IRS Efforts Regarding 403b Plans

The IRS is consistently trying to equate 403b plans with 401k plans that we are mostly aware of. They have a plan in mind, which they have released during the 403b summit that was held in Florida.

The Summit was in fact opened by an IRS Tax law specialist, who said that the IRS is debating the issue of a new procedure related to draft revenue. This would mean a significant step in the development of 403b plan regulations. It is estimated that these regulations will be released by the first quarter of 2010.

This date will be a milestone for the 403b plans, as on this date the 403b plan that will be moving towards a new epoch.

According to Mr. Architect, the spokesperson who opened the summit in Florida, the IRS has already released the following:

• A draft set of procedures which describes how the agency intends to progress the new 403b plan.

• A sample of the 403b plan language that will support the projected model.

• A call for comments from the public, regarding the model 403b plan they propose. All comments should be received until the first of June 2009.

Mr. Architect also predicts that the models or prototypes will be coming from retailers, who predict that they will have about 30 plans running on the new 403b model. When this model will be approved, then the plan sponsors, who will be adopting the plan, will be able to sign an agreement, which would lay out the ways in which they will adopt the plan provisions set out in the prototype, to make the new plan work more efficiently.

Finally Mr. Architect concluded by saying that the urges plan sponsors and plan advisers to meet up, thus maximizing the relief provided by the IRS for the transition period, which would be December 2009.

Reference; http://www.planadviser.com/compliance/article.php/4116

Saving on Tax Money

Everyone is interested in learning about the ways and means of saving on tax money. Each and every year we dread that payment and we all dream that some angel would come along and tell us his little tax saving secrets. Well, maybe your dream has become a reality!

There are various ways to save money, if you know the tricks, and if you think you can’t do this on your own then why not employ a tax consultant to help you out? If you simply have a look online, you will find numerous articles providing useful information regarding the numerous ways in which you can save on tax money. Always make sure that the approach you decide to go for validates the end result.

It could be that presently while you are reading through this article, the tax environment is comparatively low. But do you really think that this situation will remain unchanged in the coming years? You must be prepared such that if and when the taxes rates will go up, you have a ready plan that will help you save on tax money.

Keep in mind that in the very long term of 30 years or more, when you will need your savings for your retirement, it is very likely that the tax rate will be higher than it is today. If you seek the advice of a professional tax consultant, he will point you towards saving your money in a 401k plan. This is retirement plans which offers multiple tax advantages, and in which employers sometimes match the employees’ savings amount.

You should make the best of this feature, and make sure that your employer is contributing close to the maximum possible amount since this would give you a very good mark-up on the money saved. If on the other hand, your employer won’t give any contribution at all, then you should consider investing in a Roth IRA instead of an employee sponsored retirement plan.

http://www.letsmakemoneysavemoney.com/knowing-how-to-save-on-taxes/

Adolescents Seeking More Financial Education

According to a recent survey, young employees are seeking more financial education and assistance from their employers, than what is actually being provided. It seems that a large percentage of younger employees, are not at all customary with the benefits of the plans that their employers are offering.

Over half of the adolescents surveyed would like to have more guidance regarding the benefits and workings of the retirement plan that their employer offers, however unfortunately only 30% of employers offer assistance.

According to this survey adolescent employees would also like to have more guidance in matters that relate to debt management and purchasing a home; advice regarding budgeting and advice on where it is best to save for retirement and also assistance as regards savings for a child’s future education.

This survey has also concluded that only half of adolescents are totally financially independent from their parents, and the others are either unemployed or else have decided to live with their parents in order to save money, since living on your own is quite expensive.

When it comes to financial education re budgeting etc, more than half of the adolescents surveyed accredit their parents for their knowledge and also for financial advice. Many also admit that they do not feel competent enough to deal with important financial decisions on their own.

The results of this survey also identify a worrying trend regarding the payment of credit card bills, since only 33% of surveyed individuals completely pay their credit card balance at end of month.

Most adolescents request to have a better background knowledge regarding finances, than what is offered by their parents. They demand more education; even through the scholastic system, that enables them to acquire enough knowledge in such a way, that they will feel confident in the financial decisions they take. The majority of adolescents would also like to see incentives, which will encourage their employers to provide employees with the financial education they need.

Reference: http://www.planadviser.com/research/article.php/4025

IPP or RRSP?

If you are undecided whether to go for an IPP or an RRSP, then read on for here are the basic details of an IPP plan.

IPP

An IPP is a retirement plan that normally consists only of one or two contributors. This plan consists of a combination of assets which will provide income on the retirement of a single individual.

This type of retirement plan is normally set up for the benefit of a small business owner, or a partnership, but it may be also used for a business’ key employees.
Further details:

• An actuarial study should be completed every 3 years to establish funding needs for the subsequent 3 years.
• A yearly contribution is made by the company, for the employee. This contribution is eligible for tax deduction for the company.
• In the even that the employee retires before age 65, then he may also take advantage of terminal funding.
• Once reaching retirement age, the employee has 3 alternatives. 1. He may either choose to withdraw a pension from his savings amount. 2. He may commute his pension thus becoming accountable for his retirement income. 3. He may buy an annuity with his savings.
• Payments on this plan do not end with the passing away of the retiree’s spouse, but will go to the employee’s estate.

Plan benefits

IPP contributors will have an advantage over RRSP contributors, in times when the market is giving a weak performance, since legislation says that if the plan assets are less than what is required to meet earnings obligations, then the company may increment the contributions in order to increase the asset base.

The IPP is also a creditor protected plan and this feature provides supplementary advantages to professionals as well as small business owners.

Reference: http://familywealthmanager.blogspot.com/2009/04/ipp-vs-rrspbusiness-ownerstake-note.html

A Short IRA History

The IRA knows its origins in the year 1974, when Employee Retirement Income Security Act was passed. This act provided amongst other things, for the realization of the IRA. The IRA back then however, was not exactly like the one we have today.
Originally IRA contributions were not deducted from pre taxed income, and the limits were of just $1500 or 15% of the total income of the household, whichever is the lowest.

