As an ERISA attorney, I always have an open phone policy with plan sponsors, financial advisors, accountants, TPAs, and other attorneys from around the country on questions they may have about their plan or a client’s retirement plan. I never wanted to be that law firm attorney who was charging for every simple phone call and I just feel that this policy is a great way to build relationships in this tight-knit industry. That being said, some of the questions I get tend to be repetitive. So while I’m not trying to dissuade people from calling me, I just want to educate everyone on some issues that they may not understand. Like I always say, the reason I love the retirement plan industry is that you can learn something new every day. So here we go:
1. In a 401(k) plan, if you are under 59 ½, you can only get a distribution of your salary deferrals for hardship, death, disability, or retirement. There can be no-in-service distribution for salary deferrals in the plan document for less than age 59 ½. If you did, it would be a disqualifying plan provision. You can have an in-service from the profit-sharing source at any stated age though.
2. A transaction between a plan and a disqualified person is a prohibited transaction. So the plan to buy a building and lease it to the plan sponsor is a prohibited transaction. Even a financial advisor serving as a plan fiduciary can’t actively solicit rollovers from former plan participants.
3. Any participant-directed investment that requires a minimum investment or account balance is subject to testing under benefits, rights, and features to make sure that these benefits, rights, or features of a plan don’t discriminate against non-highly compensated employees. So investments with minimum investments of $25,000 can be discriminatory if enough non-highly compensated employees don’t have $25,000 in their plan account. One solution to that dilemma is if the investment can be traded in a brokerage account, offer self-directed brokerage accounts to all plan participants.
4. There is no statute of limitation for not filing a Form 5500. Using the Department of Labor’s Delinquent Filing Program is far less expensive than getting socked with a penalty from the Internal Revenue Service of $50,000.
5. Offering a new comparability profit-sharing allocation to a 401(k) plan should not be used in tandem with a safe harbor matching contribution formula because you can not use the matching contribution to offset any minimum contributions under a new comparability plan design (which a safe harbor profit sharing 3% contribution can).
6. When terminating 401(k) plans, be wary of the successor plan rule which is only applicable to 401(k) plans. Under the successor 401(k) plan rule, generally, an employer may not terminate a 401(k) plan and then start a new one for at least 12 months after the original plan is terminated.
7. Be careful of offering any incentives for people deferring or not deferring into a 401(k) plan, outside of the new de minims rule. A 401(k) plan is not qualified unless it complies with the Contingent Benefit Rule. The Contingent Benefit Rule provides, in part, that no other benefit may be conditioned, directly or indirectly, on an employee electing to make or not to make elective contributions under the 401(k) plan.
8. Many plan errors can be corrected without seeking submission to the IRS’ voluntary compliance programs. It all depends on the size of the error and the years involved.
