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Too Late for a SAR?

“My client has not distributed the summary annual report (SAR) for his 401(k) plan for 2021.  Is he past the deadline to provide the SAR to participants?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor in Florida relates to the timing of a plan’s summary annual report.

Highlights of Discussion

The date a plan sponsor must deliver a SAR to plan participants and beneficiaries is tied to the end of the plan year—unless the individual has an extension to file the plan’s Form 5500. (The SAR is a summary of Form 5500 information.) If your client had an extension to file the plan’s Form 5500 for the 2021 plan year, he may still have time to timely distribute a SAR.

The regulations require distribution of the SAR within nine months after the close of the plan year (or two months after the Form 5500 filing). The Form 5500 for a plan is generally due seven months after the end of the plan year (i.e., July 31st for a calendar year plan). So, generally, a calendar year plan has a SAR distribution deadline of September 30th following the end of the plan year.

However, if the plan sponsor has an extension to file Form 5500 for the year, the sponsor also has additional time to provide the SAR (i.e., two months after the close of the filing extension [DOL Reg. § 2520.104b-10(c)]. For example, if a calendar year plan has an extension to file Form 5500 until October 15th of the following year, the plan sponsor must distribute the SAR for the plan by December 15th.

Example:

Toy Time Inc., as a calendar year 401(k) plan that had an extension to file its Form 5500 for the 2021 plan year until October 15, 2022. That means, the SAR for Toy Time’s 401(k) plan is due to participants and beneficiaries by December 15, 2022.

Conclusion

A SAR is a summary of Form 5500 information that must be given to plan participants and beneficiaries annually and upon request. The regulations require distribution of the SAR within nine months after the close of the plan year or, if there is a filing extension for Form 5500, within two months after the close of the filing extension.

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The ABCs of 401(h) Plans

“My client asked what are considered qualified medical expenses for a 401(h) plan. Can you give me a rundown of the important points to know about these plans?”

Highlights of Discussion

A “401(h) plan” is a retiree medical benefit account that is set up within a defined benefit pension plan (or money purchase pension plan or annuity plan) to provide for the payment of benefits for sickness, accident, hospitalization and “medical expenses” for retired employees, their spouses and dependents. The arrangement must meet the requirements of Internal Revenue Code Section (IRC §) 401(h)(1)-(6).

The term medical expense means expenses for medical care as defined in section IRC §213(d)(1), which include amounts paid for

  • The diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,
  • Transportation primarily for and essential to medical care,
  • Qualified long-term care services or
  • Insurance (including Part B Medicare premiums and any qualified long-term care insurance).

Note that the plan document language can modify timing of distributions, what benefits are covered and to whom the plan is offered as well, although a 401(h) account cannot discriminate in favor of officers, shareholders, supervisory employees, or highly compensated employees with respect to coverage or contributions and benefits.

The amount contributed to the 401(h) account may not exceed the total cost of providing the benefits, and the cost must be spread over the future service. According to Treasury Regulation § 1.401-14(c), a qualified 401(h) account must provide for the following:

  1. Retiree medical benefits must be “subordinate” to the pension benefits;
  2. Retiree medical benefits under the plan must be maintained in a separate account within the pension trust;
  3. For any key employee, a separate account must also be maintained for the benefits payable to that employee (or spouse or dependents) and, generally, medical benefits payable to that employee (or spouse or dependents) may come only from that separate account;
  4. Employer contributions to the account must be reasonable and ascertainable;
  5. All contributions (within the taxable year or thereafter) to the 401(h) account must be used to pay benefits provided under the medical plan and must not be diverted to any purpose other than the providing of such benefits;
  6. The terms of the plan must provide that, upon the satisfaction of all liabilities under the plan to provide the retiree medical benefits, all amounts remaining in the 401(h) account must be returned to the employer

The subordinate requirement is not satisfied unless the plan provides that the aggregate contributions for retiree medical benefits, when added to the actual contributions for life insurance under the plan, are limited to 25 percent of the total contributions made to the plan (other than contributions to fund past service credits). The 401(h) contribution limitation is sometimes referred to as the “subordination limit,” since its purpose is to insure that medical contributions are subordinate to the contributions for pension benefits.

Aside from employer and/or employee contributions to a 401(h) account, plan sponsors with overfunded, terminating defined benefit plans may make tax-free “qualified transfers” (a.k.a., “420 transfers”) to related 401(h) accounts. Limitations apply, and the amount transferred is not considered a reversion subject to either income or excise taxes. This provision is set to expire for transfers made after December 31, 2025.

Conclusion

Pension plan sponsors may find 401(h) accounts appealing as one way to provide for the payment of retiree medical benefits. Depending on the terms of the plan, a 401(h) account can receive employer and/or employee contributions as well as transfers of excess pension benefits, provided certain requirements are met. 401(h) account contributions are tax deductible; earnings are tax-deferred; and distribution can be tax free.

© Copyright 2024 Retirement Learning Center, all rights reserved