The goals of the IRA were to:

• Provide a retirement plan for individual who were employed by companies, which did not provide them with a retirement option.
• To preserve the position of plan assets as being tax-deferred, upon termination of employment.

This retirement option, which was then offered solely through banks, became popular immediately, and attracted billions of dollars in contributions. Another law called the Economic Recovery Tax Act, then made the IRA even more available, since is allowed it to be offered to everyone under the age of 70 and a half.
During the years contributions were allowed to increase, and after that some restrictions were introduced that limited the amount of contributions that could be made by people who were earning less than $35,000 if single, or less that $50,000 when married.

During the years other changes have taken place that allow non working spouses to make contributions to the IRA, and catch up contributions were also allowed for people aged 50 or over.

More recently however, owners of a traditional IRA were given the option to switch to a Roth IRA, irrespective of their income level. In addition to the release from this income cap, taxpayers that decide to switch to a RIRA, are also permitted to divide taxation on the funds that will be converted between 2010 and 2011.

Reference: http://bfponline.com/weblog/682/history-of-the-individual-retirement-account-ira/

Take The Best Advantage of Your Retirement Plan

If you want to make the best out of your 401k plan, or your IRA then you first need to clearly understand the early withdrawal rules of both these plans. This guide will provide you with the guidance you need and will answer all your questions. It is an indispensable read, which will allow you to tap into the potential of your retirement plan, before you reach sixty.

Saving lots of money in taxes is a good idea that interests anyone. Individuals sometimes make early withdrawals out of these plans, for a variety or reasons such as retiring early, maybe paying off a mortgage or to cover college fees for their children. If you want to make a withdrawal, and avoid paying taxes, you should clearly understand the rules and regulations that govern this plan.

When is comes to types of plans, we all know that there are various, and that each and every one of them, has different rules. Don’t worry though, because this incredibly handy and informative book will go through all of them.

This book will also provide you with essential information that regards the setting up of an SEPP plan. This stands for Substantially Equal Periodic Payment plan, and will allow you to make the withdrawals you need, while escaping the 10% tax that goes with withdrawing.

This book also covers how you should borrow money from your retirement plan, and what or rather what not needs to be reported to the IRS. You will also find lots of helpful and easy to follow examples and other tax planning tips right through the book. So enjoy saving your tax money!

Reference: http://retirewell.findfastr.com/retirement-planning/how-to-tap-your-ira-or-401k-and-escape-tax-the-60-minute-guide-to-the-early-withdrawal-rules

Simple Facts About SIMPLE IRA

A SIMPLE IRA plan is a retirement option, that offers the employer a very simple way of matching his employees’ contributions. Within this plan, an employee can make monthly contributions by way of a small salary deduction, towards his retirement fund, and the employer may also match this contribution, or make a non elective one.

A SIMPLE IRA plan cannot be set up by just any employer. Only employers who have a total of 100 or less employees, who have earned a total of $5000 during the previous year, may choose to opt for this plan.

Tax exempt employers and government entities, are also allowed to maintain a SIMPLE IRA plan. Establishing a SIMPLE IRA plan is simple and requires only three steps:

1. You must adopt the model of the SIMPLE IRA plan, through either Form 5305-SIMPLE or 5304-SIMPLE. You may also use a prototype plan which has been approved by the IRS
2. All the employees who are eligible to make contributions must be given adequate information about the plan in which their contribution will be deposited.
3. A SIMPLE IRA account needs then to be set up for each employee with a bank or another financial institution.

A SIMPLE IRA needs to be set up between the following dates: January 1 and October 1, and is to be maintained on a calendar-year basis. Further more, if an employer maintains another qualified plan, under which his employees receive an allocation of contributions, then the employer cannot make contributions under the SIMPLE IRA plan. This fact is however subject to some exceptions.

Reference: http://www.irs.gov/retirement/article/0,,id=111420,00.html

Facts About the SIMPLE 401k plan

A SIMPLE 401k plan is a plan is an intersection between a traditional 401k plan and a SIMPLE IRA, and offers you the best features of both plans.

The highlights of a SIMPLE 401k plan are the following:

• While an employer who decides to adopt a traditional 401k plan for his business requires hiring costly professionals for testing purposes, a SIMPLE 401k plan does not require any tests. This therefore makes it cheaper, and more attractive especially to small businesses.
• As with the traditional 401k plan, loans are allowed from a SIMPLE 401k plan. This feature makes the plan very appealing since participants as well as employers, like the idea of being able to borrow funds from their own account.
A SIMPLE 401k plan also has some disadvantages, as listed below:
• Contributions made into a SIMPLE 401k plan have to be immediately vested, and this may result in high staff turnover
• On a SIMPLE 401k plan, the contribution limits are lower than the ones on a traditional 401k plan. While on a traditional 401k plan an employee may defer up to 25% of his total salary, on a SIMPLE 401k plan he can contribute up to a maximum of 3%.
• If an employer decides to set up a SIMPLE plan, unfortunately he cannot then set up a traditional 401k plan, for employees who are not entitled to contribute in the SIMPLE plan.
Regarding eligibility:
• A SIMPLE 401k plan may be adopted by the same employers who are eligible for the traditional 401k plan, with only one difference. An employer needs to have a maximum of 100 employees to be able to adopt this plan.
• As regarding employees, every employee who is 21 years of age, and has been employed for minimum 1 year, is eligible.

Reference: http://www.investopedia.com/articles/retirement/04/052604.asp

SIMPLE 401k or SIMPLE IRA

As a business owner, choosing a retirement plan for your employees should be one of the most important financial decisions you may take. This is so because a retirement may be a factor that helps you attract and maintain employees.

