adventures in retirement plan design compliance and administration considerations presented by kelly...
TRANSCRIPT
Adventures in Retirement Plan DesignCompliance and Administration
Considerations
Presented ByKelly Marie Hurd, ERPA, CPC
Senior Retirement Plan Consultant
T H E V I E W S E X P R E SS E D BY T H E S P E A K E R S A R E T H E I R O W N A N D D O N O T N E C E SS A R I LY R E P R E S E N T T H E V I E W S O F A N Y P E R S O N,
L I V I N G O R D E A D, R E A L O R F I C T I T I O U S, M A L E O R F E M A L E , R E L I G I O U S O R AT H E I S T … Y O U G E T T H E P O I N T.
N O P E O P L E O R A N I M A L S W E R E H A R M E D I N T H E M A K I N G O F T H I S P R E S E N TAT I O N.
T H E C O N T E N T O F T H I S P R E S E N TAT I O N I S G E N E R A L I N N AT U R E A N D I S F O R I N F O R M AT I O N A L P U R P O S E S O N LY. I T S H O U L D N O T B E U S E D A S A S U B S T I T U T E F O R S P E C I F I C TA X , L E G A L A N D / O R
F I N A N C I A L A DV I C E T H AT C O N S I D E R S A L L R E L E VA N T FA C T S A N D C I R C U M S TA N C E S.
Caveats & Disclaimers
Slide | 3
Design
Document
Investments
Record-keeping
Compliance/Gov’t
Reporting
Consulting
Legal/Accountin
g
Overview
www.dwcconsultants.com/services/plancomponents.php
Slide | 4
Retirement plan goalsPlan design options
◉ Safe harbor ◉ Automatic enrollment
Compliance considerations◉ Required testing◉ Related companies
Plan corrections
Agenda
Retirement Plan Goals
Slide | 6
What are you trying to accomplish with the plan?◉ Provide a maximum benefit to the owner(s) of the
company◉ Maximize the contributions to the company
executives◉ Implement a plan in order to secure a government
contract◉ Provide generous benefits to all employees to attract
and retain talent
Retirement Plan Goals
Slide | 7
Nondiscrimination testing to ensure Highly Compensated Employee (“HCE”) benefits not disproportionate to Non-HCE (“NHCE”) benefits
Must meet one of two tests to be HCE◉ 5% owner test
◉ Compensation test
Employees not meeting one of these tests are NHCE
HCEs & Nondiscrimination
www.dwcconsultants.com/knowledge_center/Key-HCE.php
Slide | 8
If the retirement plan is not for the benefit of all employees, define the target group◉ Who do you want to benefit from the retirement
plan?◉ Can you exclude certain classifications of employees
from benefiting under the plan?Determine your maximum and minimum
funding goalsRegulations are structured with testing that
requires plans to provide a minimum benefit to qualified employees
Benefiting Employees
WorkerClassification
Slide | 10
Permitted based on valid job classification◉ Title or job function◉ Location or division◉ Hourly or salaried
Not permitted if indirectly based on service◉ Temporary◉ Seasonal◉ Normally scheduled to work less than…
Defining Employee Exclusions
IRS Quality Assurance Bulletin, FY-2006, No. 3
Slide | 11
TempsSeasonal employeesPer diem employeesInternsStudentsEtc.
All of these are still employees!
Other Than Full Time
“An Rose Employee By Any Other Name”, PRECISION Magazine, 2014 edition, page 5.
