,000 X

1/12 = $250

• PT Tax = $38 (250 x 15%) if corrected during same year

• Price rises if error continues beyond end of year

18

Amount involved for 3 year PT

• Company fails to deposit $10,000 on March 1, 2010 • Company corrects error March 31, 2012

• Interest rate • First year: rate on date of failure

• Thereafter: rate on first day of year

Date Principal Rate Time Amount

Involved

3/1/2010 $10,000.00 4% 0.83836 $335.34

1/1/2011 $10,335.34 3% 1.00000 $310.06

1/1/2012 $10,645.40 3% 0.24590 $78.53

Computing tax for 3 year PT

Transaction

Date Taxable Period

2010

Return

2011

Return

2012

Return

3/1/2010 3/1/2010 to

3/31/2012 $335.34 $335.34 $335.34

1/1/2011 1/1/2011 to

12/31/2011 $310.06 $310.06

1/1/2012 1/1/2012 to

3/31/2012 $78.53

Total $335.34 $645.40 $723.93

15% of total $50 $97 $109

Total excise tax for all years = $256

DOL calculator says lost earnings = $788.48

19

Is there a de minimis exception to avoid preparing Form 5330?

• No

• If you file under VFCP for a late deposit, you can prevent

a PT, and avoid giving notice to the participants if:

• You complete Form 5330

• Send it to the DOL with the VFCP application

• The amount of the tax does not exceed $100

• The employer deposits the tax into the plan

1

401(k) Questionnaire – The Final Chapter Tuesday, April 30, 2013 Richard A. Hochman, Esq., McKay Hochman

Co. Inc.

Donald J. Kieffer Jr., Esq., IRS

Topics to be Discussed

• IRS current 401(k) activity

• The 401(k) questionnaire

• Practitioner viewpoint

• Future uses

2

401(k) Facts

• Section 401(k) plans are the most

popular plans in the United States

• More the 500,000 401(k) plans

• Cover about 60 million participants

• Average account balance = over

$58,000

Background

• Compliance Check performed by EP

Compliance Unit (EPCU)

• First IRS on-line compliance check

• Statistical sample of 1,200 randomly

selected plan sponsors

• Stratified based on plan size

• Number of participants

3

Background – EPCU Projects

• Completed projects with reports on website

• 401(k) Excess Deferrals Project

• Over 26,000 W-2Cs filed to correct errors

• Corrected software/date transmission problems

• 401(k) Money Purchase Plan Project

• Only 1 of over 700 contacts had improper plan

• Completed – 401(k) Final Report

• 401(k) Untimely Deferral Deposit Project also

underway

Background – 401(k) Recurring Errors

• Non-amender/Late amender

• Failure to follow the terms of the plan

• Definition of “Compensation”

• Matching contributions

• Nondiscrimination testing (ADP/ACP)

• Omitting eligible employees

• IRC 402(g) limits

• Timely deposit of employee elective deferrals

4

401(k) Plans – Projects

• EPCU Upcoming Projects

• Based on Final Report findings

• Learn/Educate/Self-Correct/Enforce (LESE)

• Completed

• IRC 402(g) Excesses (only a few issues found)

• Top Heavy 401(k) Plans (many issues found)

• In-Progress

• Safe Harbor 401(k) Plans

• Based on 401(k) Interim Report findings

• Initial Year 401(k) Plans

Questionnaire Objectives

• Look at plan form and operation issues

• Learn how our outreach & compliance

programs are working

• Optimize EP outreach & compliance efforts

5

Background to Report

• 98% of the plan sponsors responded

• Initiated examinations on the 2% non-

responders

• Questionnaire data analyzed to

• Identify potential compliance problems

• Design future compliance efforts

• Improve case selection models

• Published interim report on Feb. 3, 2012

Person Completing Questionnaire

6

Questionnaire Categories

• Demographics

• Plan Participation

• Contributions

• Nondiscrimination

• Distributions/Plan Loans

• Automatic Contributions

• Other operations

• Roth features

• Voluntary Compliance

• Plan Administration

Plan Selection Demographics

7

Final Report Highlight

more likely to be

aware of EPCRS

Final Report - Issues of Concern

Defaulted loans

• 60% of plans saw an increase in the number of defaulted

loans from 2006 to 2008.

• 47% of plans saw an increase in the number of

outstanding loans from 2006 to 2008.

• There was a decrease in the number loans originated

during the same time period.

• This is an indication that older loans are not being timely

repaid.

