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The Loren D. Stark Company, Inc. functions as a Third Party Contract Plan Administrator (TPA) for many different types of Tax Qualified Retirement Plans [i.e., Defined Benefit (DB); Profit Sharing (PSP); Employee Stock Ownership (ESOP); Standard, Simple, and Safe Harbor 401(k); etc.]. Although these different types of Plans have significant differences, many administrative issues are substantially the same. Scroll down or click on one of the following items for Administrative Guidance: PLAN DISTRIBUTIONS UPON Termination of Employment ADDITIONAL INFORMATION ABOUT DISTRIBUTIONS Payments that can and cannot be rolled over EMPLOYEE SALARY DEFERRALS [401(k)] PLAN DISTRIBUTIONS UPON TERMINATION OF EMPLOYMENT In the event an employee-participant separates service from the Plan Sponsor for reasons other than Death, Disability or Retirement, the following factors must be considered: Time of Distribution. Although rare, some plans do not permit distributions until the normal Retirement Date. Generally, a plan that determines the participant's account value as of some date other then daily (i.e., annually, quarterly, semi-annually, etc.) referred to as a balance forward plan may permit distributions to terminated employees either as of the valuation date proceeding termination of employment or as of a valuation date subsequent to termination of employment such as a valuation date after a one year Break-in-Service. A daily valued plan, of course, may permit a plan distribution at any time. However, it is important to keep in mind that a participant who has terminated employment with an account balance of $5,000 or more shall not be required to withdraw his account from the plan. The timing of a withdrawal can be important relative to the volatility of the account value, lack of suitable investments with available depositories, the inconvenience of processing the distributions, and so on. A terminated participant with an account of less than $5,000 may be required to withdraw his account. In the event such a participant does not complete the necessary Application for Plan Benefits, the plan may send the participant the vested portion of his account less the mandatory 20% withholding without any input from the participant. This distribution is referred to as a Cash Out. The Form of Benefit. The form of distribution is usually in a single sum (lump sum) although many plans provide for alternative methods of distribution. For example, defined benefit plan benefits are always expressed in terms of a monthly annuity commencing at the normal Retirement Date and, if a lump sum withdrawal is requested, the present value of the vested accrued benefit is not known until calculated using the interest rate and mortality table applicable at the time of computation. Substantially all other plans are defined contribution plans and the distributable amount is the market value on the determination date of distribution of the account to the extent vested. Procedure. Except in the case of a Cash Out, a distribution cannot occur until an Application for Plan Benefits has been processed. A form is available on this site or from your plan sponsor. The form must be processed by your TPA and approved by the Plan Administrator before submission to the depository. A terminated employee-participant will be frustrated if he starts this distribution procedure with unrealistic expectations. The valuation date and many other factors influence the process. Technology has not made the process paperless as of this writing. Disability. Disability is generally a full vesting event and it is predominately required to be total and permanent disability. The Plan Administrator usually will depend on the determination of the Social Security Administration for the participant's status. Under disability the distribution procedures are the same as termination of employment. Death. The participant's death is generally a full vesting event and a death certificate is the only necessary requirement. However, the death benefit from a plan is not controlled by the decedent's Will and is not subject to probate unless the participant's estate had been named as the beneficiary. Therefore, it is important that the participant completes and keeps current a beneficiary designation form. Such a form is available on this site or from the Plan Administrator. The participant's spouse must be named as the primary beneficiary or the spouse waives the right to be named the beneficiary. The participant may name his children as a group as the contingent beneficiary as follows: "My children, per stirpes." In the event the participant has a will which creates a trust for children, the trust should be named as the beneficiary as follows: "Name of person designated as Trustee, Trustee of the Trust created by my Last Will and Testament, but in the event I die without creating such a Trust, to my children per stirpes." We strongly advise consulting an attorney in these matters. Retirement. Retirement is Termination of Employment after attaining the conditions of retirement under the terms of the plan and is always a full vesting event. The distribution procedures are the same as termination of employment. Participant Loans. Participant Loans may not be available as a plan provision. If loans are available the maximum loan amount is 50% of the participant's account balance at the time of the loan or $50,000, if less. The loan payments must be made in equal principal and interest payments over a period not to exceed five (5) years, but may be longer if the loan proceeds are used to purchase the participant's principal residence. Frequently Asked Questions About Plan Loans Q1: I have a loan from my 401(k) plan. I am quitting my job. What happens to the loan? A1: This depends on your employer's policies. Your employer may require that you repay the loan entirely upon termination of employment, or within three (3) months of your termination. Failure to