Plan Design
Slide | 13
Should be customized to fit the employer’s goals
Factor to consider◉ Employee turnover
◉ Consistency of cash flow
◉ Flexibility
◉ Complexity
◉ Tax ramifications
Stay tuned…
Plan Design
Slide | 14
Retirement plans offer a plethora of design options◉ Safe harbor designs◉ Pro-rata vs. integrated allocations◉ New comparability
Plan Design
Slide | 15
Annual Compensation Per Capita Pro Rata Permitted
Disparity
New Comparabilit
y
Owner #1 $255,000 $20,750 $51,000 $51,000 $51,000
Owner #2 $255,000 $20,750 $51,000 $51,000 $51,000
Manager #1
$ 80,000 $20,750 $16,000 $13,440 $ 5,200
Manager #2
$ 50,000 $20,750 $10,000 $8,400 $ 3,250
Manager #3
$ 45,000 $20,750 $9,000 $7,560 $ 2,925
Staff #1 $ 40,000 $20,750 $8,000 $6,720 $ 2,600
Staff #2 $ 30,000 $20,750 $6,000 $5,040 $ 1,950
Staff #3 $ 30,000 $20,750 $6,000 $5,040 $ 1,950
Staff #4 $ 23,000 $20,750 $4,600 $3,864 $ 1,495
Staff #5 $ 22,000 $20,750 $4,400 $3,696 $ 1,430
$830,000 $207,500 $166,000 $155,760 $122,800
61% 20.0% 61% 65% 83%
Comparison of Methods
www.dwcconsultants.com/knowledge_center/ProfitSharing.php
Slide | 16
Plan design that provides for automatic passage of ADP test
Minimum employer contribution required Participant notice required 30 – 90 days
prior to start of each plan year Two “traditional” options Two automatic enrollment options
Safe Harbor 401(k) Plans
“The Not-So-Safe-Harbor 401(k) Plan”, PRECISION Magainze, 2013 edition, page 12
Slide | 17
Matching contribution◉ 100% of the first 3% of deferrals, plus
◉ 50% of the next 2% of deferrals
Base contribution◉ 3% of compensation
Immediate vesting required
Safe Harbor 401(k) Plans - Traditional
Slide | 18
Deferrals◉ Minimum 3% during initial period
◉ Auto increase by 1% per year up to 6%
◉ Maximum is 10%
Matching contribution◉ 100% of the first 1% of deferrals, plus
◉ 50% of the next 5% of deferrals
Base contribution◉ 3% of compensation
Maximum vesting = 2 year cliff
Safe Harbor 401(k) Plans – Auto Enrollment
Slide | 19
Annual Compensatio
n
401(k) Deferrals
SH Base (3%)
New Comp (10.14%/1.38
%)
Total ER
Alloc.
Total Allocation
Owner #1 $255,000 $23,000 $7,650 $25,850 $33,500 $56,500
Owner #2 $255,000 $17,500 $7,650 $25,850 $33,500 $51,000
Manager #1
$ 80,000 $ 4,000 $2,400 $ 1,104 $ 3,504 $ 7,504
Manager #2
$ 50,000 $ 1,000 $1,500 $ 690 $ 2,190 $ 3,190
Manager #3
$ 45,000 $ 0 $1,350 $ 621 $ 1,971 $ 1,971
Staff #1 $ 40,000 $ 0 $1,200 $ 552 $ 1,752 $ 1,752
Staff #2 $ 30,000 $ 0 $ 900 $ 414 $ 1,314 $ 1,314
Staff #3 $ 30,000 $ 0 $ 900 $ 414 $ 1,314 $ 1,314
Staff #4 $ 23,000 $ 0 $ 690 $ 317 $ 1,007 $ 1,007
Staff #5 $ 22,000 $ 1,000 $ 660 $ 304 $ 964 $ 1,964
$830,000 $46,500 $24,900 $56,116 $81,016 $127,516
61% 87% 61% 92% 83% 84%
Safe Harbor & New Comparability
Slide | 20
Let’s review a typical California safe harbor plan.
I Love Rock N Roll, Inc.
Plan consistently fails ADP test
◉ HCE ADP = 10%◉ NHCE ADP = 4%
Is Safe Harbor 401(k) the best option?
Slide | 21
Failed ADP test◉ HCE ADP = 10%◉ NHCE ADP = 4%
Correction◉ Increase NHCEs to an average of 8%, or◉ Decrease HCEs to an average of 6%, or◉ Combination of the two, or◉ Safe harbor plan
I Love Rock N Roll, Inc.
