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DOL sample 401(k) plan fee disclosure form  (11p .pdf)

Recent IRS revenue rulings & NEWS regarding 401(k) plan sponsors & service providers

  1. NEWS - 04/05/05 DOL Expands Voluntary Fiduciary Correction Program:  Effective immediately, the DOL is making available a voluntary fiduciary correction program (VFCP) that is generally easier to use and covers an expanded variety of transactions. Like  the earlier VFCP, ERs can correct fiduciary errors without risk of court action or penalties under the ERISA. But the newly revised program lets ERs provide summary documentation (and not detailed information and copies of accounting and payroll records earlier required) when correcting $50,000 or less in delinquent participant contributions or loan repayments. It also extends the streamlined procedure to corrections involving larger amounts when the ER takes action within 180 days of the time it received the funds in question. This is the first time, DOL has included a model application form with the new VFCP and has placed an Online Calculator on its Web site (www.dol.gov/ebsa), to help ERs to make program calculations. Applicants still must fully correct any violations, restore to the plan any losses or profits with interest, and distribute any supplemental benefits owed to eligible participants and beneficiaries. A "no action" letter is given to plan officials who properly correct violations.
  2. News from the Nov04 IRS Employee Plans Newsletter Special Edition contains information regarding certain schemes which use employees with short periods of service to insure that most, or all, of the benefits paid under a retirement plan go to the ER's HCE's plus information on vacancies at the Advisory Committee on Tax Exempt and Government Entities (ACT).
  3. News from the IRS, a Proposal to Push Phased Retirement - In response to a 2002 inquiry (IRS Notice 2002-43, July 8, 2002), the IRS on Nov. 9 proposed rules that, when finalized, would let employers launch "phased retirement" arrangements. Under "phased retirement," employees who are at or near eligibility for retirement could elect a reduced schedule or workload, thereby providing a smoother transition from full-time employment to retirement. The employer would benefit by retaining the services of an experienced employee and the employee could continue active employment with greater flexibility and time away from work. According to the proposed rules, an employee in a phased retirement program would have a dual status, under which the employee would be treated as retired to the extent of the reduction in hours and treated as working to the extent of the employee's continued work with the employer. Employer and employee would have to enter into an agreement, in good faith, under which the employee would reduce by 20 percent or more the number of hours the employee works during the phased retirement period. The proposed regulations generally require that all early retirement benefits, retirement-type subsidies and optional forms of benefit that would be available upon full retirement be available with respect to the phased retirement accrued benefit. However, the proposed regulations would not permit payment to be made in the form of a single-sum distribution (or other eligible rollover distribution) in order to prevent the premature distribution of retirement benefits. Also, they do not allow key employees to participate in phased retirement. Phased retirement benefits could not be paid before an employee attains age 59 1/2 under the proposal. Profit-sharing and 401(k) plans could either provide for the same phased retirement rules that are proposed in these regulations or provide for other partial or full in-service distributions to be available after attainment of age 59 1/2. However, eligible governmental plans under Code Section 457(b) could not provide for payments to be made before the earlier of severance from employment or attainment of age 70 1/2. The rules would require periodic testing to ensure that employees in phased retirement are in fact working at the reduced schedule, as expected. Thus, unless an exception applies, a plan would have to annually compare the number of hours actually worked by an employee during a testing period and the number of hours the employee was reasonably expected to work. If the actual hours worked prove to be materially greater than the number expected, the employee's phased retirement benefit would be reduced prospectively. Such a reduction would be required if the employee's work hours exceed either 133-1/3 percent of the anticipated work schedule or 90 percent of a full-time schedule. This annual comparison would not be required after the employee is within three months of attaining normal retirement age or if the employee's compensation does not exceed pay at an ordinary full-time rate for the employee's expected work schedule. Further, no such testing would apply for the first year of an employee's phased retirement or if the employee entered into an agreement to fully retire within 2 years. The proposed rules address only tax issues; they do not include any rules relating to health coverage nor address any potential age discrimination issues, other than through the requirement that participation in a phased retirement program be voluntary. Comments on the proposal are due to the IRS by Feb. 8, 2005.
  4. DOL information about Your Fiduciary Responsibilities (16 page .dpf) and specifically related to Mutual Funds (2 page .dpf).

  5. The DOL Employee Benefits Security Administrations (EBSA) released an ERISA Reporting Guide to assist employers, plan sponsors and service providers in meeting their reporting and disclosure obligations under ERISA DOL published news release 03-775(.pdf) Download this EBSA ERISA guide (19 page .pdf) or call (866)444-3272.