Both the SIMPLE 401k plan and SIMPLE IRA are targeted for businesses which employ a maximum of 100 employees. So what should you choose? Both plans offer advantages as well as disadvantages, which will help you ascertain which the best option for your business is:

• Employers, who choose to go for the SIMPLE 401k plan, may also choose to maintain another plan, for those employees who are not eligible for the SIMPLE 401k. Adversely, if an employer opts for a SIMPLE IRA, he will not be allowed to have any other plan, not even for non eligible employees.
• The SIMPLE 401k plan requires employees to be 21 years of age and employed for at least 1 year to be eligible to make contributions. A SIMPLE IRA on the other hand, has no age limits.
• Neither plan is required to perform non-discrimination testing, and both plans are subject to a 60 day notice.
• On the IRA loans are not allowed, while on the SIMPLE 401k plan, the employer may choose to include the loans option for his employees.
• Contributions for both plans should be immediately and fully vested.
• For both plans, the employees will make a contribution from pre taxed income, with the employer having the option to match. The payments are however subject to different capping rules, which may have different results.
• When an employer decides in favour of making matching contributions, on the IRA he will have the option of decreasing his match to less than 3%, but more than1%, for every 2 years out of 5. SIMPLE 401k plans do not offer this option.

Reference: http://www.investopedia.com/articles/retirement/04/060904.asp

The Basic Points in Establishing a 401k Plan

When you are planning on opening a 401k plan, there are certain points you need to think about and work through. One of these would be whether you want to take care of setting up the plan yourself, or whether you want to talk to a retirement professional to help you get the job done. Here are the four action points for you:

First you need to have a written plan. This will assist you in your daily operations. Before writing the plan document, you need to decide what type of 401k plan is best for you. These are your options:

• A traditional 401k plan offers you the maximum flexibility of all the options. An employer has the option to match the participants contributions on this plan, and the contributions made by participants are from pre-taxed income.
• A safe-harbour 401k plan is comparable to the above; however in this case employer contributions should be fully vested when paid. Tax rules for this plan are less complex than those for the traditional plan
• The simple 401k plan was produced for owners of small businesses, to enable them to have a retirement plan that is cost efficient. The simple plan is for small businesses employing 100 individuals or less.

Your second step is to make sure that the assets of the 401k plan are held in trust, thus benefiting only the participants and not the business profits.

You must also develop a good record keeping system, to keep track of all payments being made in and out of the plan, investments chosen, earnings made and expenses paid from the plan.

Finally you should also provide your employees with adequate information regarding the benefits they have and the requirements of the plan. A summary plan description is a very good way of providing all the necessary information to the participants.

Reference: http://www.irs.gov/retirement/article/0,,id=119612,00.html

Small Business Owners’ Worries

Studies show that as much as half of the total amount of small business owners is worried, that they will not have enough money for their retirement. They comment that in the event that they will need medical attention or to pay for recovering from a serious illness, they won’t have enough money.

Almost all of the small business owners said that they are not planning on stopping work completely when they reach retirement age, but rather cut back on the working hours. Some individuals also state that even though they have passed retirement age, they are still working full time and always looking out for new opportunities.

It is a fact that most small business owners are choosing not to retire completely, however it is also true, that an increasing number of individuals who wish to retire, simply don’t afford to, since they are concerned that after their retirement, they won’t be able to maintain the standard of living they were used to.

Since 2003, Wells Fargo Company Limited, a company that provides a diverse range of financial services, has been studying the trends of small business owners, and set up a Small Business Index. This index basically studies the ratings of small business owners in their currents financial situation, and compares this with the perception of how their business should perform within the next 12 months.

After conducting the studies, the vice president of this company stated that it is very important for small business owners, to plan ahead for their retirement, even though they don’t plan on stopping from work completely.

Reference: http://www.401khelpcenter.com/press_2008/pr_wellsfargo_012908.html

Retirement Tips For the Self Employed

A large number of self employed business owners, find it very hard to start a retirement plan. They are many times at a loss, about what type of retirement plan would be suited for them and their small business. As a self employed individual, you may either choose to open a solo 401k plan, or else a Simplified Employee Pension.

If you want to go for the simplest option, then you should aim towards opening a SEP. This plan is available very easily from most mutual companies or brokerage institutions. As for investment choices, these are normally comparable to the IRAs.

In comparison however, you may be able to contribute more money into a solo 401k plan since SEPs allow you to save up to a maximum of 20% of your business income. To clarify, this is calculated as being business income, less half of the tax of self employment. The figure rounds up to about $45,000. In 401k plans on the other hand, you can save $15,500 and another 20% of the business income as defined above. In addition to this, you may also make catch-up contributions of up to $5000, if you are aged 50 or over.

Now since the $15,500 mentioned above is not calculated as part of the income savings, this means that you will be able to save a higher percentage all in all into a 401k plan. If you already have a regular 401k plan with an employer, and have some freelance earnings, then the contributions made into the solo 401k plan, will be reduced by the contributions made into the regular 401k plan you already have. This however does not affect the 20% business income, so you are still ahead of a SEP.

The only issue is that solo 401k plans are not available from many investment firms, and the fees will very considerably from one to the other. You just need to choose what you want; whether it’s simplicity, or a plan that will allow you to save a significant amount of money.

Reference: http://www.kiplinger.com/columns/ask/archive/2007/q0801.htm

Available Solutions Reversing Start-Up Costs

Department of Labor statistics have uncovered a trend in 401k plan participation. It seems that 64% of workers employed by large or medium sized business are participating in a retirement plan, whilst only 34% of workers employed by small businesses are participating in such plans.

Small businesses state that they are not offering retirement plans, due to their expensive nature. Owners worry about the costs of setting up as well as maintaining and administering such plan. Start-up charges have always been an issue for such small business who intended to start a 401k plan for their employees. Nowadays however, the EGTRRA has helped in minimizing this problem, thus opening the doors to employees who wanted to start saving for their retirement. This law has put into operation a form of credit, that helps employers offset the costs of starting up a 401k plan, and adequately educating their employees about its benefits and the way it works.

As a business owner, you are able to claim credit for costs that you have incurred during the tax years after December 31, 2001. These costs have to be related to the start-up of a retirement plan such as SEP, the SIMPLE or the qualified plan options. The credit you will get, will be equal to 50% of the cost you have paid in setting up and administering the plan, up to a maximum amount of $500 per tax year, for the first three years of the plan.