8

Plans that Permit Loans

0

10

20

30

40

50

60

70

80

90

100

Small Medium Large Extra Large


Top Heavy plan issue

• Failure to provide 3% minimum

contribution

• 19% of plans that indicated they were Top

Heavy provided some lesser level of top-

heavy contribution based on the

Questionnaire responses.

9

Final Report Highlights – Top Heavy Status

more likely to be

top heavy


Small Employers with Multiple Plans

• Approximately 79,000 out of the 396,000

plan sponsors with less than 100

participants (about 20%) had more than

one plan.

10

Final Report Highlights – Participation in Elective Deferrals

One–year service requirement

Age 21 restriction

Permit employee after-tax contributions

more likely to have no

age requirement

Testing

• ADP Test Corrections

• As provided in the Interim Report.

31% prior Year

60% current Year

9% Claim Exempt from Testing

Method of Correction

• Distribution of Excess Contributions

2006 – 61%, 2007 – 58%, 2008 - 67%

• Additional Contribution of QNECs

2006 – 4%, 2007 -3%, 2008 – 4%

11

Testing

• Additional Contributions of QMACs

• 0% all three years

• Re-characterizing elective deferrals as employee after-tax

• 2006 – 23%, 2007 – 26%, 2008 – 17%

• Other Method

• 2006 – 7%, 2007 – 6%, 2008 – 4%

• More than one Method

• 2006 – 5%, 2007 – 7%,2008 – 7%

Final Report Highlights – Employer Contributions

Suspended/Discontinued Matching

• 2006 – 1%

• 2008 – 4%

Suspended/Discontinued Non-Elective

• 2006 – 2%

• 2008 – 5%

15% reported suspension, reduction or discontinuance of

matching or non-elective contributions in the 4 years preceding the questionnaire.

12

Final Report Highlights – Employer Contributions

Fixed Match in 2008

0

10

20

30

40

50

60

70

Small Medium Large Very Large

13

Discretionary Match in 2008

0

10

20

30

40

50

60

70


Final Report Highlights – Plan Type

Safe Harbor SIMPLE

more likely to be a safe

harbor plan

14

Safe Harbor Plans

0

10

20

30

40

50

60

70

80


Employer Contributions to Safe Harbor Plans

0

10

20

30

40

50

60

Basic Match Enhanced Match Non-Elective

15

Methods for Providing Safe Harbor Notices

0

10

20

30

40

50

60

70

80

90

100

E-Mail Regular Mail Handed Out Posted InWork Place

Posted On-line

Other

Final Report Highlights – Automatic Contribution Arrangements (ACAs)

Plans that include an ACA 5% Plans that include an ACA 5%

16

Final Report Highlights – Automatic Contribution Arrangements (ACAs)

more likely to have

an ACA

Less than 20% of plans with an

ACA satisfy both the QACA and

EACA requirements.

Final Report Highlights – Distributions

Very Large

Plans

Very Large &

Large Plans

more likely to permit

involuntary cash-outs

more likely to permit

in-service withdrawals

17

Final Report Highlights – Determinations

Very Large

Plans

Very Large

Plans

less likely to use a pre-

approved plan

more likely to request the

IRS determination letter

Final Report Highlights – Defined Benefit Plans

18

Final Report Highlights – Customer Education and Outreach

Very Large

Plans

more likely than small,

medium or large plans to

be aware of & use the

Fix-It Guide

Final Report Highlights – Plan Administration

Third-party administrators used for

19

Primary Responsibility for Plan Administration

Person Responsible for Plan Administration (by employer size)

20

Next Steps

We will use the Questionnaire’s findings to:

• modify and improve our 401(k) plan

compliance tools

• produce outreach materials

• improve voluntary compliance programs

• assess the need for additional guidance and

• define upcoming projects and enforcement

activities

New Look IRS Website

21

How can I find retirement plan information?

www.irs.gov/Retirement-Plans

More Information

Starting at www.irs.gov/Retirement-Plans... Starting at www.irs.gov/Retirement-Plans

22

More Information

401(k) Self-Audit Tool - Current

23

401(k) Self-Audit Tool - Future

We are repackaging it as the

Questionnaire Self-Audit Tool (QSAT).

Adding new internal control questions

• The QSAT is scheduled to be launched

later in 2013.

• Will help plan sponsors find, fix and avoid

costly mistakes

Questions

• ?????????