do so will cause the loan to go into default. This will then be treated as taxable income to you. You will be responsible for income taxes as well as any applicable penalties. Q2: Can I make payments on the loan by sending a check to my former employer? A2: Yes. However, this depends on the employer's policy. Some employers allow this, others do not. If your employer does allow this, you must remember to make the payments on time according to the payment schedule. Failure to make the payments on time will cause the loan to default and become taxable. You are responsible for making the payments; your employer is not required to remind you. Q3: Can I roll my loan over to my Individual Retirement Account? A3: No. Q4: My new employer's plan allows loans. Can I transfer my loan to the new plan? A4: This depends on the policies of both your old employer and your new employer. Both of them may allow this, in which case you can do so. You will need to contact the appropriate person at your new company to find out how to arrange this transfer and exactly what information they will require from your former employer. Keep in mind, however, that neither the past or present employer is required to permit a transfer of your loan. If either one does not permit this, then you may not transfer the loan directly to the new plan. Q5: If I cannot transfer the loan to my new plan, and my old employer will not accept monthly payments, what can I do to keep from paying taxes on it? A5: You must completely repay the loan before you take a distribution from your old employer's plan, and before the loan goes into default. Q6: Can I take a loan from my new employer's plan to repay the loan from the old plan? A6: This depends on your new employer's plan. If the plan allows loans, you may borrow from it to the extent you qualify under the terms of the plan. If your new employer's plan accepts rollovers, you may be able to roll over your old plan's funds to the new plan, then borrow from that rollover. If you can arrange a temporary loan to repay the old plan loan first, you can avoid taxes on the old loan and repay the temporary loan with proceeds from the new plan loan. Again, this depends on the terms of your new employer's plan. Q7: Why is this so complicated? A7: The Internal Revenue Service governs plan loans. Since retirement plan money has not been taxed, the IRS wants to be sure that loans are not abused in a way that allows employees to avoid paying taxes on funds they receive. Both your old employer and your new employer face substantial financial penalties from the IRS if they do not properly follow these rules. Do not expect this to be as simple or quick as transferring funds between bank accounts. Your employers have a duty to follow these rules and protect the tax benefits of their plans for all their employees. Qualified Domestic Relations Order. (QDRO) A QDRO is a domestic relation's order that creates or recognizes the existence of an alternate payee's right to receive all or a portion of a participant's retirement plan benefits. A Domestic Relations Order is a judgement, decree or order, including an approved property settlement under a state domestic relations law (including a community property law), relating to the provisions of child support, alimony payments or marital property rights to an alternate payee. An alternate payee is any spouse, former spouse, child or other dependent of the plan participant who is identified by the order as having a right to receive plan benefits of a participant. A QDRO must specify: 1. The name and last known mailing address of
the participant and each alternate payee that is covered by the order; A QDRO may not require: 1. A plan to provide any type or form of
benefit or any option not otherwise provided under the plan; Hardship Withdrawal. The plans are very specific as to the conditions that permit a Hardship Withdrawal (HW). However, in general HW's are unsatisfactory in that, in most cases, medical expense hardships being the exception, such HW's are taxed as ordinary income and are subject to the 10% pre-59½ excise tax. Proving that an alternate source is available to satisfy the financial need can be difficult for the participant and the Plan Administrator. Further, if a plan loan is available, that source must be used first. If a Hardship Withdrawal is made from a 401(k) Plan, then a total suspension of continued contributions to the plan must be maintained for the six month period following the withdrawal. Pre-Retirement/In-Service Distribution. Plans may, but generally do not, provide for withdrawals by an active participant upon the attainment of a certain status such as a certain number of years of participation and the attainment of a certain age. These distributions are subjected to all taxes and penalties and are a sure way to reduce the potential for future financial independence. ADDITIONAL INFORMATION ABOUT DISTRIBUTIONS Top Payments that can be rolled over:
Payments
that cannot be rolled over:
EMPLOYEE SALARY DEFERRALS [401(k)]. Subject to future Cost of Living Adjustments (COLA), the maximum annual Salary Reduction Amount (SRA) is $11,000 for year 2002 or, if less, 25% of compensation. Any employer contribution is used in the calculation of the 25% limit with an aggregate combined dollar limit of $40,000 subject to future COLA. The confusion and disappointment of refunds and QNEC's can be avoided by consulting early each plan year with your LDSCO Pension Consultant. Practical Information Regarding 401(k) Plan ADP/ACP Testing Top Q1: What is the ADP test? A1: ADP stands for Average Deferral Percentage. 