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Terminating a defined contribution plan

“My client is thinking of terminating the 401(k) plan for her business. She has numerous employees. What are the steps to plan termination?”

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 an advisor in California is representative of a common inquiry related plan terminations.

Highlights of Discussion

Before terminating a plan, it is best to check with the plan’s record keeper or third-party administrator to determine the set procedure for executing a plan termination. Be sure to document the reasons for and all actions taken to terminate the plan.

Generally, under treasury regulations and other official guidance, the steps to terminate a defined contribution plan that covers common-law employees include the following.

  1. Execute a board resolution to authorize the plan termination and set the date of termination.
  2. Amend the plan to establish a plan termination date and make the language of the plan current for all outstanding law changes or qualification requirements effective as of the plan’s termination date.
  3. Make all required contributions accrued as of the plan termination date.
  4. Fully vest the benefits of all affected participants[1] and beneficiaries as of the set termination date.
  5. Notify all plan participants and beneficiaries about the plan termination.
  6. Authorize the plan to distribute all benefits in accordance with plan terms as soon as administratively feasible after the termination date.
  7. Provide a rollover notice to participants and beneficiaries who may elect to receive eligible rollover distributions.
  8. Distribute all plan assets as soon as administratively feasible (generally within 12 months) after the plan termination date.
  9. File a final Form 5500 series return, whichever is appropriate.
  10. Although not required, the plan sponsor may file for an IRS determination letter upon plan termination, using Form 5310 PDF, Application for Determination for Terminating Plan, to ask the IRS to make a ruling about the plan’s qualified status as of the date of termination. If a filing is done, the plan sponsor must notify interested parties about the determination application.

Conclusion

Terminating a defined contribution plan involves multiple steps. The plan sponsor and committee must carefully execute and document each step to ensure plan fiduciaries fulfill their obligations to affected participants and beneficiaries. For additional guidance, please see Chapter 12. Employee Plans Guidelines, Section 1. Plan Terminations.

 

 

[1] Applies to any employees or former employees with an account balance as of the termination date

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Form 5500 and the Automatic Filing Extension

“My client failed to file his Form 5500 for his company’s 401(k) plan by the deadline of July 31, 2020. Is there any way to get a filing extension?”

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 from Pennsylvania is representative of a common inquiry related to filing IRS Form 5500.

Highlights of the Discussion

Your client would have had to have filed a Form 5558, Application for Extension of Time To File Certain Employee Plan Returns by the company’s regular due date (i.e., July 31, 2020, in this case) to request a one-time extension (for 2 ½ months) to file its Form 5500 for the year. However, if your client has filed for an extension to submit his company’s business tax return for 2019, he still may be in luck with respect to filing his plan’s Form 5500 for the year.

The IRS will grant an automatic extension of time to file the Form 5500 Annual Return/Report of Employee Benefit Plan for a year—until the business’s due date for filing its federal income tax return—if  all of the following conditions are met:

  1. The plan year and the employer’s tax year are the same;
  2. The employer has been granted an extension of time to file its federal income tax return to a date later than the normal due date for filing the Form 5500; and
  3. A copy of the application for extension of time to file the federal income tax return is maintained with the filer’s records.

 An extension granted by using this automatic extension procedure cannot be extended further by filing a Form 5558, nor can it be extended beyond a total of 9½ months beyond the close of the plan year. (See the Instructions to Form 5500, page 4.)

Unfortunately, if your client did not file Form 5558 for the one-time extension, and does not qualify for the automatic extension to file by the tax return deadline, he could face late filing penalties. Those penalties could be reduced by participating in the Delinquent Filer Voluntary Correction Program.

Conclusion

Business owners who have been granted an extension to file their business tax returns automatically receive an extension of the deadline to file Forms 5500 Return/Report for their retirement plans, if they satisfy certain conditions.

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DOL Filing for Top Hat Plans

“Are top hat plans required to file a Form 5500 report with the Department of Labor (DOL)?”

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 from Washington is representative of a common inquiry related to top hat plans.

Highlights of the Discussion

Top hat plans (i.e., unfunded plans maintained for a select group of management or highly compensated employees) are exempt from most of the requirements of the Employee Retirement Income Security Act of 1974 (ERISA), including the need to file a Form 5500 series report. Instead, top hat plans are subject to an alternative method of compliance with the reporting and disclosure provisions of ERISA.

