Post-severance Compensation

The final 415 regulations provide clarity on how to treat compensation paid to terminated participants after their employment terminates.  All plans must apply the new regulations to compensation for testing purposes.  401(k) deferrals can only be made on this “considered compensation.”  The regulations state:

"…in order for payments after severance from employment to be treated as compensation [for plan purposes], payments made for services provided to a former employer must be made by the later of 2 ½ months after the severance of employment or the end of the limitation year that includes the date of severance of employment…"

Post-severance payments made within the time frame described above should be counted as compensation if they include payment for regular wages for services rendered, commissions, or bonuses, all of which would be paid as compensation if the individual continued employment.  Compensation that is accrued bona fide sick, vacation, other leave, or a taxable payment from a nonqualified deferred compensation plan, and that is paid within the timeframe described above, is not included unless the plan is specifically drafted to include it.  Please note: The TSC document includes this as compensation with the EGTRRA Restatement.  We also plan to issue an amendment that will include it for all plans this year, even if the EGTRRA Restatement is not done in 2008.  For more information regarding the EGTRRA Restatement please read the EGTRRA Restatement article in this issue of the TSC Translator.

Payments “triggered” by severance of employment (pure severance pay or parachute payments) are excluded and should never be included as compensation, even if paid within the time frame described above.

Contact your TSC Retirement Plan Administrator for more information should you have questions about post-severance compensation.

Earlier this year, TSC sent a letter to current clients that explained the IRS-mandated EGTRRA Restatement.  In short, the EGTRRA Restatement is a required plan rewrite for the purpose of incorporating retirement plan law changes into the new IRS approved document.

We have formally entered the final 2 years of the EGTRRA Restatement for certain profit sharing/ 401(k) and similar Defined Contribution plans, and TSC has begun the process of restating approximately 1300 plans on the new document.  The deadline to complete the restatement of each plan is April 30, 2010.

Our goal is to make the restatement process easy for you to complete.  As a reminder, if you are contemplating any design or operational changes in your plan, a good time to implement the change is with your EGTRRA Restatement.  While TSC is regularly looking at ways to improve your plan, there may be other changes you are considering that have not been discussed with TSC.  Please be aware that IRS rules dictate when plan documents must be amended to reflect changes for a plan year.

If you want to make a change to your plan document you should notify TSC now.  If you request a document change with TSC after November 3, 2008 TSC may not be able to implement the change this year.

(More details regarding the EGTRRA Restatement can be found by visiting our website www.tsc401k.com).

A note about 403(b) Plans and Defined Benefit Plans

All 403(b) Plans must be amended for the EGTRRA and Final 403(b) regulations by the end of 2008.  Defined Benefit plans are on a different 6-year cycle than Defined Contribution plans, and the restatement of those plans is scheduled to begin in 2010.

What do we pay TSC for?

Sometimes we get the question: What do we pay you for?  We like to think we get asked this question because we make our clients’ plans so easy for them.  Any successful qualified plan has a lot of professional expertise supporting it.  TSC, as part of your Retirement Plan Team, provides plan design and ongoing operational compliance as mandated by both the Internal Revenue Service (IRS) and the Department of Labor (DOL).  We are the people who make sure your plan is designed and maintained pursuant to your business and participant needs.  We ensure that the plan stays current with the ever-changing legal and regulatory environment.  TSC helps coordinate the activities of the “players” on your Retirement Plan Team, which include your investment company and your Investment Advisor.

Plan Design: TSC’s experienced Consultants make certain that your plan design is appropriate to your company. Your TSC Retirement Plan Administrator monitors your plan to see if any demographic or other changes might justify adjustments in your plan design.   Our Client Relations department is your support and can assist in making sure your plan is running smoothly and meeting your needs and expectations.  Our Legal Department keeps you up to date on the ever-changing rules and regulations thus affording you the opportunity to change your plan design.

Administration: The administrative services that TSC provides span many different areas pertinent to the successful operation of your retirement plan.  Some services are provided on an annual basis and others are provided many times throughout the year.  The expertise of our experienced staff is available to you as needed any time during the year.

• Loans processing - review forms for accuracy and forward to investment company.
• Withdrawals - review forms for accuracy, verify vesting information and availability and forward to the investment company.
• Request and review annual census to complete testing.
• Complete Annual Valuation.
• Run annual non-discrimination testing.
• Prepare the Form 5500.
• Prepare bound report of valuation and testing results.
• Prepare the Executive Summary - this will highlight issues that require immediate attention.
• Compliance Issues - in the event of failures to any of the non-discrimination tests TSC will summarize and assist in making the corrections.
• Assistance with plan audits.

Plan Documents: Qualified plans have as their foundation their plan documents.  These are the legal materials that govern the operation of the plan, and they are required by law.  It is the first thing the IRS or DOL look for in the event of an audit.  TSC has a legal department that vigilantly monitors the legal and regulatory environment and ensures your documents are up to date. 

Have a question for Gary?  Reply to the email of this issue of the Translator and your question will be reviewed and answered.  If chosen, it will be published in future articles of the Translator.

Generally, you should not be directing your participants to contact TSC with questions.  TSC’s basic fee structure does not include the additional time required to answer participant questions.  Participant telephone calls can be lengthy and numerous and delay TSC’s ability to complete the services that our clients have contracted us to perform.

We suggest that your company have an on-site person that your plan participants can contact with questions.  If this individual does not know the answer, we encourage them to contact your TSC Retirement Plan Administrator for assistance.   This structure promotes TSC’s ability to provide ongoing education to the person who has been assigned as the contact at your company and will help to keep your fees from increasing.

Occasionally, a confidential situation may arise when you feel it pertinent for your plan participant to speak directly to your TSC Retirement Plan Administrator.   In these instances, you should contact your TSC Retirement Plan Administrator, explain the situation and provide the telephone number of the participant to be contacted.   Your TSC Retirement Plan Administrator will then call the participant and answer their questions.

Typically, a partial plan termination occurs when there is a 20% or greater reduction in the number of eligible participants in a plan due to actions taken by the employer.  The time frame used for this determination is usually the plan year, although the IRS has indicated that a longer period may be considered if there are a series of related events of more than a year.  However, there is no clear cut test to make this determination as other facts and circumstances can also be considered.  As an example, a construction company that lays off 80% of its workforce every November with the intention of re-hiring them in the spring could argue that this is a routine business practice for their company and therefore no partial plan termination occurred.

When a partial plan termination occurs, all affected participants become fully vested.  Failure to vest affected employees could result in IRS disqualification of the plan.  If you have a 20% reduction in your participants, legal counsel should be obtained to determine if a partial plan termination has occurred and TSC should be notified and.  TSC is not a plan fiduciary and therefore cannot make the final determination that a partial plan termination has occurred.