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Newsletter
September
2003 Volume
20 - Number 3
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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:
Underfunded Pension
Plans: Return of Quarterly Contributions - Many defined benefit plans
that had been fully funded in prior years will now be subject to the
quarterly contribution rules.
New Cross-Testing
Minimum Gateway Contribution Requirements -
Beginning in 2002, additional requirements must be met by any plan that
relies on cross-testing to pass non-discrimination requirements.
Fiduciary Liability And ERISA 404(C) - ERISA Section 404(c) is
an optional provision that provides that a plan fiduciary may be relieved of
fiduciary liability for investment decisions made by the plan participants if
certain steps are taken.
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UNDERFUNDED PENSION PLANS: RETURN OF QUARTERLY CONTRIBUTIONS With our current economic climate and the stock market’s decline, many defined benefit plans that had been fully funded in prior years are now underfunded. Many of these plans will now be subject to the quarterly contribution rules. Quarterly Contribution
Requirements. Quarterly
contributions are required for defined benefit pension plans that have a
current liability funded percentage for the preceding plan year of less than
100%. Quarterly Contribution
Amount: The
amount of the quarterly contribution is 25% of the lesser of: (1) 90% of the
current plan year minimum required contribution, or (2) 100% of the prior
year minimum required contribution. Most
plans do not have their actuarial valuation completed by the time the first
quarterly installment is due. That means that only item (2) above can be used
to determine the quarterly requirements until the actuarial valuation is
completed. Once the valuation is completed, the quarterly requirement will
either remain the same or decrease if item (1) above is less than item (2). Quarterly Contribution
Timing. Required
quarterly installments are due 15 days after the end of each quarter. For
example, a calendar year plan will be required to make the first quarterly
payment on April 15 of such year, and the second, third, and fourth quarterly
payments will be due by July 15, October 15, and the following January 15,
respectively. Late Quarterly Payment. Plans
that pay required quarterly contributions late must include an interest
assessment in their funding standard account, which, although deductible,
increases the overall contribution necessary to avoid a funding deficiency. Quarterly
contributions add one more wrinkle to the administration of a defined benefit
plan. A wrinkle that many more plans
will have to endure in the current economic environment.
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CROSS-TESTING
MINIMUM GATEWAY CONTRIBUTION REQUIREMENTS
New regulations
effecting cross-tested plans became effective in 2002. These regulations mandated that additional
requirements be met by any plan that relied on cross-testing to pass non-discrimination
requirements. Cross-testing can be
used to demonstrate that a plan’s allocation of contributions does not
discriminate in favor of the highly compensated employees (HCE). Cross-tested plans have become very
popular since their introduction in the 1990s and one of the most common
cross-tested plan designs involves employee classifications, which allows the
employer to tailor plan contributions to more effectively meet retirement
goals. Under the new regulations, most plans may use cross
testing to test for nondiscrimination only if the plan satisfies the “minimum
gateway allocation” requirements. Under the gateway requirement, all
non-highly compensated employees (NHCE) who receive an employer contribution (other than a 401k match) must receive a
minimum gateway allocation. The minimum gateway allocation for NHCE is the
lesser of: ·
5% of compensation, or ·
One-third of the highest allocation rate for any HCE. For example, if the owner receives a $40,000 profit
sharing contribution (which is 20% of $200,000 in compensation), then the
NHCEs must receive at least 5% of pay. “Who
must receive a minimum gateway allocation?” ·
Non top-heavy profit sharing plans – all eligible participants
that work at least 1,000 hours and are employed at year-end. ·
Top-heavy profit sharing plans – all eligible participants
employed at year-end, regardless of hours worked. A top-heavy plan is a plan in which 60% of the assets belong to
the owners of the employer/ plan sponsor.
The 3% of pay top-heavy minimum contribution can help satisfy the
minimum gateway allocation. ·
Safe-harbor 401(k) plans – all participants, that meet the
statutory maximum eligibility requirements of 1-year and age 21, must meet
the minimum contribution gateway regardless of year-end employment or hours
worked. However, if the plan benefits
employees who do not meet the statutory maximum eligibility requirements,
then the participants with less than 1-year of service and age 21, do not
have to meet the minimum gateway allocation. Plans that meet the minimum gateway allocation must still
meet the general non-discrimination requirements of Section 401(a)(4). The new regulations have added a layer to
existing cross-testing regulations.
This extra layer creates additional administration and plan design
issues and it is important that the plan document have provisions that allow
the plan to satisfy all of the gateway requirements. If a cross-tested profit sharing plan has to give NHCE
more than the 5% of pay minimum contribution gateway, the employer should
consider if a safe-harbor 401(k) provision could reduce the employee cost. |
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FIDUCIARY LIABILITY AND ERISA 404(c)
The Employee
Retirement Income Security Act of 1974 (ERISA) is a federal law that
regulates retirement plans. It lays
out the roles and responsibilities of retirement plan fiduciaries. ERISA
Section 404(c) is an optional provision that provides that a plan fiduciary
may be relieved of fiduciary liability for investment decisions made by the
plan participants if certain steps are taken. Some
fiduciaries may be under the mistaken assumption that their plan complies
with 404(c) simply because they allow participants to direct investment of
the retirement account. However, this
is not the case unless they have taken the following steps to comply with
404(c): ·
Notify participants that the plan complies with 404(c) and
that the fiduciaries may be relieved of fiduciary liability for losses that
result from their investment directions. ·
Permits participants to exercise control over the
investment of their accounts, and allows them to give instructions about each
core investment alternative at least once in any 3 month period. ·
Offers a broad range of investment alternatives (at least
three diversified core investment categories). ·
Provides participants the opportunity to make independent
investment choices. ·
Supplies participants with information to make informed
investment decisions. If these
basic 404(c) requirements and others are met, participants likely cannot hold
the plan fiduciaries liable for disappointing returns on their investments. The fiduciary is still
responsible for the selection of the investment alternatives, and for
monitoring them over time. |
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