To be eligible for this credit, you need to have 100 employees or less receiving a salary of at least $5000 from your end.

Reference:
http://www.401khelpcenter.com/401k/small_business_tax_credit.html

The Benefits of 401k Plans

A 401k plan is a retirement plan, in which company employees save money for their retirement. This came about since social security cannot be the only source of income that retirees live on when they retire.

The 401k plan is administered by a company and both employees as well as the employers may contribute funds into the 401k plan. Employers are not however legally bound to match their employees’ contributions.

Apart from the reason why 401k plans exist, their biggest advantage is that the contributions that employees make into the plans come from pre-taxed income. Therefore contributors are not paying tax on the amount they save. The same goes for the interest. The interest earned on the contributions is not taxed, until that is, you take the money out – normally when you retire.

Even then, only the funds that you withdraw from the account will be liable to tax. However it is important to keep in mind, that since when you retire you will have less income, it follows that the tax rate that you will be paying on withdrawing the funds, will be lower than what you are paying now.

When the economy was working fine a few years ago, employers were commonly matching the contributions that their employees were making into their 401k plans. This meant that as an employee, you were getting a 100% mark-up, in the amount of money you were saving. Unfortunately though, since the economy has slipped into recession, these generous employer packages have become few and far between.

The fact is that, even without the employers matching your contributions, saving in a 401k plan is still worth it and will most definitely be an important factor in your future. So if your employer does offer this plan, don’t miss out!

Reference: http://greatgifts.mangacite.com/2009/03/28/a-401k-plan-benefits-you-in-many-ways/

Retirement Planning Tips

Some people have been saving for their retirement, since their first day of work. Others have never given the topic a second thought. Neither one of these scenarios is unusual. Retirement planning can be a very touchy subject for many, however a few tips might be what you need to start you off.

The first thing you need to do is sit down and make some calculations. You should have a goal in your mind, about when you want to retire. This target will make you work harder to achieve your goal. You then have to establish an estimate of the amount of money you will need to save by this date. If you have a look on the internet, you will find many available tools that will help you in this.

Secondly, make sure you know what social security benefits you can avail yourself from. This can be easily done; just have a very good look at the statement that Social Security sends you around your birthday.

Ask your boss whether your company offers any retirement plans. If they don’t examine what options are available; fix an appointment with your tax advisor to enquire about IRAs and ask for advice from a licensed financial planning officer. The more information you have, the better the decision you will make. Don’t forget that this will determine your standard of living after you retire.

Always keep your common sense and do not fall for any investment scams. Always consider what your living situation will be in the future. Don’t wait until you can’t go up the stairs, to decide to relocate to another house. Study the cost of living in different cities that you would consider living in. This may be helpful when you are planning for retirement, and it might even save you money!

Planning for retirement might seem very complicated. If you take some time to plan your future, this will ensure that you will still have a decent standard of living, after you retire. So don’t put it off. Start planning today.

Reference: http://senioradults.mixed-themes.com/?p=285

Questions and Answers to Financial Planning

What is Financial Planning?

This is a service offers by a licensed individual, that will assist you and guide you through any financial decisions you face. The service includes setting goals for the future, planning for your financial future, allotting your portfolio into investments as required and exploring different investment options.

Is Financial Planning really necessary?

This service will allow you to organise your financial situation, in such a manner that you plan for your future, maximize the return you are getting for your money, spread your portfolio to spread the risks, reduce tax liability and therefore achieve financial peace of mind.

Can’t I do this alone?

Some people probably could. But will you? Most professionals find it difficult to sit down and realistically think about their financial future. They claim that they do not have the time, or that there are so many options available that they don’t know where to start. Also frequent tax legislation changes make it difficult to keep abreast.

What would this plan include?

It will analyze your cash flow; assess your portfolio and debts; analyse your estate planning; make income tax projections; plan for your retirement; evaluate insurance needs; analyze educational funding; and analyze your business if applicable.

What is my function in the process?

You just need to provide the most accurate information you can. Your planner has to understand your goals, dreams and your attitude.

Are fees for Financial Planning tax deductable?

Yes, but subject to limitations.

How can I measure the worth of this service?

After the planner provides you with his recommendations, you can compare the plan’s costs, to the projected gains. Over the long term, the gains should exceed by far the cost of preparing the plan.

Will this plan make me rich?

This plan can’t make you rich quickly. What is can do is help you save more of the money you earn, and make your funds work harder for you.

Reference: http://www.dmozonline.com/free-articles/eight-questions-about-financial-planning.html

Are You Missing a Plan Participant?

Employers will learn that sometimes, finding a missing 401k plan participant is a very difficult task.

The IRS has come out with a statement P-1-187, which gives information on how to make use of its letter forwarding program, which is for companies, individuals and federal agencies who need to locate missing persons.

The steps are as follows:

1. Write a covering letter addressed to the IRS disclosure office found in the area where the petitioner is located. This should include the reason why assistance is required, a list with the details of the persons who need to be located, and the details of the person to whom the IRS is to send the acknowledgement letter.

2. With the covering letter you must attach letter addressed to the individuals who cannot be located, that includes instructions for the receiver to voluntary contact the sender. It’s important to include disclaimer statement as per IRS guidelines.

3. The IRS office, upon receiving a valid request, will then look through its records, and if an address for the missing person is found, they will forward the letter in their own envelope. If the letter is returned as undeliverable, it will then be destroyed but the requestor will have no knowledge of this.

This program is free however for requests involving more that 50 missing persons, there is a program at a cost, from the Disclosure office at Washington DC.

Another option would be the National Registry, where you will be able to register the names of any missing persons that have not claimed their retirement money.

Reference: http://www.401khelpcenter.com/401k/missing-plan-participant.html

401k Plan Audit

DOL rules currently state that contributions made by employees into 401k plans, are converted to plan assets, from the earliest possible date in which these payments can be divided from the general assets, but not later than 15 days after date of receipt. This is a bit unclear and subject to interpretation.