Slide | 22
Annual Compensatio
n
401(k) Deferrals ADP SH NEC
(3%)SH Match
(Basic)Targeted
QNEC
Mick $100,000 $10,000 10.00% $3,000 $4,000 $ 0
Steven 90,000 10,000 11.11% 2,700 3,600 0
Ringo 80,000 0 0.00% 2,400 0 0
Iggy 70,000 5,000 7.14% 2,100 2,800 0
Beck 50,000 1,500 3.00% 1,500 1,500 0
Jimi 50,000 5,000 10.00% 1,500 2,000 3,125 (6.25%)
Lana 40,000 0 0.00% 1,200 0 2,500 (6.25%)
Meghan 40,000 400 1.00% 1,200 400 2,500 (6.25%)
Bono 40,000 0 0.00% 1,200 0 2,500 (6.25%)
Beyonce 20,000 350 1.75% 600 350 1,300 (6.25%)
Kanye 15,000 0 0.00% 450 0 1,875 (12.5%)
$595,000 $32,250 $17,850 $14,650 $13,800
Non-HCE Group
Slide | 23
Failed ADP test◉ HCE ADP = 10%◉ NHCE ADP = 4%
Options◉ Pro rata QNEC = $595,000 x 4% = $23,800◉ Safe Harbor NEC = $17,850◉ Safe Harbor Match = $14,650◉ Targeted QNEC = $13,800
I Love Rock N Roll, Inc.
eba.benefitnews.com/news/the-unconventional-401k-2736440-1.html (requires free registration)
Slide | 24
ABC Company – Considering Auto Enrollment◉ 8 HCEs
100% participation Average deferral of 6.53%
◉ 395 NHCEs 57% participation Average deferral of 2.52%
◉ Auto enrollment 4% of pay 0% opt-out rate
Automatic EnrollmentTesting
Slide | 25
XYZ Company – Already Has Auto Enrollment◉ 51 HCEs
94.1% participation Average deferral of 6.59%
◉ 128 NHCEs 94.5% participation Average deferral of 3.61%
◉ Auto enrollment 48 new NHCEs enrolled at 3% of pay 0% opt-out rate NHCE average deferral of 3.55%
Automatic EnrollmentTesting
Slide | 26
30-year old participant, earning $50,000/year with annual COLAs of 3%◉ Replacement ratio = 69%
Retirement age = 65Average annual investment return of 8%Default deferral of 3% of pay
◉ Runs out of money by age 70Escalating default deferral from 3% to 6% of
pay◉ Runs out of money by age 78
Automatic EnrollmentComfortable Retirement
www.plansponsor.com/print.aspx?id=6442513744
ComplianceConsiderations
Slide | 28
Nondiscrimination testing◉ Minimum coverage◉ Top heavy◉ ADP/ACP (we covered by loving Rock and Roll)◉ Compensation ratio◉ Other
Key employees vs. HCEs/NHCEs
Compliance Considerations
www.dwcconsultants.com/knowledge_center/NDT-Overview.php
Slide | 29
Applicable limits◉ Plan and participant level limits◉ Plan year and calendar year
Related companies◉ Controlled groups◉ Affiliated service groups
Compliance Considerations
Slide | 30
Applicable Limits
www.dwcconsultants.com/knowledge_center/contributionlimitations.php
Limit Code Section 2015 2014 2013
Compensation 401(a)(17) $265,000 $260,000 $255,000
Elective Deferrals [401(k)] 402(g)(1) $18,000 $17,500 $17,500
Catch-Up Contributions [401(k)] 414(v)(2)(B)(i)
$6,000 $5,500 $5,500
Elective Deferrals [SIMPLE] 408(p)(2)(E) $12,500 $12,000 $12,000
Catch-Up Contributions [SIMPLE]
414(v)(2)(B)(ii)
$3,000 $2,500 $2,500
Annual Additions – DC Plan 415(c)(1)(A) $53,000 $52,000 $51,000
Annual Additions – DB Plan 415(b)(1)(A) $210,000 $210,000 $205,000
HCE – Compensation Test 414(q)(1)(B) $120,000 $115,000 $115,000
Key Employee – Officer Comp 416(i)(1)(A)(i) $170,000 $170,000 $165,000
Key Employee – 1% Owner Comp
416(i)(1)(A)(iii)
$150,000 $150,000 $150,000
Social Security Wage Base N/A $118,500 $117,000 $113,700
RelatedCompanies
Slide | 32
Plan document◉ Only “lead” employer◉ Adoption by other employers
Crediting service for eligibility and vesting◉ Required for related employers◉ Optional for unrelated employers
Nondiscrimination testing◉ Aggregation generally required for related employers◉ Separate testing for unrelated employers