Sponsors of top hat plans are required to submit a “statement” to the DOL pursuant to DOL Reg. 2520.104–23 within 120 days of the plan’s effective date. As of August 16, 2019, it is mandatory for sponsors of such plans to file top hat plan statements electronically via the Top Hat Plan Statements Online Filing System. In March 2020, the DOL introduced its a top-hat plan statement search engine.

The information requested on the statement is quite simple:

  • Employer identification information (EIN, name, address);
  • Plan administrator information;
  • Number of top-hat plans maintained;
  • Number of participants in each plan; and
  • A declaration that the sponsor maintains the plan(s) primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.

If a sponsor fails to file the top hat statement with the DOL, the plan could be subject to ERISA’s full reporting and disclosure requirements, and assessed penalties by the DOL and IRS. Corrections can be made through the Delinquent Filer Voluntary Compliance Program.

Conclusion

While a sponsor of a top hat plan does not have to file an annual Form 5500 series report for the plan, it must submit a statement to the DOL within 120 days of the plan’s effective date. Failure to do so could result in more burdensome reporting requirements and penalties.

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Auditor’s Report “Disclaimer of Opinion” for Form 5500 Filings

“What does it mean when the auditor’s report for a plan’s Form 5500 filing says the auditor, ‘does not express an opinion?’ I thought that was the whole purpose of the auditor’s report.”

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 from Colorado is representative of a common inquiry related to the report performed by an independent qualified public accountant (the auditor)[1] that accompanies certain Form 5500 filings

Highlights of the Discussion

Most likely, the plan in question was subject to a “limited-scope” audit rather than a “full-scope” audit of the plan’s financial information. Under a limited scope audit, the auditor can only render a “Disclaimer of Opinion,” because he or she was not able to obtain sufficient audit evidence to provide a basis for an audit opinion.

Under ERISA Sec. 103(a)(3)(C) and DOL Reg. 2520.103–8, plan sponsors may instruct the auditor not to perform any auditing procedures with respect to investment information prepared and certified by “qualified institutions.”  A qualified institution could be a bank, trust company or similar institution, or an insurance company that is regulated, supervised, and subject to periodic examination by a state or federal agency that acts as trustee or custodian for the investments. This option is referred to as a “limited scope audit,” and is available only if the certification by the qualified institution includes a statement that the information is complete and accurate. Limited-scope audits are typically less expensive that full scope audits.

Limited Scope Audit VS. Full Scope Audit

Limited Scope

Full Scope

The auditor does not audit the certified investment Information for the plan. He or she still tests participant data, including the allocation of investment income to individual participant accounts, and tests contributions, benefit payments and other information that was not certified. The auditor reviews the entity’s financial statements, including all assets; liabilities and obligations; and financial activities, without any limitation.

It is the responsibility of the plan sponsor to determine whether the conditions for limiting the scope of an auditor’s examination have been satisfied, and only the plan sponsor can request the auditor to limit the scope of the audit. The American Society of Certified Public Accountants (AICPA) has put together a “Limited Scope Audits Resource Center” to help plan sponsors satisfy their fiduciary responsibility in this area.

As an interesting aside, the Department of Labor (DOL) attributes the overall increase in noncompliant plan audits with the corresponding increase in the number of limited-scope audits performed.[2] According to a DOL report, “Assessing the Quality of Employee Benefit Plan Audits,” of the plans studied, 81 percent had limited scope audits and of those limited-scope audits, 60 percent contained major deficiencies. In fact, as a result of the study, the DOL recommended that Congress amend ERISA to repeal the limited-scope audit exemption.

To date there have been no law changes, but the AICPA Auditing Standards Board, in 2019, issued two new auditing standards related to the financial statements and annual reports of employee benefit plans, and transparency in annual reports:

  1. Statement on Auditing Standards(SAS) No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA; and
  2. Statement on Auditing Standards (SAS) No. 137, The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports.

SAS 136 creates a new section in the AICPA Professional Standards, and deals with the auditor’s responsibility to form an opinion and report on the audit of financial statements of ERISA employee benefit plans. SAS 136 takes effect for audits of ERISA plan financial statements for periods ending on or after December 15, 2020. SAS 137 enhances transparency in reporting related to the auditor’s responsibilities for nonfinancial statement information included in annual reports.