The regulations provide however no assistance regarding how the employer should establish whether he is in compliance to the rule or not. The fact is that small employers will think that they are in compliance with the general rule, since they transfer the funds by not later than the 15th day. In reality however the DOL may determine that under the general rule, since the business is small and has only a single payroll system, he is able to separate the funds at a much sooner date.

DOL investigators normally assume that 401k plan contributions for small employers should be segregated within just 7 days from the payment date. If the employer is found in breach of this 7 day presumption, he should in this case contest the interest earnings that are to be assessed against him, and try to press as much as he can the time line forward. We must not forget that this is not the general rule but only a presumption and you may contest also that the general rule states that every business has to be taken separately.

An employer may want to place out a time line that documents the concrete steps to segregate the contributions, and also the time required for each step, and this might include:
• The time needed to calculate the contributions
• Manually processing loans for each payroll
• Verifying the calculations
• Communicating the amounts to the payables dept.
• Time required for financial institution to receive the check and process the transaction
• Time needed to provide investment firm with allocation instructions to participants.

Late deposits will be subject to interest rates which vary. They also have to deliberate reimbursing the participants for any lost earnings and where there is a breach, a penalty of 20% will also be charged to the employer. Since DOL investigations are under way, it might be a good idea for employers to review their procedures and compliance.

Reference: http://www.401khelpcenter.com/401k/perdue_401k_deposits.html

401k Plan Audit Papers

If you’re up for an audit on your 401k plan, then the Department of Labour or the Internal Revenue Service will be asking you for a list of items, that should be available at all times.

Items requested both by DOL and IRS:

• The 401k plan document and any amendment that have been made; trust agreement
• A duplicate of the most current determination letter
• Duplicates of the Form 5500/5500-C; the annual report of the Employee Benefit plan; copies of schedules including schedule A,B and schedule SSA if pertinent; copies of all attachments such as notes to the financial statements.
• Any existing endorsements and fidelity bonds
• Reports from the administrators, and trustees including journals and minutes to investment committee meetings.

The IRS will require:

• Duplicates of the Form 5500/5500-C and the Annual Report of the Employee Benefit Plan for the year successive to the years under present scrutiny.
• Duplicates of the Form 1120, the minutes to the activities that take place with the trust as well as the plan; a copy of the 7004 form.
• A duplicate of the employer’s Form W2P, a statement for the receivers of any annuities, retirement payments, pension payments or IRA payments; a duplicate of the Form 1099R; a record of the total amount distributed from profit sharing, Individual Retirement Arrangements and Retirement Plans, for the years under scrutiny.
• Any cancelled checks that verify the contributions of the years under study.
• Any schedules that demonstrate whether the 401k plan met the ADP and also the ACP tests.
• Employees’ records that specify employees’ details.
• Payroll records
• Allocation schedules of participants
• When applicable a copy of the consent declarations from spouses.

The DOL will ask for:

• A summary of the plan description
• A summary of the plan’s annual reports
• Insurance policy if held
• A list of the service providers and plan managers and their contracts
• Any correspondence that relates to the plan
• Account statements that have been recently provided for the participants
• Papers that show the contributions for the employee that are due from each payroll
• A statement of the investment policy
• All the documents relating to loans if any such as application and promissory notes
• Details and documents about all property held including vehicles, equipment, land and buildings.
• Documents that relate to any other real estate investment.


Reference: http://www.hollandhart.com/newsitem.cfm?ID=521

Questions to Ask Plan Vendors

If you are considering changing your 401k plan vendor, then there are a number of questions you should ask, and also a number of areas you should cover before going ahead.

The key areas you should consider are the following:

Service:

• Make sure that your account representative operates from an office close by, and not some 3 states away. Don’t forget that it is easier to arrange for participant educational seminars when the provider is close by.
• Ask about call centre hours, and what service they will be able to offer you
• Is there any web support and how user friendly is it?
• Make sure that the paperwork such as the statements that participants get, as well as your reports suit your needs and are easy to go through
• Confirm the regularity of retirement distributions
• Confirm the efficiency with which contributions, as well as transfers are recorded.

Compatibility:

Ask for references for plan sponsors of similarly sized plans, who have had positive and negative experiences with the provider you are looking at. Remember that not all the providers are suitable for a small plan, where the sponsor might need more service.

Fees:

401k plan fees may be calculated in various ways such as the number of participants, the amount of plan assets, execution of transactions and you may also have fixed charges. See what works best for you and your participants.

Compliance:

Confirm that the charges relating to compliance with the IRS regulations are built into the base of the new plan. In the case that there are no extra costs, you are better off asking your accountant to handle the situation.
Blackout Periods

We all know that balancing all the accounts takes its fair share of time. However you should always ask for a reasonable estimate of how long the blackout period will last.

Reference: http://www.401khelpcenter.com/changing_vendors.html

When to hire an attorney

401k plan participants are nowadays demanding more information; employers and company officers as well as the government are all demanding clarity and there is a general awareness in the retirement plan market.

As awareness rises from all the parties involved, it is important to compliant with the legal regulations. Appointing an advisor to assist you in complying with the ERISA is a very crucial choice. The advisor should have the correct knowledge and expertise, to help you in navigating though certain particulars of your position. It is of the utmost importance to find an advisor that provides you with the necessary attention and best solutions.

ERISA/employee benefits attorneys, offer their clients a very beneficial service that limits the extent of possible liability and also protects the employees’ rights. An employee benefits attorney should be involved in the following situations:

• In any area of merger, purchase or dispossession
• When a company reviews its employee benefit plan
• To reassess all the features of fiduciary decisions, or decisions which may affect the qualification of a plan
• To design plan documents
• To discuss the impact of any new legislation
• When the work force is substantially reduced
An experienced ERISA attorney should be involved in the following situations:
• During a merger of a present Money Purchase Plan with an already active 401k plan
• For compliance and planning related to PPA
• To determine what the fiduciary liability problems are
• Planning for blackout periods and any oversights that occur during auditing or stock taking
• To provide advice to the plan participants
• To explain the 401k plan fees
• When there are possible withdrawal liabilities arising from pension plans with multi employers.