Application of limits◉ Annual additions limit
Implications
Slide | 33
One person or entity is deemed to own what another person or entity owns
Three different definitions◉ IRC §267(c)
Prohibited transactions◉ IRC §318
Highly compensated employees and key employees Disqualified persons in S-Corp ESOPs Affiliated service groups
◉ IRC §1563 Controlled groups
Attribution
www.dwcconsultants.com/knowledge_center/OwnerAttribution.php
Slide | 34
Parent/subsidiaryBrother/sisterCombined
Types of Controlled Groups
“Related Companies: Who Is In Control?”, PRECISION Magazine, 2013 edition, page 3
Slide | 35
One business owns at least 80% of one or more other businesses◉ For purposes of combined annual additions limit,
threshold is greater than 50%Single parent may own multiple subsidiariesGroup may include several tiers
◉ Parent owns subsidiary◉ Subsidiary owns other subsidiaries
Parent/Subsidiary Group
Slide | 36
Example◉ Company A owns the following:
100% of company B 80% of company C 50% of company D
◉ Parent/subsidiary group consists of A, B and C but not D
Example◉ Same as above and C owns 40% of D◉ A (50%) + C (40%) = 90%, so D is now part of the
controlled group
Parent/Subsidiary Group
Slide | 37
Five or fewer owners satisfy both of the following:◉ Common ownership of at least 80%, and◉ Identical ownership of more than 50%
Brother/Sister Group
Slide | 38
Example
Owner 3-Hour Tour
Island Resort
Identical
Gilligan 40% 30% 30%
Ginger 20% 40% 20%
Mary Anne 35% 15% 15%
Thurston 5% 0% 0%
Professor 0% 15% 0%
Common 95% 85% 65%
Brother/sister group includes 3-Hour Tour and Island Resort◉ 85% common ownership◉ 65% identical ownership
Slide | 39
A-orgB-orgManagement
Types of Affiliated Service Groups
www.dwcconsultants.com/knowledge_center/AffiliatedSvcGroup.php
Slide | 40
Consists of an A-Organization and a First Service Organization (“FSO”)◉ A-Organization
Has ownership interest in FSO, and Regularly performs services for FSO, or Regularly associated with FSO in performing services
to a third party◉ FSO
Any type of entity If corporation, must be professional services
corporation Determined based on operation, not form
A-Org
Slide | 41
Both A-Org and FSO must be service organizations◉ Capital is not a material income producing factor◉ Banks are never service organizations◉ These are always service organizations
Health Law Engineering and architecture Accounting and consulting Actuarial science and insurance Performing arts
A-Org
Slide | 42
Law firm◉ Firm is a partnership◉ Each attorney has his/her own PC◉ PCs, rather than individual attorneys, are partners
in law firm◉ A-Org affiliated service group
PCs are A-Orgs Law firm is FSO
Example
Slide | 43
Medical practice◉ Doctor owns PC◉ Doctor has ownership in imaging center◉ Doctor refers patients from PC to imaging center for
x-rays◉ A-Org affiliated service group
PC is A-Org Imaging center is FSO
Example
Slide | 44
Consists of a B-Organization and an FSO◉ FSO
Same definition as in A-Org group◉ B-Organization
Derives a significant portion of its business from FSO, and
Provides services to FSO historically performed by employees, and
Owned at least 10% by HCEs of FSO◉ Significance
Less than 5% is never significant 10% or more is always significant Everything else is facts and circumstances
B-Org
Slide | 45
Central Billing Office (“CBO”)◉ Five ENT practices are equal owners of CBO◉ Each ENT practice has two equal owners◉ CBO derives 20% of its business from each practice
