Contribution Timing Safe Harbor

The Department of Labor (DOL) has issued proposed regulations establishing a safe harbor for the timely deposit of employee contributions to small retirement plans.  This would apply to plans that have less than 100 participants as of 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 timeframe would be acceptable even if the contributions could have been segregated at an earlier date.

The regulations are intended to clear up the confusion surrounding the current regulations that state that contributions must be deposited as soon as they can reasonably be segregated from the employer’s assets, but in no event can this be later than the 15th business day of the month following the month in which the contributions were withheld.

In the interim, the DOL is using this as an acceptable timeframe.

I must admit, that after nearly 30 years in this business I am quite puzzled by the fact that the primary focus of the 401(k) Industry seems to be on “plan features" rather than the individual participant's “Retirement Readiness”.

What do I mean by plan features and retirement readiness?  Plan features include, but are not limited to; multiple fund family platforms, internet access, 800 numbers, etc.  Retirement readiness, in its simplistic form means; how much money will I need when I retire and how much should I be contributing each month in order to get there.

Why would I say I am puzzled by this focus?  Although it is quite clear to all of us that the industry has done a great job in providing quality investment platforms, I can not understand why the speakers, commentators and writers are not more concerned with the “retirement readiness” and inadequacy of benefits for the vast majority 401(k) plan participants.  While the industry has done its job by providing wonderful features such as internet access and 800 numbers that give them access to their account information instantly, it must now get behind the movement to provide adequate retirement benefits by making it easy for each and every participant to achieve a meaningful benefit. 

Surveys conducted by the Employee Benefit Research Institute, Profit Sharing Council of America and many of the 401k plan products providers clearly indicate that the vast majority of all plan participants, particularly those of lower income, are dramatically under funded.  I believe it is incumbent on the retirement plan industry as a whole, to provide awareness to this problem.  A simple approach is to provide each participant with the tools needed to set a retirement income benefit goal.  Statistics indicate that “goal setters” contribute 2.5 times more to their 401(k) plan than non-goal setters.  Today’s participants make their contributions to the investment platform hoping they will accumulate enough funds toward an Unknown Benefit at retirement.  What I believe is necessary is to set a retirement benefit goal (say 70 to 80% of final pay) and develop a plan to achieve that goal.

Any person who has been authorized by the plan sponsor or plan administrator may sign as the Plan Administrator and/or Employer/Plan Sponsor on the Form 5500 and the Schedule SSA when applicable.  The signer is not required to be an owner or officer of the plan sponsor, but often is.  The same individual may sign in all places.

The common misconception is that “part-time” employees are not eligible to participate in the plan.  This is not necessarily true.  If any employee meets the plan’s age, service and hour requirements during any eligibility computation period, they are eligible to enter the plan on the next entry date.

If your plan has a 1 year of service and 1000 hours requirement, all employees, including “part-time” employees, who have worked 1000 or more hours during the eligibility computation period are eligible for the plan.  For example, if a “part-time” employee works 20 hours per week every week for a year, they would complete 1040 hours and would be eligible to participate.

A plan is considered Top Heavy when 60% or more of the total assets of the plan are attributable to Key Employees at the end of the plan year. Consequently, an employer contribution equal to the highest contribution rate (including salary deferrals) of any Key Employee, up to a maximum of 3% of full year’s compensation, will be required to be made for all eligible Non-Key Employees for the following plan year.  The contribution is based on full year’s compensation even if the participant first enters the plan later than the first day of the plan year.  The required contributions are satisfied by cumulating all employer contributions and employer forfeitures allocated to participants for the plan year.

If your plan is a Safe Harbor plan, it is “deemed” not Top Heavy for each plan year in which no additional employer contributions or forfeitures in addition to the Safe Harbor contributions are made.

KEY EMPLOYEE defined:

A Key Employee is an employee (include former or deceased employees), who:

1. was an officer whose annual compensation from the employer exceeds $150,000 (indexed amount) in the prior plan year; or
   
   
2. was an employee owning more than 5% of the business in either the current or prior plan year; or
   
   
3. was an employee owning more than 1% of the business in either the current or prior plan year, and whose compensation exceeds $150,000 for the plan year.