401(k) plans are required to perform this test each year. To maintain their tax-qualified status, the test must be passed. Very briefly, to perform the test, the employer divides the employees into two groups, Highly Compensated Employees (HCE's) and Non Highly Compensated Employees (NHCE's). The percentage of salary contributed to the plan is calculated for each eligible employee, and these percentages are then averaged for each group. The average percentage for the HCE's may exceed the average percentage for the NHCE's, but only by a limited amount. If the difference is too great, the percentages must be adjusted until the test is passed. The most common way to do this is by refunding contributions made by HCE's. Other methods include increasing plan contributions to NHCE's, depending on the specific plan. Q2: How are the refunded contributions determined? A2: The IRS has specific rules on how the refund amounts are calculated. The refunds begin with the HCE with the highest dollar amount contribution. His or her contribution is lowered first, to the dollar level of the next highest employee. Then both contributions are lowered together until reaching the next highest employee's dollar level, and so on, until the total dollar amount of refunds returned equals that determined under the IRS procedure for calculating the refund amount. It is important to note that the employer cannot determine who gets a contribution refunded. That is determined only by IRS rules. Q3: What are the tax effects of the contribution refund? A3: The intended effect of the refund is to restore each participant and the plan to the financial position they would have been in had the contributions been limited to pass the test in the first place. The refunds, if distributed within 2½ months of the plan year-end, are taxable to the participant as compensation in the year the salary deferral was originally paid. The refunded contributions will include a small adjustment for any investment earnings during the year to put the plan in the same position it would have been in had the contributions not been made in the first place. If the refund is not distributed within 2½ months of the year-end, they must still be distributed within 12 months of the year end; however, the excess contributions are subject to a 10% excise tax assessed on the plan sponsor. It is important that the ADP testing be done soon enough to allow time for the plan's investment provider to pay these refunds within the 2½ month time frame to avoid this excise tax. A contribution refund is not an IRS penalty; it is merely an adjustment to the affected employees' plan contributions. The employees still benefit from the tax-deferral on the contributions not refunded. This adjustment preserves the tax-qualified status of the plan, and the tax deferral of contributions and earnings that remain in the plan. The fact that a refund is necessary is not an indication of some failure on the part of the plan sponsor or administrators, it is just an adjustment to limit the contributions of the Highly Compensated Employees to the appropriate amount as specified in the Internal Revenue Code. Q4: What happens if the ADP test is not corrected? A4: If the ADP test is not corrected by either timely refunding excess contributions or by making a fail-safe contribution, the plan will be disqualified. No tax deductions will be allowed for contributions made to the plan, earnings on the plan investments will be taxed and distributions from the plan will not be eligible for rollover.
We have provided the following glossary to assist you with the many technical terms and concepts which pervade the employee benefits field. These explanations are deliberately non-technical and may not apply in all instances. 401(k) Plan. A type of profit sharing plan which permits participants to elect to defer a portion of their salaries on a pre-tax basis into the plan. An employer may encourage participant's salary deferrals by offering to match the deferrals with an employer contribution. 401(k) plans are subject to special rules and restrictions beyond those applicable to regular profit sharing plans. 404(c). A section of ERISA that applies to defined contribution plans which limits the fiduciary responsibility of plan sponsors for plans that give employees the responsibility of selecting their own investments. A key element of Section 404(c) concerns an employer's obligation to provide adequate investment choices as well as information and education. Compliance with Section 404(c) is optional. Actual Contribution Percentage Test (ACP Test). A test applicable to 401(k) plans and other plans with employer matching contributions (and employee after-tax contributions). The ACP test measures whether employer-matching contributions discriminate in favor of highly compensated employees. Actual Deferral Percentage Test (ADP Test). A test applicable to 401(k) plans that measures whether salary deferrals in a 401(k) plan discriminate in favor of highly compensated employees. Administrative Policy Regarding Self-Correction (APRSC). The IRS' voluntary compliance program that permits the self-correction of certain plan disqualifying administrative defects without IRS approval, generally within two plan years. Annuity. An Annuity is a contract that makes periodic payments of both principal and interest by systematic liquidation of a principal amount. An annuity may have a guaranteed death benefit; in some cases, may also have a minimum guaranteed investment return. Annuities usually offer a series of monthly or annual payments, generally for the life of the annuity owner. Beneficiary. A beneficiary is a person to whom all or part of a deceased participant's account balance is payable. Beneficiaries are designated by plan participants at the time of their enrollment and may be periodically changed by the participant. A married participant cannot designate someone other than his or her spouse as beneficiary unless the spouse agrees. Break-in-Service. A Break-in-Service is defined as a plan year during which an employee is paid for less than 501 hours of service after termination of employment. Absence attributable to an authorized leave of absence does not create a potential Break-in-Service. Benefit Accruals. Amounts that are credited as earned toward a participant's retirement benefit under a defined