Example
Slide | 46
Example
Simpson’s ENTBart (50%)
Milhouse (50%)[FSO]
Jetson’s ENTAstro (50%)Jane (50%)
[FSO]
HB ENTHanna (50%)
Barbera (50%)[FSO]
Scooby’s ENTDaphne (50%)Velma (50%)
[FSO]
Flintstone’s ENTFred (50%)
Barney (50%)[FSO]
Central BillingOffice
[B-Org]
Slide | 47
Consists of a management organization (“MO”) and recipient organization (“RO”)
MO’s principal business is to provide management functions for RO
No common ownership required
Management Groups
CorrectingPlan Errors
Slide | 49
1. Failure to timely adopt amendments required by tax law changes.◉ Full plan restatement due by April 30, 2016, maybe
earlier for safe harbor 401(k) plans. www.dwcconsultants.com/knowledge_center/
RestatePPA.php
2. Failure to follow the plan’s definition of compensation when determining benefits.
3. Failure to include eligible employees or exclude ineligible ones.
IRS Top 10 List
Slide | 50
4. Failure to follow rules related to participant loans.
5. Failure to follow rules related to in-service withdrawals.
6. Failure to satisfy rules related to required minimum distributions at age 70 ½.
7. Failure to satisfy rules related to eligibility to sponsor certain types of plans.
8. Failure to pass the ADP and/or ACP test.
IRS Top 10 List
Slide | 51
8. Failure to pass the ADP and/or ACP test.9. Failure to provide the top-heavy minimum
benefit to non-key employees.10. Failure to cap benefits at the annual
additions limit.
IRS Top 10 List
www.irs.gov/Retirement-Plans/EP-Examination-Process-Guide---Section-2---Compliance-Monitoring-Procedures---Top-Ten-Issues---Voluntary-Correction
Slide | 52
Admitting You Have A Problem IsThe First Step!
Confess your sins?Go forward and sin no more? I’m an atheist?
To Correct Or Not To Correct?
Slide | 53
Impact on participants and beneficiaries Impact on plan administrationLikelihood of discoveryStatute of limitationsPersonal liability of plan fiduciaries
To Correct Or Not To Correct?
Slide | 54
Correction Programs
“Accidents Will Happen”, PRECISION Magazine, 2014 edition, page 14
DOL (DFVC & VFC)◉ Specific errors◉ Specific methods◉ No self-correction
IRS (EPCRS)◉ Almost any error◉ Pre-approved
methods or “roll your own”
◉ Self-correction permitted sometimes
Page | 55
Questions
Kelly Marie Hurd, ERPA, CPC
Senior Retirement Plan Consultant
651.204.2600 ext. 117 www.linkedin.com/in/kellymariehurd
[email protected] www.DWCconsultants.com
APPENDIX
Slide | 57
Established in 1999National ERISA consulting firmLocations in multiple statesOver 700 clients nationwideConsulting & compliance services for defined
contribution and defined benefit plans are our only service lines
No E&O claims since company inception
About DWC ERISA Consultants, LLC
Slide | 58
Our Team…◉ Consultants average more than 10 years of experience◉ Partners average over 20 years of experience◉ Registered with the IRS as return preparers, subject to
strict ethical standards◉ Hold active industry leadership roles
IRS Advisory Committee on Tax Exempt & Government Entities
ASPPA Board of Directors and Executive Committee ASPPA Government Affairs Committee Co-editor-in-chief of The Journal of Pension Benefits Professor of Benefits/Compensation – Carlson School of
Management Author of the Defined Contribution Handbook
Expertise & Leadership
Slide | 59
Every member of the DWC team is encouraged to think beyond the conventional wisdom and
put themselves in their clients' shoes.
