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Newsletter
March
2008 Volume
25 - Number 1
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This newsletter is addressed to our clients, their attorneys,
accountants and other professional advisors. Citations may be included for those
who want to refer directly to the source material. IN THIS ISSUE:
A
NEW Q&A
PERTAINING TO PAYMENT OF PLAN EXPENSES - There are often questions regarding payment of qualified plan
expenses. The following are some of the most frequently asked. This newsletter can also be
viewed online at www.prplans.com. |
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A NEW SAFE HARBOR RULE FOR THE TIMELY DEPOSIT OF
EMPLOYEE CONTRIBUTIONS On February 29,
2008, the Department of Labor (DOL) issued proposed regulations establishing
a safe harbor for the timely deposit of employee contributions, including
401(k) contributions, for retirement plans with fewer than 100 participants. In 1988, the DOL
published regulations requiring that amounts which have been withheld from a
participant’s wages for contribution to a pension plan must be deposited on
the earliest date on which such amounts could reasonably be segregated from
the employer’s general assets, but, in no event, more than 90 days from the
date on which such amounts are received or withheld by an employer. These regulations
were amended in 1996 to require plan sponsors to deposit employee contributions
and participant loan payments into a plan as of the earliest date on which
such contributions could reasonably be segregated from the employer’s assets,
but in no event to exceed the 15th business day of the month
following the month in which the participants’ contributions are received or
withheld by the employer. Many plan
sponsors ignored the earliest date portion of the amended regulation and
interpreted this revision to mean that the employer had until the 15th
day of the following month to deposit employee deferrals into a plan.
However, the DOL is mainly concerned with the requirement that the funds must
be deposited as soon as they could reasonably be segregated from the
employer’s general assets. One way in which the DOL determined what constituted
the earliest date on which the funds could reasonably be segregated from an
employer’s general assets was to look at the shortest period of time in which
such deferrals had been deposited in the past and apply that as the standard
for the timely deposit of all deferrals. If the DOL determined that this
requirement was not met, then the employer was not in compliance with the
regulations and could be required not only to make up lost earnings on the
funds, but also to pay excise taxes on the amount involved. The new safe
harbor rule is intended to provide plan sponsors with a clear understanding
of what will constitute timely compliance with deposit requirements. Under
the proposed regulations, pension plans with fewer than 100 participants as
of the beginning of the plan year will be treated as meeting the requirements
if contributions are deposited no later than the 7th business day
following the day on which the amounts would have been payable to the
participant in cash or following the day on which such amount is received by
the employer, as in the case of a participant loan payment given to the
employer. Deposits satisfying the requirements of the proposed regulations
will be treated as timely even if such contributions could have been
segregated from employer assets on an earlier date. Participant
contributions will be considered to be deposited when placed in an account of
the plan without regard to whether the contributed amounts have been
allocated to specific participants or investments of such participants. Eligibility for
the safe harbor rule is based strictly on the 100 participant threshold as of
the beginning of the plan year and not on whether the plan is a large
plan/small plan filer of the Form 5500 under ERISA Section 104(a), The 80-120
participant rule used by some plans to determine Form 5500 filing status is
not applicable. The safe harbor
regulations will become effective on the date of publication of the final
regulations in the Federal Register. However, the DOL states that in the interim
it will not consider that there has been a violation of the Employee
Retirement Income Security Act if the plan satisfies the proposed safe
harbor. The DOL believes
that the adoption of the “7 business day” safe harbor rule would allow most
employers with small plans to take advantage of the safe harbor and benefit
from the certainty of compliance afforded by the proposed regulations. |
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Q&A
PERTAINING TO PAYMENT OF PLAN EXPENSES In general, expenses related to “settlor”
functions performed by a plan sponsor (such as decisions to establish, amend
or terminate a plan) are not considered to be part of the reasonable expenses
of administering an ERISA Plan. As a result, these expenses may not be paid
from plan assets. However, expenses for administrative activities (such as
the preparation of plan amendments required by law changes and the processing
of benefit transactions) incurred in the performance of the plan fiduciary’s
duties are considered reasonable plan administrative expenses. As such, they
may be paid from plan assets. This manner of classifying plan sponsor functions concerning plan
expenses often raises questions regarding payment of qualified plan expenses.
This brief Q&A assumes the plan document is worded such that expenses may
be paid from plan assets. The following are
some of the most frequently asked questions: Q: Can the fees
for an IRS audit of the plan be paid from the plan assets? A: No. An IRS audit is a tax audit performed
to verify or disallow employer/sponsor deductions and benefits the plan
sponsor as opposed to the plan. Therefore the sponsor must pay for such audit
expenses. However, if an independent audit of the plan is required, fees for
the independent CPA audit may be paid by the plan. Q: Can a plan pay
administration expenses? A: Payment of
these expenses must be in the interest of plan participants and
beneficiaries. Generally the plan document will contain provisions which deal
with the issue of paying plan expenses. If, however, the document is silent
on this issue, the plan may pay reasonable administrative expenses. If the plan
requires the employer to pay expenses, but the employer has the right to
amend the document, the employer may amend the plan prospectively to provide
that allowable expenses may be paid by the plan. The employer may not use
plan assets to pay for such an amendment. Q: May
forfeitures be used to pay administrative expenses
after plan termination? A: Regulations do
permit this. However, some plans have a provision that requires allocation
and vesting of all non-vested funds upon plan termination. Therefore, there
may not be any unallocated forfeitures available after plan termination. Q: Can a plan
charge participants for the cost of self directed accounts? A: Yes, however,
the charge must be reasonable. If the charge would be considered excessive,
there could be a discrimination issue. Q: Can a plan pay
expenses for the termination of a plan? A: The decision
to terminate a plan is generally for the benefit of the employer and involves
services for which an employer may reasonably be expected to bear the cost in
the normal course of its business or operations. However actions taken in
connection with implementing the termination of a plan may be paid by the
plan if the document so provides. These would include filing annual reports,
notifying participants and beneficiaries of the termination, calculating
accrued benefits, preparing benefit statements and amending the plan to
effect an orderly termination that benefits participants and beneficiaries. Q: May a plan pay
expenses related directly to a participant from the participant’s account? A: Yes,
investment management fees and advice, commissions, self-direction fees,
section 404(c) disclosure, and reasonable expenses for distributions, loans
and QDRO status. Q: May the plan
pay the user fee for an application for self-correction under the Employee
Plans Compliance Resolution System (EPCRS)? A: No Q: May the plan
pay plan related government imposed penalties and fines? A: No Q: May the plan
pay Pension Benefit Guarantee Corporation (PBGC) premiums? A: Yes |
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