  6. 04/17/04 NEWS from the IRS on design & administration of automatic enrollment programs. Per IRS Information Letter, 2004 TNT 71-31 that provides informal guidance an update on Revenue Ruling 2000-8 where the IRS approved a program for automatic enrollment or negative elections where the plan imposed a 3% automatic compensation reduction on all eligible employees and provided appropriate notice to participants at initial eligibility & annually & invests corresponding deferrals in a balanced fund till or unless a participant elects differently & permits changes to comp reduction, any time.    ---   The IRS suggests:

    • there is no safe harbor auto comp reduction %; a program's % may be higher or lower than the 3% specified in Revenue Ruling 2000-8;

    • auto comp reduction % may increase or change over time pursuant to a specified schedule;

    • the auto comp % reduction, or any % increases, may apply in whole or in part to one or more future increases in or supplements to comp (i.e. raises, bonuses, etc.), or may be conditioned on taking effect or scheduled to take effect on any time comp increases or supplements;

    • initial & annual notices for auto enrollment must contain a clear description about current & future auto comp reductions

    • automatic comp reduction %’s need not be tied to the elective deferral %’s matched by ER and

    • all applicable nondiscrimination limits i.e., ADP & the annual limits [402(g) & 415] apply to all deferrals, auto + voluntary

    • This cannot be relied on for an audit & default investments must be scrutinized to ensure it is appropriate from a fiduciary standpoint. 

  7. 1/30/04 NEWS - Rollover accounts now free from some distribution restrictions, if accounted for separately as per IRS Rev. Rul. 2004-12 (1/30/04) è www.irs.gov/pub/irs-drop/rr-04-12.pdf

  8. [Rev. Rul. 2004-10 (Jan. 29, 2004)] addresses whether a defined contribution plan can charge the accounts of former employees for a pro rata share of the plan’s reasonable administrative expenses when the accounts of current employees are not charged for those expenses è http://www.irs.gov/pub/irs-drop/rr-04-10.pdf
  9. [Rev. Rul. 2004-11 (Jan. 29, 2004)] provides guidance on the special rule for acquisitions and dispositions under the Code’s minimum coverage requirements è http://www.irs.gov/pub/irs-drop/rr-04-11.pdf
  10. [Rev. Rul. 2004-12 (Jan. 29, 2004)] addresses whether distributions of amounts attributable to rollover contributions are subject to the restrictions on permissible timing that apply to distributions of other amounts from a plan è http://www.irs.gov/pub/irs-drop/rr-04-12.pdf
  11. [Rev. Rul. 2004-13 (Jan. 29, 2004)] addresses situations in which a safe harbor plan will be subject to the top-heavy rules è http://www.irs.gov/pub/irs-drop/rr-04-13.pdf
  12. Notice of Blackout Periods DOL 01/24/04 Final DOL Rules & SAMPLE Blackout Notice

  13. [Private Letter Ruling 200404050 (Oct. 20, 2003)] states MEV's (Market Value Equalizer) may not be a plan contribution. Many insurance companies offer MVEs to help sell plans by grossing-up participants' accounts for annuity early termination charges.   NOTE: A private letter ruling applies only to that specific taxpayer and may not be used or cited as precedent but it may offer insight into the IRS’s analytical approach to that specific taxpayers question è www.irs.gov/pub/irs-wd/0404050.pdf  

Rev. Rul. 2004-10 states that 401(k) plans may charge pro rata share of expenses to accounts of former employees (but not charge the accounts of active employees) without creating a “significant detriment”! This brings the IRS into line with previous guidance from the DOL in Field Assistance Bulletin (FAB) 2003-3, which provided that charging former employees’ accounts for reasonable expenses on either a pro rata or per capita basis would not violate ERISA  Regulations under Code Section 411(a)(11) provide that a participant’s consent to a distribution is not valid if the plan imposes a significant detriment on the participant for not consenting to a distribution. In its examination guidelines, the IRS has stated that a participant who does not take a distribution upon terminating employment cannot be treated less favorably than an active participant without violating this rule and generally meant that plan expenses may not be imposed on terminated employees if they are not also imposed on active employees. 2004-10 also states that “an allocation of administrative expenses of a defined contribution plan to the individual account of a participant who does not consent to a distribution is not a significant detriment if that allocation is reasonable and otherwise satisfies [ERISA’s] requirements.” And states that charging such expenses on a pro rata or “another reasonable basis” to the accounts of former employees does not impose a significant detriment under Code Section 411(a)(11) because analogous fees are imposed in the marketplace for a comparable investment outside a plan, such as an IRA but cautions, that not every allocation method is reasonable, i.e., a pro rata allocation of the expenses of active employees to all accounts (including the accounts of former employees), while allocating the expenses of the former employees only to the former employees’ accounts, would not be reasonable. The allocation method must not discriminate in favor of the HCEs.