Reference: http://www.401khelpcenter.com/when_to_hire_attorney.html

The Basic Facts on Catch-Up Contributions

Catch-up contributions are extra payments that people aged 50 or over can make into their retirement plans. Before a participant can make catch-up contributions however, certain limits must be met:

• The annual deferral limit
• The plan’s deferral limit
• Or the annual ADP limit

Studies show that a majority of the present 401k plan options, offer the facility of paying catch-up contributions; the figure is about 93% of plans. Legally however, a plan does not necessarily need to offer catch-up contributions.

If as a provider, you would like to make provisions for catch-up contributions, than probably your plan has to be amended. It is best to confirm with your legal counsel or your record keeper, to ascertain what exactly your particular plan needs.
Catch-up contributions like normal contributions are to be made out of payroll deductions, and as an employer you don’t need to match your employees’ contributions. It would be wise to inform them of your decision, if you’re not going to match.

As regards to paperwork, catch-up contributions are to be shown together with the normal contributions, on the same W2 form. When conducting ADT testing, catch-up contributions are not to be included. Same goes for tests determining the minimum amount of contribution that is needed for a top-heavy plan.

When determining balances available for loans, catch-up contributions should be treated like the normal contributions.

Finally if as an employer, you allow catch-up contributions on one plan, then the same option needs so be offered on all the other plans that permit elective deferrals.

Apart from this you should also consider issues that regard the implementation of catch-up contributions on your system.


Reference: http://www.401khelpcenter.com/catch-up_contributions.html

401K Plans – The Details

A 401k plan is an arrangement where an employee can decided to have a part of his or her salary, deposited into a retirement plan. The contribution is taken from the employee’s pre-tax income (some plans do however accept after-tax contributions).

The contributions made are then invested in a wide range of investments like stocks and shares, bonds and government stocks. Employers may, at their discretion and without legal obligations, match their employees’ contributions. The 2005 maximum annual contribution that may be done by an employee was $14,000. An employee aged 50 or over, has the option of making additional contributions, to catch up.

This amendment was made by the EGTRRA in 2001, and allowed catch-up contributions of up to $1,000 in 2002, $2,000 in 2003, $3,000 in 2004, $4,000 in 2005, $5,000 in 2006, and indexed thereafter.

All the above mentioned pre-tax contributions, and also the gains that are made on the 401k plan account, are only liable to tax when the funds are withdrawn. Also, according to the Growth and Tax Relief Reconciliation Act of 2001, an individual may contribute up to a maximum of $15,000 up to the year 2006, and from that point onwards the contributions

401k plans apply to employees who work in the private sector. There are other plans similar to the 401k plans, that in turn applies to employees who work in the public sector (457 plans), and for those who are employed in the nonprofit sector of the industry(403b plans).

In 1986, Congress had passed some amendments, and encouraged the employers of the private sector, to have more confidence in the 401k plans which have been a matter of regulatory and legal disagreements for years.

Since this time, the 401k plans have becoming the most popular and the most expanding type of retirement plan.

Reference: http://www.401khelpcenter.com/tracking/history_of_401k.html

Collective Trust Funds

The Collective Trust Funds have been around since 1927 and at this time, they were already an esteemed investment, inside the retirement plan society. CTFs are investments which provide various positive benefits since they are not subject to tax, and they are a mutual investment that is composed of assets of stock bonuses, retirement assets and trusts that are not subject to income tax.

The story wasn’t however so plain sailing since in the 1980s, the retirement plan sector began to change. CTFs have been used as investment vehicles in the first 401k plans. When the new plans came around in the 1980’s these began investing in mutual funds, since the latter offered expedient answers and also features that were more appealing for retirement plans.

Until the late 1990s mutual funds were doing much better than CTFs, and the majority of CTFs stayed in the defined contribution market, which was made up of funds that offered stable values and slow moving indexes.

CTFs have however made a comeback a few years ago; when in 2003 the market began again to change. The recovery occurred when plan sponsors began looking for funds that carried a lower fee. The flexible qualities of CTFs also helped in their revival.

Lately CTFs are also being used in retirement plans that can be defined as less traditional. The CTFs expansion possibilities are more promising that those for mutual funds, within the market for retirement plans. As we move along, more and more investment management firms are looking at CTFs, and re including them in their portfolios.

Reference: http://www.401khelpcenter.com/401k/ctf_overview.html

Adjustments in Plan Limits

We have just been announced with the adjustments for the cost of living that will be applicable to pension plans and also other matters, for the 2009 tax year.

The Internal Revenue’s Service code section 415, deals with the adjustments in contributions into plans that qualify under retirement plans. This section also states that the Commissioner should adjust these limits annually, in relation to the rise of the cost of living.

A good number of the limitations in pension plans will be changing during this year, since the rise in cost of living index, has covered the statutory requirements. Other limitations will however remain as they are.

In August of last year, we have been issued with Act 186, which changed the Puerto Rico Internal Revenue Code of 1994. This change was an increase in the limitation of the annual contribution that an employee makes which is pre tax.

This change affects plans that qualified as retirement plans under the Puerto Rico Code. This amendment has resulted in the elimination of the percentage of the pay limit, and also the amount of dollars, is going to gradually increase, until the year 2013.

As from January 1st, 2009 there has been an increase in the limit on the yearly benefit of plans that are found within the definitions of Section 415 b1A. The increase is of 10,000 dollars to a total of 195,000 dollars. Participants, who have been alienated from service before this date, have to calculate the limitation by multiplying their return limits.

Plan administrators that have been given constructive determination letters, should refrain from asking for new ones, just because of the annual amendments for the adjustments of the maximum plan limitations.


Reference: http://www.401khelpcenter.com/2009_401k_plan_limits.html

What is a 401k plan?

A 401k plan is an employee sponsored retirement plan that allows for participants, to make pre-tax contributions to their plan. 401k plan contributions are normally deducted automatically for each employee, every time the employee gets paid. By pre-tax contribution we mean that the money is taken out of the salary, before the salary is taxed.