1

403(b) vs. 401(k) – Plan Design Considerations for Tax-Exempt Organizations Tuesday, April 30, 2013 Rod Stortenbecker , CPC, QPA, FLMI

Senior Consultant, Lincoln Financial Group

Plan design options for tax-exempt organizations

Numerous types of tax-exempt organizations

Only certain tax-exempt and governmental entities may

sponsor 403(b) plans:

501(c)(3) – no other tax-exempt organizations

Public schools and certain governmental entities

Today’s discussion will focus on a 501(c)(3) tax-exempt

organization’s sponsorship of a 403(b) plan

2

Plan design options for tax-exempt organizations

• What types of plans can a 501(c)(3) tax-exempt

organization sponsor?

401(k)

401(a) (Profit Sharing or Money Purchase)

403(b)

457(b)

403(b) plans - ERISA vs. Non-ERISA

“Subject to ERISA” means participants’ benefits & rights

are protected

These include eligibility, participation, funding, reporting,

disclosure, anti-alienation, anti-assignment, bonding and fiduciary

duty.

A 403(b) plan can be exempt from ERISA requirements if

certain conditions are met.

Regulatory exemption

employer cannot exercise discretionary authority and decision making

additional factors must be considered

Statutory exemption

applies to governmental plans and non-electing church plans

Today’s discussion will focus on ERISA 403(b) plans

3

Impact of recent changes on 403(b) plans

2009 Final Regulations

Written plan document requirement

Elimination of open-ended contract-to-contract transfers

o Replaced with “contract exchanges” and has restrictions/conditions

Clarification on nondiscrimination rules for salary deferrals

o Normally scheduled to work fewer than 20 hours per week

Termination of a 403(b) plan possible

EPCRS (Revenue Procedures 2008-50 and 2013-12)

Expanded correction program now available to address errors in

plan administration as well as plan document

403(b) vs. 401(k) - Basic differences

Comparison of 403(b) and 401(k) plans

Availability and general requirements

Eligibility and entry requirements

Plan design considerations

Contribution limits

Testing requirements

Reporting requirements

Disclosure requirements

4

403(b) vs. 401(k) - Basic differences (cont.)

Availability

ERISA 403(b) Plan

401(k) Plan

Who can

sponsor?

Section 501(c)(3) tax-

exempt organization,

educational institution,

and electing church

employer

Any business entity,

including tax-exempt

organizations,

corporations, partnerships,

and sole proprietors

Note: A governmental

entity is ineligible from

sponsoring a 401(k) unless

the plan is grandfathered.


General Requirements

ERISA 403(b) Plan

401(k) Plan

Funding vehicle

and

investment

options

Annuity contract that

satisfies Section

403(b)(1)) or mutual

funds held in a Section

403(b)(7) custodial

account

Group annuity contract or

trust which may hold

investments such as

mutual funds,

nonregistered separate

accounts, stocks, bonds,

and employer securities.

Written plan

document

Required

Required

5


Eligibility Requirements

ERISA 403(b) Plan

401(k) Plan

Eligible Employee

Salary deferrals: “universally

available”; exclusions include:

o Employees normally

scheduled <20 hours/week

o Student employees

o Nonresident aliens without

U.S. source income

o Employees covered under

another 401(k), 403(b), or

govt. 457(b) plan

o Those with deferrals < $200

Employer contributions:

o Exclusions allowed

provided Section 410(b)

minimum coverage passed

All contributions available to

all employees; exclusions

include:

Statutory exclusions:

o Nonresident aliens without

US source income

o Collectively bargained

employees

Non-statutory exclusions:

o Exclusions allowed

provided Section 410(b)

minimum coverage test

passed


Entry Requirements

ERISA 403(b) Plan

401(k) Plan

Entry

Requirements

Salary deferrals:

No age or service

requirement allowed


Age and/or Service

requirement allowed

Maximum age 21

1 year of service; 2

years if full and

immediate vesting

All contributions:

Age and/or Service

requirement allowed:

Maximum age 21

Deferrals: 1 year of

service

Employer Contributions:

1 year of service; 2

years if full and

immediate vesting

6


Plan Design Considerations

ERISA 403(b) Plan

401(k) Plan

Safe Harbor

Design

Allowed – deemed to pass

ACP test

Allowed – deemed to pass

ADP and/or ACP test

Vesting

Salary deferrals:

Full and immediate


maximum 3-year cliff or

6-year graded schedule

Salary deferrals:

Full and immediate


maximum 3-year cliff or

6-year graded schedule

Plan to Plan

Transfers

90-24 transfers replaced

with contract exchanges and

plan to plan transfers

Transfers are allowed

between 401(k) plans in

certain circumstances


Contribution Limits

ERISA 403(b) Plan

401(k) Plan

Contribution

Limits and

Aggregation

415 limit – lesser of 415

Compensation or 415 limit as

indexed; 2013 limit is $51,000

Includes employee and

employer contributions

Excludes: Age 50 catch-up

contributions. Note: The 15-

year special catch-up is

included in 415 limit.