[Priv. Ltr. Rul. 200404050 (Oct. 20, 2003)] states that a Gross-up to participants' accounts for annuity early termination charge is not a plan contribution. The “Market Value Equalizer” (MVE) that some insurance companies offer to induce plans to switch group annuity contracts is affected. Often a plan with a group annuity contract is faced with paying an early termination charge that is deducted from participants’ accounts when the plan decides to switch to another provider’s group annuity contract. As an inducement to make the switch, some insurance companies offer an MVE feature, which essentially is a gross-up of participants’ accounts in an amount equal to the early termination charge deducted by the previous provider. The new provider then recovers the gross-up amount (i.e., the MVE) by amortizing it over a period of time and adding the amortized amount to the contract’s normal investment charges. The IRS focused on the fact that the MVE would not be a permanent addition to the participants’ accounts & noted that the early termination charge of the previous provider would be paid either from amounts previously contributed to the plan, which were subject to the Code’s contribution limits when paid to the plan, or from earnings on those contributions, which are not subject to the Code’s contribution limits. As a substitute for the early termination charge, the MVE should be treated the same way—i.e., as previously subject to the Code’s contribution limits or not subject to these limits & concluded that the MVE was not a plan contribution and as a result, would not be subject to Code Sections 404 (deduction limitation), 4972 (excise tax on nondeductible contributions), 401(k)(3) (ADP testing), 401(m) (ACP testing), 402(g)(3)(A) (dollar limit on elective deferrals), or 4979 (excise tax on excess contributions) & the MVE would not adversely affect the plan’s qualified status under Code Sections 401(a)(4) (nondiscrimination) or 415 (limit on annual additions) & would not result in taxable income to participants when paid to the plan. Caution A private letter ruling is directed only to the taxpayer requesting it and may not be used or cited as precedent but it offers insight into the IRS’s analytical approach.

1/30/04 NEWS - Rollover accounts now free from some distribution restrictions, if accounted for separately as per IRS Rev. Rul. 2004-12 (1/30/04) www.irs.gov/pub/irs-drop/rr-04-12.pdf  The IRS addresses the issue of what distribution restrictions apply to amounts attributable to rollover contributions. After highlighting the rollover rules contained in the Code, the IRS holds that if an eligible retirement plan separately accounts for amounts attributable to rollover contributions, then distributions of the rollover funds will be free from plan limits on the timing and permissibility of distributions, with three exceptions. The exceptions are that all distributions, including distributions attributable to a participant's rollover account, will remain subject to (1) the survivor annuity requirements of Code Sections 401(a) and 417; (2) the minimum required distribution rules of Code Section 401(a)(9); and (3) the 10% early distribution penalty under Code Section 72(t). (Note that whether the 10% early distribution penalty applies depends on the type of plan making the distribution--for example, amounts that are not subject to the penalty if distributed from an IRA may be subject to it when distributed from a 401(k) plan.) Finally, the IRS clarifies that this ruling applies to rollover contributions and not, for example, to amounts that a plan receives through a transfer of plan assets under Code Section 414(l). Distributions of elective deferrals from a 401(k) plan may only be permitted upon certain events--reaching age 59-1/2, hardship, death, disability or other severance from employment—although a plan may be more restrictive. Revenue Ruling 2004-12 expressly provides that if a 401(k) plan separately accounts for rollover contributions, the rollover amounts may be distributed at any time, regardless of whether the participant has experienced one of the plan's triggering events. Note that the IRS describes what a plan may allow but does not require it. In other words, it would be perfectly acceptable for a 401(k) plan to provide that a distribution from rollover funds will not be allowed unless one of the plan's triggering events has occurred. It is important to confirm that a plan's distribution provisions are consistent with its distribution forms and procedures. And the plan's SPD should clearly explain any restrictions that apply to the distribution of rollover accounts. To avoid misunderstanding, distribution restrictions applicable to rollover accounts should also be explained to participants when they initiate rollovers into the plan.

DOL Clarifies Pension Fund Duties for Dealing with Mutual Funds Seeking to aid pension plan fiduciaries in dealing with the recently revealed illegal or otherwise questionable practices of various mutual funds, the Labor Department's Assistant Secretary for Employee Benefits Administration, Ann L. Combs issued a guidance statement on Feb. 17. "In cases where specific funds have been identified as under investigation by government agencies, fiduciaries should consider the nature of the alleged abuses, the potential economic impact of those abuses on the plan's investments, the steps taken by the fund to limit the potential for such abuses in the future, and any remedial action taken or contemplated to make investors whole." In deciding whether to participate in settlements or lawsuits involving mutual fund misconduct, "weigh the costs to the plan against the likelihood and amount of potential recoveries," the guidance suggests. In general, it reminds plan fiduciaries that they must act prudently and that this means using a "deliberative process" and documenting the process and decisions made. Also, a plan may charge redemption fees or place limits on the frequency of trading by its own participants; this would not, in and of itself, negate protection enjoyed by plan fiduciaries from the use of participant-directed accounts under Section 404(c), the statement maintains. However, its warns that use of trading restrictions not contemplated under terms of the plan raises issues concerning the application of section 404(c) and imposition of a "blackout period" requiring advance notice to affected participants and beneficiaries.

