Vesting

The Pension Protection Act has eliminated non-top-heavy vesting schedules starting in 2007.  All plans must adopt top-heavy vesting schedules for all employer contributions.  More rapid schedules, as always, are permissible.  Any plans that had graded vesting schedules in which participants did not vest 100% in year 6 must amend their vesting schedules to the more rapid top-heavy schedules of at least a 6-year graded schedule accruing at least 20% each year starting with the second year and reaching 100% in the 6th year (the “2/20” schedule).

Plans with a 5-year cliff schedule (participants are 0% vested until their 5th year of service in which they then become 100% vested) must go to a 3-year cliff schedule or better if they still want to use the cliff method.    

The new vesting schedules apply to all participants that worked at least 1 hour in the 2007 plan year.  For calendar year plans, this means after 12/31/2006; for non-calendar year plans it means after the last day of the Plan Year ending in 2007.  Therefore, participants who terminated employment during the 2006 Plan Year or earlier would remain under the existing vesting schedule.  Everyone else must vest according to the new schedule.

Unless directed otherwise, TSC has moved plans under the old graded vesting schedule to a 6 year graded schedule or if a 5 year cliff to a 3 year cliff schedule.  All documents will be updated with the new vesting schedules on the Restated EGTRRA documents that will be created in 2008 or later. If you have any questions regarding this change, please call your TSC Plan Administrator.

The foundation of a retirement plan enabling them to be "qualified" and "shelter" its funds from taxation is that the plan be for the primary benefit of the participants and that it not be discriminatory in operation. Discriminatory is defined by the IRS. Compliance tests are required to ensure a qualified retirement plan is not discriminatory. There are also so-called "safe-harbors" that, if utilized, enable a plan to pass some or all tests automatically. 

The ADP test is the Actual Deferral Percentage (ADP) test. It is a specific nondiscrimination test that applies to salary deferral contributions to 401(k) plans. This test compares the average of the deferral rates for Highly-Compensated Employees (HCE) to the average of the deferral rates of the Nonhighly-Compensated Employees (NHCE). HCEs are determined by ownership, stock attribution rules and/or compensation.  Anyone with greater than 5% ownership of the company is automatically considered an HCE.  Spouses, parents, grandparents and children of owners are also considered as HCEs due to stock attribution rules.  In addition to owners, any participant earning greater than $100,000 in 2007 (indexed by COLA) is also considered to be an HCE even though they are not owners. There is another similar test called the "ACP" test or Actual Contribution Percentage test that is applied to Employer Matching contributions and employee after-tax contributions (not Roth 401(k)) to plans.

What happens if a 401(k) plan fails its ADP and/or ACP test?

Common corrections are: (i) a refund of excess contributions plus interest to certain HCEs; or (ii) a "Qualified Non Elective Contribution" is allocated to NHCEs. The refund of excess contributions must be done within 2½ months of the close of the plan year to avoid an IRS excise tax of 10%. For 2007 Plan Years, if the refund is made within 2½ months following the end of the plan year, it is taxable to the participant in the calendar year in which the first day of the plan year begins. If the refund is made after 2½ months following the close of the plan year, it is taxable to the participant in the calendar year in which the distribution is received. New legislation proposes a change in the tax treatment for 2008 Plan Years - more information to come.

The positive response and feedback to the TSC 401(k) Health Check™ has confirmed our conviction that Plan Sponsors want their plans to be successful.  We have heard from both Sponsors and Investment Advisors that the Health Check has provided them with the tools needed to determine and improve the overall success of their plan.

The overall success of a retirement plan is measured by the Adequacy of the Participants’ Benefits.

Let me give you a quick overview of the Health Check and how it will help you determine the overall success of your plan.  The Health Check basically answers three key questions:

First, how much income at retirement is considered an adequate amount?

Industry experts suggest an Income Replacement Ratio (including Social Security) of 70%-80% of final pay represents an adequate retirement benefit for most people. The Health Check uses 75% as the benchmark goal for an individual participant’s Income Replacement Ratio.

Second, how many participants must achieve an Income Replacement Ratio of 75% for the plan to be considered successful?

Ideally all of them. However, in reality that’s not likely to occur. Therefore, again we look to industry experts who suggest that a plan may be considered successful if at least 2/3 or 67% of plan participants are on target to achieve a 75% Income Replacement Ratio. The Health Check reports the percentage of non-highly compensated employees on target to achieve a 75% Income Replacement Ratio allowing the Sponsor to know to what extent their plan is successful.

And finally, how will the Health Check help each participant set goals and plan for their retirement?

Included with the Health Check are individual participant summaries that can be distributed to each participant. These summaries will show participants their estimated amount of income at retirement so that they can take appropriate steps to meet their retirement goals.
 
TSC is currently working on the 2008 Health Check for each plan. The goal for delivery to Sponsors is within 45 days after the completion of the 2007 Plan Year valuation reports.  After they have been created, your Plan’s Health Check and individual participant summaries are also available on your TSC Secure Plan Access website.

In addition, TSC will notify your plan’s Investment Advisor when the Health Check has been sent to you. We believe it is very important to have your Advisor work with Plan Sponsors and each participant to help them achieve their retirement benefit goals.

Please visit our Website at tsc401k.com and click on the Quick Link “401(k) Health Check” to view a sample.  Should you have questions please feel free to contact your TSC Retirement Plan Administrator.

Safe Harbor can mean many different things, but it is most commonly known as a way to benefit the 401(k) program and eliminate the requirement for ADP/ACP Testing.  It is advantageous for Highly Compensated Employees (HCE) are unable to maximize their deferrals because the average deferral rate of the Non-Highly Compensated Employees (NHCE) won't support it.  A Safe Harbor solution is satisfied by implementing either of the following:

a) The 3% employer nonelective contribution method: a contribution of at least 3% of pay to all eligible employees whether they defer or not;

b) The Matching Contribution method: a matching contribution of 100% of the first 3% of pay that employees contribute and 50% of the next 2% of pay (a 4% maximum matching contribution). An enhanced matching formula at least equal to this formula is also permitted.  With this option, only employees deferring will benefit.

Safe Harbor contributions must be made to all employees who have satisfied the Plan's eligibility requirements usually everyone who is eligible to make a 401(k) contribution.  They must be 100% vested immediately and there cannot be an hour or last day requirement in order to receive the contribution.  In order to incorporate safe harbor features in your plan, you must provide participants at least a 30 day notice in advance of the Plan Year stating the employer contribution that will apply. The plan document must also be amended their plan document prior to the beginning of the Plan Year in order for it to take effect.

If all the Safe Harbor conditions are met, the plan is exempt from the year ADP/ACP and Top Heavy tests, provided that no additional employer contributions are made for that year.