1. Census – what needs to be included for adequate reporting
- It is important you confirm that ALL employees who worked during the plan year are listed on the census and add any that are missing, including leased, part-time and seasonal employees.
- If any employee is a rehired employee, please provide the employee’s original hire date, most recent term date and the rehire date during the current year.
- In the status code column, please list all the codes that apply for each employee (there may be more than one).
For additional information regarding “part-time” and “seasonal” employees, please read the corresponding articles in past issues of the TSC Translator.
Part-time employees - http://www.tsc401k.com/translator/archive/volume5.htm
Leased employees - http://www.tsc401k.com/translator/archive/volume7.htm
2. Compensation – the various types as it relates to retirement plan
Providing accurate Plan compensation at year end is essential to the correct administration of your qualified Plan. The following items address some of the main topics in this area:
Compensation Definition:
The Plan adoption agreement provides for specific provisions on how your Plan defines compensation. Generally, compensation is defined as “Wages, Tips and Other Compensation Box on Form W-2”, and then typically allows for adding back such items as 401(k) deferrals, 125 (Cafeteria Plan) deductions and transportation expenses, among others. Examples of this may include, HSA accounts, pre-tax medical, and supplemental insurance. These inclusions and any others that apply need to be manually added to the W-2 wages.
If you are obtaining gross compensation from your payroll provider rather that performing manual calculations using W-2 wages, you will need to check with your payroll provider to confirm that gross compensation contains the necessary inclusions. This is very important as it directly impacts testing for your Plan.
Post-Severance compensation, paid by the later of 2 ½ months after severance of employment or the end of the plan year that includes the date of severance from employment for services rendered or for, commissions, or bonuses (all of which would be paid as compensation if the individual were still employed) would be considered compensation for plan purposes.
Please note that compensation paid as part of a severance package is always excluded and should be deducted from the reported W-2 wages and/or from your payroll report.
“Date of Entry” (DOE) Compensation:
Generally, in the first year an employee meets eligibility requirements, most Plans provide that compensation reported for Plan purposes is compensation earned only while the employee is a participant in the Plan. The Plan document will specify this. This compensation is provided in addition to the “YTD Gross Comp” and is inputted in the year end census spreadsheet in the “DOE” column. Both fields must be completed if applicable. Please note the DOE field should be left blank, if an employee has not met eligibility for the first time in the Plan year.
Excluded Compensation:
Your Plan may specify certain forms of compensation are excluded. This may include overtime, commissions, bonuses, etc. The compensation exclusions can be different for contribution sources (i.e. deferrals, match, non-elective contributions etc.). The excluded compensation is reported separately in a column on the year end census spreadsheet titled “Excl Comp”. Your “YTD Gross Comp” as reported includes the excluded amounts; therefore the net of the compensation reported in these two columns is how we arrive at Plan compensation for administration purposes.
Sole Proprietor & Partnership/Limited Liability Compensation:
If your business is a Partnership or a Limited Liability Company that is treated as a partnership for federal taxation purposes, you are generally required to report your compensation as Net Earned Income from Self Employment before employer contributions to the Plan. This is usually the amount from Form 1065, Schedule K-1, box 14, code A.
If your business is a Sole Proprietor for taxation purposes, you are generally required to report earned income before entering a deduction for Plan contributions; the preliminary amount on Line 31 of Schedule C.
Normally these types of owners do not receive W-2 income; however, you must report any W-2 wages from all employers if it applies. TSC outlines specific details on how to retrieve this information from the appropriate schedules in the Year End Questionnaire.
3. Bonding – it is required for all plans and reported on the 5500
Fidelity Bond Requirements:
The Employee Retirement Income Security Act (ERISA) provides that each plan official who "handles" plan funds or other property be bonded by an approved surety company for acts of fraud or dishonesty, directly, or through connivance with others. In addition to the mere physical control or ability to exercise control of the funds, “handling” includes disbursement authority, signatory authority with regard to checks and other negotiable instruments, the authority to supervise or make final decisions with regard to these activities or the power to transfer funds. The fidelity bond must be fixed at the start of each plan year in an amount equal to at least 10% of the amount of plan funds as of the last day of the preceding year with a$1,000 minimum and $500,000 maximum ($1,000,000 maximum if the plan holds employer securities). The bond must provide for a discovery period of one year after the contract ends and it must provide that any proceeds owed must be paid directly to, or paid over to, the plan. A blanket bond, individual schedule, named schedule or position schedule are acceptable structures and either multiple-penalty or aggregate penalty provisions are permissible. In addition, a bond may cover a single plan or multiple plans, but in the case of multiple plans, it must adequately cover each of the plans at least up to the statutory minimum requirements. Plans covering only an owner and spouse or partnership partners are exempt from the requirements.