benefit pension plan or a participant's account balance under a defined contribution plan. Closing Agreement Program (CAP). An IRS program under which a retirement plan sponsor can agree to enter into a written settlement with the IRS and pay a monetary penalty in order to avoid the disqualification of the sponsor's retirement plan. Compensation. Compensation generally means that portion of a participant's wages to be utilized for plan purposes. However, in the case of a sole proprietor it means his net Schedule C less the plan contribution with a self-employment social security tax adjustment. Compensation for a partner is his K-1 earned income less the plan contribution. Death Benefit. The death benefit is the portion of a plan participant's accrued benefit/account balances that is payable to a named beneficiary upon the participant's death. Deemed Distribution . A term recently coined by the Treasury Department to describe the taxable event of a loan that does not qualify for the participant loan safe harbor of Code Section 72(p) of the Internal Revenue Code. A deemed distribution is a taxable event for the plan participant upon default of a plan loan. Defined Benefit Plan. A "traditional" pension plan that promises to pay an employee a specific monthly benefit for life starting at retirement age. The benefit is usually based on service and compensation. Defined Contribution Plan. A type of qualified plan that maintains an individual account for each participant and in which each participant's benefits are based solely on the participant's account balance which depends upon the level of employer and employee contributions and the earnings on those contributions. They may be profit sharing, 401(k), money purchase pension plans or stock bonus plans. In a profit sharing plan, employer contributions may be based on a percentage of compensation or company profits. In some defined contribution plans, employees may direct their own investments within the choices offered by the plan. Department of Labor (DOL). One of the federal government agencies responsible for the enforcement of the provisions of ERISA, and does so through a National Office, which dictates policy and deals with rulings and exemptions and field offices (regional offices) that are charged with investigation and enforcement of the laws. Depository. The custodian of an IRA or Plan funds such as a Trust company, Mutual Fund, Bank, Insurance company, etc. Determination Letter. A letter issued by the IRS stating whether a plan qualified for special tax treatment and, if applicable, whether it includes a qualified trust. Obtaining a favorable determination letter is not required although they are almost universally accepted as necessary or desirable. A favorable determination letter provides a high degree of protection to subsequent challenge by the IRS that the plan document was not adequate or qualified. The determination letter does not provide protection against defects in plan operation that can disqualify the plan. Determination Year. The twelve-month period used to determine plan compliance, usually the plan year. Discretionary Contributions. Any employer contributions to a 401(k) or profit sharing plan that are not mandated by the terms of the plan. Disqualifying Provision. A plan provision violating the qualification rules and resulting in disqualification of the plan. Eligible Employee. An employee who has met the eligibility requirements set forth in a retirement plan. Enrolled Actuary (EA). A Person who performs actuarial services for a plan and who is enrolled with the Federal Joint Board for the Enrollment of Actuaries. ERISA. The Employee Retirement Income Security Act of 1974. A comprehensive piece of federal legislation designed to regulate the provision of private employer retirement and welfare benefits. The Act passed by Congress encompasses both Internal Revenue Code provisions determining when a retirement plan is tax qualified and Department of Labor provisions governing the rights of participants and beneficiaries as well as the obligations of plan fiduciaries. Highly Compensated Employees (HCE's). Highly Compensated Employees are those employees who own more than 5% of the company or earned wages in excess of $85,000 during the prior plan year. In determining if individuals own more than 5%, taken into consideration is any stock they own themselves, plus any stock owned by their parents, spouse, children and grandchildren. IRA. An individual retirement account or and individual retirement annuity that holds assets on a tax deferred basis. Internal Revenue Code (Code). The Internal Revenue Code of 1986, as amended. Internal Revenue Service (IRS). The agency of the Treasury Department with the responsibility for administering, interpreting and enforcing the Internal Revenue Code. Key Employees. For purposes of determining if a plan is "top heavy" a key employee is one who during the year and four (4) preceding years:
Look-back Year. Usually the twelve-month period immediately preceding the plan year used to determine the plan's compliance with certain governmental regulations. Lump Sum Distribution. A distribution of the entire balance to the credit of a participant in a profit sharing plan or a pension plan. These amounts are entitled to 5- and 10-year averaging upon distribution. 