415 limit – lesser of 415

Compensation or 415 limit as

indexed; 2013 limit is $51,000

Includes employee and

employer contributions

Excludes: Age 50 catch-up

contributions

Please note: Generally, the 415 limit applies individually to each plan (“control” exception). In

2013, an employee could receive $51,000 in each type of plan. The 402(g) limit requires

aggregation of the deferrals made to all 403(b) and 401(k) plans for the calendar year. For 2013,

an individual’s limit to defer in both plans is $17,500, exclusive of catch-up contributions. The

457(b) top hat plan has its own limit and such contributions are excluded in these plans limits.

7


Contribution Limits (cont.)

ERISA 403(b) Plan

401(k) Plan

Roth

Contributions

Allowed

Allowed

Catch-up

Contributions

Age 50+ catch-up allowed

15-year catch-up allowed

for certain employers and

specific service and

contribution requirements.

Employees who qualify may

contribute up to $3,000

above the applicable 402(g)

limit.

Age 50+ catch-up allowed


Testing Requirements

ERISA 403(b) Plan 401(k) Plan

Nondiscrimination

Testing

Salary Deferrals

Universal Availability

Requirement

No formal test

Employer Match

ACP Test

410(b) Minimum Coverage

Test

Employer Non-elective

401(a)(4) General Test


Test

Note: Benefit, Right or

Feature Test may apply

Salary Deferrals

ADP Test


Employer Match

ACP Test


Test

Employer Non-elective

401(a)(4) General Test


Test

Note: Benefit, Right or

Feature Test may apply

8

Testing Requirements (cont.)

ERISA 403(b) Plan 401(k) Plan

Top Heavy

Not applicable

Applicable unless plan

meets exception

available for 401(k) safe

harbor plan design



Reporting Requirements

ERISA 403(b) Plan

401(k) Plan

Form 5500

Required

Required

Audit Requirement

Required if plan has

greater than 100 lives

Required if plan has

greater than 100 lives

9


Disclosure Requirements

ERISA 403(b) Plan

401(k) Plan

Participant

Disclosure and

Notice Requirements

• SPD

• SMM

• SAR

• Benefit statements

• Fee disclosure

• Special tax notice

• Universal availability

notice

The following may apply:

• Safe harbor notice

• Automatic enrollment

• QDIA

• Blackout/SOX notice

Same, except Universal

Availability does not

apply).

In addition, employer

stock diversification

may apply.

401(k) and 403(b) plans – Key differences

Some of the most significant differences between 403(b)

and 401(k) plans are:

Plan eligibility

Universal Availability / ADP testing

Top-heavy

10

Adopt a 401(k) rather than a 403(b)?

Why would an eligible organization adopt a 401(k) plan

rather than a 403(b) plan?

May not understand or may assume 401(k) is better

Eligibility or possible exclusion of certain employee

classes/groups for salary deferral purposes

Universal Availability requirement vs. ADP

o May be able to project results & determine which is better

Different investment options or ability to utilize certain types of

investments

Maintain multiple plans

• Is it advantageous to maintain a 403(b) and a 401(k) or

401(a) plan?

May allow an employer to “double up” contributions for some groups

Additional Considerations

A number of nonprofit employers still have more than one plan

403(b) plan typically will accept salary deferrals and 401(a) plan will

accept employer non-elective contributions

401(a) plan may even accept the employer match associated with the

deferrals to the 403(b) plan

A 403(b) plan may be terminated but cannot be merged with a

401(k) or 401(a) plan

May acquire an entity that has plan (merge, terminate, freeze?)

Paternalistic retirement “leakage” concerns for terminated plans

11

Questions?

Thank you.

403(b) vs. 401(k) - Plan Design Considerations for Tax-Exempt

Organizations

Rod Stortenbecker, CPC, APA, FLMI

Senior Consultant

Lincoln Financial Group

E-mail: [email protected]

Documents

The State of My Service Agreement Tuesday, April 30, 2013 · 2005 provides that an entity manager of a tax-exempt organization may be subject to an excise tax on prohibited tax shelter