Since the IRS and Department of Labor are involved, following regulations is of critical
importance, but the strategy for doing so must be considered in the context of the day-to-day
business environment and each client’s objectives.
Custom Solutions
Slide | 60
Mandatory professional credentialing program◉ All consultants must complete the exams toward the
Enrolled Retirement Plan Agent (“ERPA”) credential within 3 years of hire. Allows consultants to represent clients before the IRS
In-house training on technical developments and process improvements
Required CPE and participation in industry conferences and events◉ Each employee has an annual budget for expenses
related to CPE.
Professional Development
Slide | 61
Compliance Advantage
Rigorous internal review standards◉ All deliverables are reviewed by a senior team member◉ Comprehensive internal controls, including electronic audit trail, to
ensure quality and accuracy Industry-leading service-delivery
◉ Generally respond to all communications within 1 business day◉ Delivery commitments based on receipt of requested information rather
than government deadlines◉ Fast turnaround times as compared to industry standards
Plan sponsor reports◉ Easy to read◉ Include action items, executive summary, and detailed sections
Compliance portal◉ Plan sponsor reports and government forms stored by type and/or year◉ Year-end plan sponsor data submission is secure and easy to complete◉ Dynamic tracking and routing of all tasks and client deliverables
Slide | 62
DWC’s service model is straight-forward. We assign a consultant, team leader and partner to each plan. DWC adheres to a strict peer-review policy, so all work is reviewed prior to delivery to our clients. Our structure provides high-touch, accurate service to our clients while maintaining cost-effective pricing.
At DWC, we dig deeper to understand each client’s unique financial and operational needs. With decades of experience, critical thinking and exceptional service, DWC combines strategic solutions with flawless execution.
Relationship-Based Service
Slide | 63
DWC does not accept revenue sharing from any third parties.
Our fee model is and has always been to charge a reasonable fee for the services we actually provide for each plan. We do not offer “all-inclusive” pricing, because such pricing models typically result in many plans subsidizing extra services that only a few plans actually require. This is a significant reason why industry surveys continually show our fees to be below the 50th percentile for the premium service-level that we provide.
We fully disclose our fees in an easy-to-understand format, and we always have, even long before “fee disclosure” became a requirement or even an industry buzzword.
Cost-Effective Pricing
Slide | 64
Client Reports: First Impression
Sales: Plan Design Projection Report◉ Customized cost-benefit analysis of several design
options◉ Delivered within 2 business days of receipt of census
Hired: Welcome Package◉ DWC team introduction◉ Roles and responsibilities (both initial and ongoing)◉ Service standards◉ Delivered within 5 business days
Slide | 65
Client Reports: Plan Document
Collaborative process◉ DWC: prepares Summary of Plan Provisions (SoPP)
comparing current provisions to proposed new document, including recommendations
◉ Client/DWC/Advisor: conference call to review SoPP, discuss and update as needed
◉ DWC: finalizes and delivers signature-ready plan document package Plan document and adopting resolution Summary Plan Description and plan FAQ QDRO policy and loan policy (as applicable) Plan Administrator’s guide and sample forms
◉ DWC: follows up to ensure timely execution of documents
Slide | 66
Client Reports: Year End Prep Report
Delivered 6 to 8 weeks prior to year-end◉ Includes required annual notices◉ Requests information needed to complete testing,
contribution calculation and government reporting, as applicable Census (several options for secure, encrypted
submission) Annual questionnaire (completed online)
◉ Client checklist as a reminder of their key tasks◉ Reminder of key compliance deadlines and our
service commitmentClient phone call to review report and process
Slide | 67
Client Reports: Annual ERISA Compliance Review
The AECR is delivered annually and includes action items, executive summary and the following items:
In the event of an IRS or DOL audit, our AECR makes the process much less stressful.
Plan eligibility review Coverage test ADP/ACP test Top heavy determination Contribution limit review Compensation ratio test
Company contribution calculation Required minimum distributions Participant loan review Proactive plan design review Related company review Form 5500 and 8955-SSA