The money contributed is then invested in one or more funds that are provided by the plan, always at the employee’s direction. Employers will normally ‘match’ the amount that the employee is paying, but in reality an employer is not bound by law to do so.
Over time, the contributions that are saved up in investments are meant to gradually grow, and the contributor is not liable for tax on this growth.

401k plans do offer other advantages to their participants, such as:

• Any business from corporations to self employed individuals may have a plan.
• The company is eligible to set the requirements upon establishment of the plan.
• Employers have the right to restrict individuals like new employees from being eligible.
• Contributions come from voluntary participant’s salary reduction and may be matched by employer.
• An individual could in 2008, defer up to $15,500 of his salary or 10% of his salary, whichever is the least.
• Participants aged over 50, may do contributions of $5000 as catch up payments.
• Withdrawals from employees aged 59.5 or younger, may be penalized.
• Employers are not obliged to match the employees’ payments.
• You may choose to have an internet plan.
• There are on average 15 investment choices.
• Loans can be taken from the plan, and also hardship withdrawals.
• The employer may receive some tax benefits if he matches his employees’ contributions.
• The plan is subject to unfairness testing.


Reference: http://www.401khelpcenter.com/401k_defined.html

Tips for Plan Fiduciaries

The ERISA demands that employee benefit plans fiduciaries; both manage and administer these plans with prudence and always in the interest of the participants and also the beneficiaries. To carry out their job as above, fiduciaries regularly rely on professionals such as pension consultants for assistance. Studies have shown that in come cases these consultants, are not fully disclosing any conflicts of interest that could affect the impartiality of the advice they offer.

The Department of Labour in conjunction with the SEC, have come up with a set of rules, to assist fiduciaries in ascertaining the impartiality of the advice provided. This is what they should ask in relation to their consultants:

1. If the consultant is registered with the SEC as an investment advisor. If he is, then he should provide all the disclosures that are needed including the ADV form part 2.
2. If he or any related company, have any relation with the money managers that they consider for their recommendation. If they do have, then they should give more details about their relation.
3. If he or his related company receives any sort of compensation, from the managers he recommends. If he does, he should provide more details such as the ratio of the payments to his total income.
4. If he has in effect a set of procedures to address conflict of interest, and whether he has any policies that prevent this compensation, from being taken into consideration while providing advice.
5. Whether he allows plans to pay for his consultation fees from the brokerage commission.
6. If he does allow the above, then how is the situation monitored, to ensure that the plan receives best implementation.
7. Whether he has any arrangements with dealers or brokers.
8. If he will acknowledge in writing his fiduciary obligation as an investment advisor to the plan, in the case that he is hired.
9. If he considers himself under the ERISA as a fiduciary, in respect to the recommendations he will provide for the plan
10. To what extent do his plan clients make use of money managers or services of brokerage, from which he is receiving fees.


Reference: http://www.401khelpcenter.com/401k/selecting_and_monitoring_pension_consultants.html

Default Investments

In 2006, the government has added a new subdivision to the ERISA of 1974, which states that a plan need not necessarily receive funds from contributors, without supplementary investment control from the given individual.

Section 404 of this act states that a contributor in an individual retirement account, should be treated as though he has control over the funds that he has saved in his individual account. There are however some conditions for this to be true:

• The contributor does not put forward his investment selection
• The contributor’s plan covers the notice needs in section 404c 5B and
• That the plan invests the contributor’s account, in agreement with the default investment rules that have been produced by the Labour Secretary.

Now the PPA needs the DOL to circulate the rules that give guidance regarding the appropriate kind of default investments, which comprise of a mixture of various assets that are in consistence with

• Appreciation of capital in the long term
• Capital protection and
• A mixture of capital protection and appreciation of the capital in the longer term.

Therefore the new ERISA subsection allows default investment portfolios to be made of investments that are regarded to as very conservative.

These rules are definitely controversial, since they go against the ERISA which says that default investments should be excluded if the portfolio is made entirely of stable investments that allow capital protection. The regulations also state that it is the fiduciary that is able to determine what the default investment should be for the participant, since he is always in obligation to do so.

In conclusion, the ERISA regulations should not be interpreted as giving a list of the cautious investments. The regulations also do not in any way restrict the fiduciary, from adopting the alternatives he thinks suit best the needs of his default participants.

http://www.401khelpcenter.com/401k/whitehouse_qdia.html

The Value Of Independent Fiduciaries

The 401k plans are mostly managed by individuals, who resist the fiduciary status, and most importantly the high level standards that are expected from fiduciary status. An Independent fiduciary, can provide substantial value. So what is the cost of hiring a fiduciary? Is it worth it?

Prudence is the cornerstone of all independent fiduciary actions and procedures. Such practice, if operated with prudence will yield excellent results for both the participants and beneficiaries. Lacking fee disclosure and transparency is another problem that we have been reading about, and which is very real.

Now since a fiduciary has the obligation to make sure that the 401k plan is paying only the reasonable expenses, therefore a fiduciary must know exactly who is being paid and how much. Appointing an Independent Fiduciary to lead this sort of investigation is a very wise decision, since the price structure of the 401k plans is a complicated and obsolete one. Such a professional however, has all the experience and expertise needed to uncover both explicit and implicit fees, which threaten the plan’s success.

High costs are already a problem with 401k plan performance, and when you combine this with a negative investment performance, the result is an unsuccessful retirement. Participants sometimes decide to take a do it yourself approach. Studies however show that such participants lacked sufficient knowledge and skill, and ended up with little gains on their 401k accounts.

A professionally managed approach will not only benefit the plan sponsor but should also deliver better returns over time for all the participants.

Achieving the best results in a retirement plan requires skill and diligence. Independent Fiduciaries have this skill and are able to spread the risk and increase benefits to the plan participants therefore securing them a better future. Hiring an Independent Fiduciary may be the difference between a marvellous retirement, or a horrifying one. Wouldn’t you want additional income worth thousands of dollars? This is the value of an Independent Fiduciary.

http://greenspringwealth.com/documents/TheValueofanIndependentFiduciary.pdf

How Many Fees Are Being Paid From Our 401k Plan?

