With nearly 3,000 retirement plan clients, we get hundreds of great questions every year. We feel it is our responsibility to be a resource for our clients, and provide valuable answers that they can count on. We have compiled the most frequently asked questions in this easy to understand reference guide.
Top 5 Most Asked Questions
What is the biggest risk in sponsoring a 401(k) plan?
The number one area in which plan sponsors get in trouble is for withholding 401(k) contributions from employees’ wages, but failing to remit those contributions to the investment custodian. We will help you manage the other compliance areas of your plan.
We forgot to send in our Form 5500 before the deadline. What do we do now?
Your best bet may be to file under the Delinquent Filer Voluntary Compliance Program. The Department of Labor fee is $750 but it allows the plan to avoid penalties of up to $1,100 per day for late filing.
When must 401(k) contributions withheld from wages be remitted to the investment company?
Generally within 7 business days, or as soon as administratively possible.
If we hire a trustee outside of our company can we avoid having liability for the plan?
No. The plan sponsor will still be liable for the proper operation of the plan.
What is the 401(k) deferral limit this year?
The deferral limit for 2021 is $19,500 plus an extra catch up contribution limit of $6,500 for any participant who is 50 years of age or older.
Questions For New Plans
What is a Safe Harbor plan?
A Safe Harbor plan is a plan which attempts to avoid the problems of the ADP and Top Heavy tests by making a guaranteed contribution to employees. That contribution is either a matching contribution that caps at 4% of wages for employees who are contributing their own funds, or a contribution of 3% of wages for all eligible employees.
Can an employee put their whole paycheck into the 401(k) plan?
Almost. As long as your plan allows, you may defer your entire paycheck less the amount withheld for Social Security and Medicare taxes.
Can I buy real estate with my retirement account?
Only if the plan document allows it. However, investments in things other than financial instruments may result in tax on your retirement account. Please consult with us before you proceed with any such transaction.
Can we exclude part time employees from the plan?
Generally, any employee who works more than 1,000 hours per year (20 hours per week) must be included in the plan.
Our company is an LLC. Can the “partners” still make 401(k) contributions?
Yes. “Partners or members” in an LLC, a partnership, or in a sole proprietorship may still make 401(k) contributions, as long as they have earned income.
Can we change our plan to be a Safe Harbor plan this year?
Yes: A 3% nonelective Safe Harbor contribution can be added 30 days prior to the end of the plan year (a Safe Harbor matching contribution cannot be added during the year). A 4% Safe Harbor contribution can be added up to 12 months after the plan year end. Generally, a Safe Harbor Notification must be given to employees 30 days before the start of a plan year. Safe Harbor matching provisions will need to wait until next year. Note: Companies who do not currently have a 401(k) plan may start a Safe Harbor plan mid-year, provided there is at least 90 days remaining in the plan year.
How much Roth 401(k) may I defer?
The limits for Roth deferrals are the same as for regular deferrals. That amount is $19,500 for 2021 plus $6,500 for catch up contributions.
What happens if we don’t get the paperwork done to enroll a participant by the entry date?
Generally, a participant must be given the paperwork prior to their initial entry date to timely enter the plan. If the participant failed to return the paperwork timely, they can still be enrolled the plan’s next “modification date”. However, if an employer has forgotten to give enrollment paperwork to an eligible participant, then they may be enrolled whenever the error is discovered. Also, the employer may have to make up a portion of the missed deferrals.
Can the owner of our company invest his 401(k) funds in something different than the employees?
Yes, but only if the investment is offered to all participants. No participant (including the owner) may invest in something that is not available to all participants.
What is an ERISA bond, and how much does it need to be?
Retirement plans are required to carry coverage to protect the plan participants from misappropriation of funds. The bond needs to be in the amount of 10% of plan assets and can generally be obtained as a rider on your regular liability insurance policy.
Other Plan And Process Questions
Do we need any documentation for employees who chose not to enroll in our 401(k) plan?
Yes. You should retain a signed enrollment form or other documentation showing that the employee declined to participate. Employers who don’t have signed waivers can be forced to make contributions for the employee later.
Do we really have to pass out a copy of the Summary Plan Description to all of our plan participants?
Yes. In fact, you must provide a copy to all eligible employees.
When must 401(k) contributions withheld from wages be remitted to the investment company?
Generally within 7 business days, or as soon as administratively possible.
What is Form 5500?
Form 5500 is the annual return (similar to a tax return) that the plan files with the Department of Labor.
Will our plan need to be audited by a CPA firm?
If you have more than 100 eligible employees at the start of your first plan year, you will need to have an audit done by a CPA firm and attach a copy to your Form 5500 filing. Otherwise, you will not need an audit until a subsequent year after you have exceeded 120 eligible participants.
Will our retirement plan have to pay taxes?
Generally no, unless the plan engages in certain less common business activities. Although the plan could pay penalties if limits are exceeded or deadlines missed.
We’d like to close the retirement accounts for some employees who have been gone for a long time. Can we just write them checks?
No. If the participant’s account is over $5,000, you may not force them out of the plan. However, if their account is under $5,000, and your plan allows it, you may force the participant to either take a distribution, or you can roll the funds to an IRA account.
What is the ADP (Actual Deferral Percentage) test?
The ADP test is a test which limits the amount the “highly paid” employees may contribute compared to all of the remaining employees. If the plan fails the test, then the highly paid employees will receive refunds of a portion of their contributions.
Why do you need a census with all of our employees each year?
There are reporting requirements, coverage tests and other factors which require that we look at a complete employee census. If you have concerns about your census information, please call us.
We’ve been told that our executives put too much money into the plan compared to the other participants. What happens now?
A third party such as an investment custodian may maintain beneficiary statements for the plan. But ultimately, it is the responsibility of the plan (usually the plan sponsor) to keep a copy of the current election. Much litigation has occurred surrounding the lack of current beneficiary statements.
As a plan sponsor, am I required to keep copies of each participant’s beneficiary statement?
A third party such as an investment custodian may maintain beneficiary statements for the plan. But ultimately, it is the responsibility of the plan (usually the plan sponsor) to keep a copy of the current election. Much litigation has occurred surrounding the lack of current beneficiary statements.
What is the deadline for funding our matching contribution?
You must fund the matching (and/or profit sharing) contributions by the due date of your business tax return, including extensions.
What does Top Heavy mean?
Top Heavy is an IRS term meaning that 60% of the plan’s investments are in the accounts of the key employees. If this happens, your plan must either (1) Make a 3% contribution to all eligible employees, or (2) The key employees may not contribute the following year.
What can we use our forfeiture account for?
Your plan document will specify, but you may be able to use forfeitures to pay plan expenses, reduce employer contributions, make funding corrections, and/or reallocate to the other participants in the plan.
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