A plan is required to engage an independent qualified public accountant to audit the assets, or you may have to increase your bonding amount, if at least 95% of your plan assets are not “qualifying plan assets.” “Qualifying plan assets” are insurance and annuity contracts, participant loans, assets held by a regulated financial institution, mutual fund shares or individually-directed participant accounts over which the participant exercises control and receives, at least annually, a statement from the regulated financial institution describing the assets held by such institution. Limited Partnerships, collectibles, real property, non-publicly-traded securities and the like (which are not in participant-directed accounts with a regulated financial institution) are not “qualifying plan assets” and may give rise to additional bonding requirements or an audit.
The coverage amount is reported on the form 5500 filed with the EBSA each year. Although not all-inclusive, a list of the DOL approved insurance companies can be found at www.fms.treas.gov/c570/c570_a-z.html. Diligent insurance agents monitor the bonding requirements and an existing business fidelity bond can be endorsed to cover these bonding requirements at little or no extra cost. You might want to consider coverage above the minimum amount to cover two or three years' future contributions and earnings. The cost is minimal and you can avoid the paperwork of increasing coverage each year.
4. Ownership – how ownership of other businesses can affect the retirement plan
There are several questions on the TSC Year End Questionnaire that have been designed to identify possible compliance issues when the owner of the business sponsoring the plan owns or controls another business. Ownership may attribute to an owner’s spouse, parents, grandparents or children, but not to step-children that have not been adopted by the owner. The rules are very complicated and if the businesses are considered affiliated or under common control, all employees must be treated as though they are employed by a single employer for retirement plan purposes.
In order to ensure that your plan is in compliance with the government rules and regulations, it is important that detailed information about these other entities be provided to TSC on an annual basis. Information about the other business entities should include a list of the owners (including their ownership percent), identification of their relationship to the owners of the company sponsoring the plan, information concerning the number of employees in the other entity and an indication if one entity provides management or other services for another. This information should be provided under “Additional Information” on the TSC Year End Questionnaire.
5. Investment Professional Authorization – why it is required and how to give it
The TSC Year End Questionnaire has a series of questions that must be answered in order to complete all of the required testing and form filings for that year. Question # 14 under the Employer/Plan Information is in regards to investment professional authorization to review confidential employee information regarding your plan.
Your answer to this question will determine whether or not the confidential employee information is given to your investment professional. The information will be provided on a secure website similar to your plan sponsor website. The secure website contains confidential information specific to your plan and its participants. Your investment professional will have access to this information only if you have authorized them to view it.
If previously supplied to us, the name of the investment professional we have on record will be indicated. If it is blank or if you have changed your investment professional, we ask you that you input the name of the investment professional you have hired to assist you with your plan. We understand your relationship with your investment professional may change and this is a way for us to verify the information we have or to make any necessary changes to our records if there has been a change in who is servicing your plan.
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6. Deposit Timing – when contributions must be deposited
Current Department of Labor (DOL) regulations state that employee 401(k) contributions must be deposited as soon as they can be reasonably segregated from the employer’s assets, but in no event later than 15 business days following the close of the month in which they were withheld. Please note that the 15-business-day rule is an outside limit and not a “safe harbor.” Deposits must be made as soon as possible after they are withheld. If you have weekly payrolls, you should be depositing the contributions weekly, and so forth. This applies to all employee contributions and participant loan repayments.
Please note that the DOL has issued proposed regulations establishing a safe harbor for the timely deposit of employee contributions for plans with less than 100 participants on the first day of the plan year. Under these regulations, contributions will need to be deposited by the 7th business day following the day on which the amounts would have otherwise been payable in cash. This time frame would be acceptable even if the contributions could have been segregated at an earlier date.
Please review your deposit timing and procedures. TSC does not review the timing of your deposits and cannot make a determination as to whether or not a deposit was made late. When deposits are made late, certain reporting requirements exist and corrective action must be taken. The U.S. Department of Labor’s Voluntary Fiduciary Correction (VFC) Program or Self Correction are 2 methods in which corrections can be made. In order to TSC to assist you in making corrections, you will need to disclose if there were any delays in your contribution deposits on the Year End Questionnaire and report the late deposits to TSC on the Late Deposit Worksheet, which is accessible through the Secure Site.
A direct question on this subject appears on Form 5500. Failure to report the late deposits and take corrective action may result in severe penalties imposed by the IRS and DOL.