In the US, we have been living through increasing concerns regarding our 401k plans. While the debates and issues continue over the excessive and hidden fees that come along with the 401k plan, it is certain that this plan is loaded with unnecessary services, which carry unnecessary fees, which are also hidden from the participant.

There are a lot of different categories of fees; such as investment management costs and plan level costs. Now to evaluate the 401k plan fees, we have to start at the beginning. In a conventional 401k plan, 14 different parties are charging their fees to the plan. Here’s who they are:

1. The brokerage firm takes hidden commission for clearing the trades of the fund.

2. The fund company takes rebates from the brokerage firm commission, for providing the shareholders with research services.

3. The fund company charges for managing the funds.

4. 401k plans which are being managed by insurance companies may have extra costs.

5. The clearing agent.

6. The custodian who holds the account for the benefit of the trust and provides data for record feeders and administrators.

7. The record keeper is also paid to take aggregate accounts at custodian level and tracks them at a participant level.

8. Sales people are paid commission for bringing new business to the above mentioned parties.

9. Fiduciary investment advisors are invoicing the plan trustee, so they get paid from the assets.

10. The many consultants who provide their services such as checking compliance.

11. Communications specialists share commissions with brokers

12. The annual accounting services

13. The plan’s legal council

14. Insurance premiums that indemnify fiduciaries.

These parties all stand to gain from the 401k plan’s assets, and this entire hidden fee problem is a result of a bad approach to the management of the plan. As long as the retirement plan industry continues defending the 401k plan and the way it works, litigation will continue and no changes will be made. What should be done is for the industry to seek an independent advice to fix the whole system, thus gaining again the trust of all future retirees.

Reference: http://www.401khelpcenter.com/pdf/mdh_understanding_fees_v4.pdf

How Important Are Risk Tolerance Questionnaires?

In the investment world, before an advisor suggests to his client any form of investment, he must first assess the client’s risk tolerance. This is done though the completion of a risk tolerance questionnaire. Without this awareness, one cannot possibly build – in good faith – a client’s investment portfolio as should be.

401k plan contributions are being routed towards various investments; meaning that the above mentioned concept should also apply. A fiduciary should realize that his investment decisions should reflect his clients and their particular risk tolerance levels.

This would translate as follows. If your employees are older, more risk conscious and conservative, then the options that you provide them should reflect this. If on the other hand they are younger and more aggressive, then you should be providing them with higher risk investment options.

So how can you know the risk tolerance of your employees? You should provide each and every participant with a risk tolerance questionnaire; help them understand what it is for and assist them in completing it.

Help your employees in filling out the information and make them realize what their personal risk tolerance is. It is not the case of explaining how stocks, shares and investment work, but at least they should realize what their risk profile is. Once you are able to estimate the risk tolerance, only then, you can select investment options.

Even though risk tolerance questionnaires are not currently mandatory on 401k plans, they should. This questionnaire will make your employees feel more in control and you will be providing them with a good service. After all, there’s their future at stake here.

Reference: http://www.401khelpcenter.com/401k/mcalmond_risk_tolerance.html

The Real 401k plan problem

During the last two years, much has been going on in DC, with regards 401k plans, their structure and their fees. If you’re looking at the situation from the outside, it is easy to say that disclosure is better, that the fees are too high and so on.

As opposed to what many people think, the fees in the retirement industry are not so high. If you look at the investment consulting firms, you will find that there are only a few who specialize in retirement investments, simply because the fee margin that they get from the retail section is higher. An analysis is done on various 401k plans, and the results show that these are not really inundated with charges like the general public was lead to think, from all the negative publicity the plan structure has been getting.

Not even disclosure is a real problem. If you look, you will find that lots of information is being provided to the contributors. Conflict of interest can also be another easy target, with investment decisions being biased towards the advisor’s own company.

To concentrate more on the 401k plan fees, I would also like to mention the services delivered in relation to this. When conducting fee analysis we found out that contributors weren’t actually getting any value out of the fees the pay. We found out that investment oversights and lack of service overall were happening, and it is these factors that are in reality essential to all the plan participants, and what needs to be concentrated on.

The 401k plan problem is not an illusion; it is really there, but we have to make out what is real and what is just a product of negative media publicity.

Reference: http://www.401khelpcenter.com/401k/graham_401k_fees.html

Who’s responsible for your 401k plan?

When employees purchase a 401k, they expect their fiduciary to provide them with the best product possible. Since most employees are not knowledgeable about investment choices and returns, they trust their fiduciary, to choose the right seller that will take the best care of their retirement money. They are basically placing their future in this person’s hands.

Apart from this, a fiduciary is legally bound to manage his clients’ money, in their best interest. In reality however, does it really work this way? The fiduciary’s employer does not authorize his employees to help you select the proper 401k vendor. Nor is the fiduciary allowed, to help you choose the funds where you want to allocate your contributions. This would put them at risk, of being sued by the employees in cases where the plans underperform or not properly managed.

The trouble with this system is that employers are not realizing that their agent is not giving the employees investments advise. At the end of the day, what’s important for fiduciaries is getting more commission and more money in their pocket. What they are doing is just handing over the forms, and wishing the employees the best of luck with their new 401k plan. What would you call this? I can barely call it educating employees. This approach is definitely not helping employees in making the right financial decisions.

It seems that employees barely check their retirement plan statement as they should. So how can you expect them to make good investment decisions? Since 2008, 401k vendors have been licensed to give their clients investment advice. Then again, this does not solve the problem, since bank or insurance companies who own investment funds, will obviously recommend their own funds to your employees.

The new pension law, allows investors to have more information regarding their investment, from their 401k plan provider. It also supports an increase in 401k plan contributions. This is definitely the way to go. To improve the situation furthers, employers need to be knowledgeable buyers, who understand their responsibility as fiduciaries, and acknowledge that they are responsible for their employees’ retirement money, and also their future. Employers need to do their home work; study how the 401k plans work, and what the pricing structure is.

Finally the authorities have to realize the abuses that take place, and assist, in providing a more accountable system.

Reference http://www.401khelpcenter.com/ackley_fees.html