Plan sponsors, investment advisors, and providers must be careful to avoid problems with nondiscrimination & prohibited transaction rules in the Internal Revenue Code and in Title I of ERISA. Investment advice & investment management is covered by ERISA’s definition of fiduciary investment advice:

  1. Investment advice or guidance provided to participants where they decide to accept the advice or not & are responsible for taking action

  2. Investment management, where an account is actively managed for the participant, e.g. the participant selects a manager to make investment decisions.

Charges or minimum balances may violate nondiscrimination requirements of section 401(a)(4) of the IRC & might become be skewed to & discriminate in favor of HCEs (violating 401(a)(4). Plans must make nondiscriminatory Benefits, Rights, and Features (BRFs) available. BRFs include all optional forms of benefits, ancillary benefits, and other rights and features available to any employee under the plan to include “any right or feature applicable to employees under the plan.” Investment advice services would be an “other right or feature,” subject to the qualification requirements for nondiscrimination. So these should be both currently and effectively available to employees. Where the plan sponsor designates an investment advisor who imposes minimum account balances or significant fees, and does not expressly allow the use of other investment advisors by participants with smaller balances or advisors with lower fees, it effectively imposes plan restrictions.

Plans with fewer than 100 participants, can be exempt from ERISA’s audit requirement for the Form 5500 filing if the plan must satisfies additional requirements for an audit waiver. 

A plan administrator must engage an independent qualified public accountant to audit the plan’s records and attach a copy of the auditor’s opinion to the Form 5500. The audit requirement may be waived for a small plan with fewer than 100 participants at the beginning of the plan year if it satisfies certain bonding and disclosure requirements.

  • Bonding. If fewer than 95% of the plan’s assets are “qualifying plan assets” at the beginning of the plan year, then the plan may be required to maintain a higher ERISA bond than generally is required. For such plans, any person handling non-qualifying plan assets must be bonded in an amount that is no less than the value of the non-qualifying plan assets. “Qualifying plan assets” include assets held by a regulated financial institution, such as a bank or similar financial institution, an insurance company, a registered broker-dealer, or an organization authorized to act as an IRA trustee. Qualifying plan assets also include qualifying employer securities, most participant plan loans, shares issued by an investment company (e.g., mutual fund shares), investment and annuity contracts issued by insurers, and assets in a participant’s account over which the participant has the opportunity to exercise control and with respect to which the participant is furnished, at least annually, with a statement from a regulated financial institution describing the assets and amounts held or issued. <<>> For example, assume that a 401(k) plan has 75 participants and total assets of $600,000 as of the beginning of the plan year--$100,000 (or 17%) of which are non-qualifying plan assets. In order for the plan to qualify for the audit waiver, anyone who handles the non-qualifying plan assets must be bonded in an amount of at least $100,000.

  • SAR Disclosures. The plan’s summary annual report (SAR) must include the following additional information: (1) the name of each regulated financial institution holding or issuing qualifying plan assets and the amount held by the institution as of the end of the plan year (this requirement does not apply to assets in a participant’s account over which the participant has the opportunity to exercise control and with respect to which the participant is furnished, at least annually, with a statement from the institution describing the assets and the amount held or issued or to certain other qualifying plan assets); (2) the name of the surety company issuing the bond if more than 5% of the plan’s assets are non-qualifying plan assets; (3) a notice that participants and beneficiaries may, upon request and without charge, examine or receive copies of statements received from the regulated financial institutions that describe the qualifying plan assets held by the institutions or evidence of the required bond; and (4) a notice that participants and beneficiaries should contact the EBSA Regional Office if they are unable to examine or obtain copies of the regulated financial institution statements or evidence of the required bond.

  • Other Disclosures. In response to a request from a participant or beneficiary, the plan administrator must, without charge, make available for examination or furnish copies of the regulated financial institution statements and evidence of any required bond - please view the DOL website FAQs http://www.dol.gov/ebsa/faqs/faq_auditwaiver.html but this website’s sample language for the SAR disclosure MAY NOT satisfy the regulation’s requirement to name the surety company issuing the bond when that disclosure is required.

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