5-year averaging in not available after 1999. Matching Contributions. Contributions made by an employer to a plan based on a percentage of an employee's own 401(k) salary deferral contributions. Money Purchase Pension Plan. A defined contribution plan, in which the employer has a fixed obligation to make annual contributions to the plan on behalf of eligible employees, usually based on a percentage of pay. Non-excludable Employees. Employees who may not be excluded from participation in their employer's retirement plan on the basis that they have not satisfied the plan's age, service and status requirements (e.g., age 21, one year of service, non-union). These employees must be taken into account when testing a retirement plan under the minimum participation and coverage tests. Party-In-Interest. A person who is prohibited from engaging in certain transactions with a plan. A lengthy statutory definition of relationships resulting in party-in-interest status, which includes seemingly everyone who ever heard of the plan or of the employer or who even passed them on the street. Plan Administration. The tasks required in order to operate the plan in accordance with its terms, as spelled out in the plan document. Plan Administrator. The individual or firm responsible for performing duties incidental to the maintenance of an ongoing welfare or retirement plan, such as determining eligibility for benefits, processing benefit claims, and so on. If the plan does not designate an administrator, the plan sponsor is the plan administrator. Plan Document. The document that describes in details all the features, operations and requirements of the plan. Plan Sponsor. The employer that sponsors the retirement plan. The sponsor can be a company, such as a corporation or partnership, or an individual business owner, such as a sole proprietor. Plan Participant. An employee or former employee who participates or participated in a retirement plan and has assets in the plan or is eligible to participate in the plan through salary deferrals but does not elect to do so. Profit Sharing Plan. A profit sharing plan is a defined contribution plan funded by an employer with discretionary contributions to employees' accounts. Prohibited Transaction. Under both the Internal Revenue Code and ERISA, certain transactions, direct or indirect, between any plan and certain related parties. The definitions of the transactions and relationships are extensive and include residual categories for any direct or indirect benefit to the related party from the use of a plan's assets. A 15% annual excise tax is assessed on prohibited transactions. Prototype Plan. A retirement plan generally offered by a bank, insurance company or other financial institution that is made available for adoption by employers who elect to use the plan. A prototype plan consists of a basic plan and an adoption agreement. To adopt this type of plan an employer selects the plan provisions that will apply by completing the adoption agreement. Generally the form of the plan has been pre-approved by the IRS. Qualified Domestic Relations Order (QDRO). A court order issued under state domestic relations laws (including community property laws) that relates to the payment of child support or alimony or marital property rights from qualified retirement plan benefits payable to a participant in a qualified retirement plan and which has been determined to be a "qualified" order by the plan administrator. Qualified Non-Elective Contribution. The Employer's contributions to the Plan, which are used to satisfy the "Actual Deferral Percentage" tests. Qualified Retirement Plan. A retirement plan which in form and in operation meet the various qualification rules set forth in Code Section 401(a) of the Internal Revenue Code. Rollover. A plan contribution made by an employee and attributable to a distribution from another qualified plan or from a conduit IRA established as a temporary holding vehicle for the proceeds of a qualified retirement plan. Summary Plan Description (SPD). A plain English summary of the provisions of an employee benefit plan required by ERISA, designed to provide a participant or beneficiary with a comprehensive, understandable overview of how the plan operates including participant rights under ERISA. Target Benefit Plan. A target benefit plan is a defined contribution plan, with contributions based upon an actuarial valuation, designed to provide a targeted benefit to each participant upon retirement. The plan does not guarantee that such benefit will be paid and has only an obligation is to pay whatever benefit can be provided by the amount in the participant's account. A hybrid of money purchase plan and a defined benefit plan. Third Party Administrator (TPA). An individual or company that provides specific administration functions for a retirement plan or a welfare plan under contract. A third party administrator is oftentimes not a deemed fiduciary of the plan but serves as an agent or contractor to the fiduciaries of the plan. Although the third party administrator provides important assistance, all responsibility ultimately falls on the employer and the Plan Administrator to make sure that the plan is properly maintained. The third party administrator may make recommendations, but the employer and Plan Administrator must make the decisions and oversee the operation of the plan. Third Party Appraisals. Refers to appraisals of certain plan assets conducted by an appraiser who is independent of the sponsoring employer or the trustee. Top Heavy Plan. A qualified plan in which more than 60% of total plan assets are in the accounts of key employees. Top heavy plans must provide accelerated vesting and minimum benefits or contributions for non-key employees for plan years in which a key employee receives a contribution. Trust. A legal entity established under state law that consists of plan assets held for the benefit of participants by trustees or other fiduciaries. Trustees. The parties named in a trust document that have responsibility to hold assets for the participants in trust. Some plan documents also give investment responsibility to the trustees. Vesting. Vesting refers to the non-forfeitable ownership of employees to the assets in their accounts. For example, an employee who is 40% vested in his or her account would be entitled to receive 40% of his benefits if he terminated employment. Year of Service. A twelve month period in which an employee completes a specified number of hours of service, commonly at least 1,000 hours. The plan document can provide a lesser requirement.
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