SAS 136 will affect limited-scope audits when it takes effect by

  1. Referring to such audits as ERISA Sec.103(a)(3)(C) audits;
  2. Clarifying what is expected of the auditor, including specific, new procedures that apply when performing the audit; and
  3. Establishing a new form of report that provides greater transparency about the scope and nature of the audit, and describes the procedures performed on the certified investment information.

For a summary of the SAS 136 changes to Form 5500 reporting, please refer to AICPA’s At A Glance: New Auditing Standard for Employee Benefit Plans.

Conclusion

Limited scope audits of Form 5500 filings may only receive a Disclaimer of Opinion from the independent auditor. Note that for audits of plan information for periods ending on or after December 15, 2020, limited scope audits will change under new SAS 136 and SAS 137.

[1] Although there are exceptions, generally, Federal law requires employee benefit plans with 100 or more participants to have an audit as part of their obligation to file an annual return/report (Form 5500 Series).

[2] DOL, “Assessing the Quality of Employee Benefit Plan Audits,” 2015

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SECURE Act Increases Late Filing Penalties

“What are the new higher penalties under the SECURE Act for companies that fail to timely file 401(k) plan reports and notices?”

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 from Massachusetts is representative of a common inquiry related to penalties for late plan filings.

Highlights of the Discussion

The Further Consolidated Appropriations Act, 2020 included provisions from the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) that materially increased penalties for plan sponsors that fail to file certain reports and notices in a timely manner. The following penalties apply to filings and notices required to be provided after December 31, 2019.

 

Form or Notice Penalty Assessed for Late Filings after 12/31/2019 Pre-SECURE Act Penalties
Failing to timely file Form 5500[1] Up to $250 per day, not to exceed $150,000 per plan year $25 a day, not to exceed $15,000 per plan year
Failing to timely file Form 5310-A Up to $250 per day, not to exceed $150,000 per plan year $25 a day, not $15,000 per plan year
Failing to file Form 8955-SSA Up to a daily penalty of $10 per participant, not to exceed $50,000 A daily penalty of $1 per participant, not to exceed $5,000
Failing to file Form 5330 The lessor of $435 or 100% of the amount of tax due The lesser of $330 or 100% of the amount due
Failing to file Form 990-T The lessor of $435 or 100% of the amount of tax due The lesser of $330 or 100% of the amount due
Failing to provide income tax withholding notices up to $100 for each failure, not to exceed $50,000 for the calendar year $10 for each failure, not to exceed $5,000

 

Conclusion

Beginning in 2020, plan sponsors face much stiffer IRS penalties for not complying with plan reporting requirements as a result of law changes.

[1] The SECURE Act did not change the DOL’s penalty of up to $2,194 per day for a late Form 5500 filing.

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Does your plan need IRS Form 8822-B?

“When filing her Form 5500 report, my client was told she needed to file IRS Form 8822-B for her 401(k) plan. What does this form report?”

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 from Tennessee is representative of a common inquiry related to plan reporting.

Highlights of the Discussion

If your client had a change of address for her business or a change in the “responsible party” (i.e., the representative of the company who received the business’s official Employer Identification Number), [1]  she is required to file IRS Form 8822-B, Change of Address or Responsible Party—Business. Form 8822-B notifies the IRS of a change to a business’s mailing address, location or responsible party. Also, if an organization had not previously identified a specific person as its responsible party, filing Form 8822-B is advisable. When there’s been a change, it’s important to have Form 8822-B in place for any future mailings or correspondence the business may receive from the IRS.

The requirement to file Form 8822-B took effect in 2014, following the release of final regulations (Treasury Regulation 301.6109).  Affected businesses must file the form within 60 days of the change that is being reported. A business files the form with either the IRS office in Cincinnati, OH or Ogden, UT, depending on the firm’s old business address.  While there is no formal penalty for failing to file Form 8822-B or late filings of the form, there is a risk that important IRS notices could be misdirected to the wrong address or sent to the attention of the wrong individual. The form specifically references its connection to certain employment, excise, income and other business returns (e.g., Forms 720, 940, 941, 990, 1041, 1065, 1120, etc.) and employee plan returns such as the Form 5500 series of returns.

Conclusion

Plan sponsors may not have been aware of the importance of IRS Form 8822-B. Filing such form, when required, can only be beneficial.

[1] IRS Publication 1635: Employer Identification Number

 

 

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Where, oh where, have my retirement benefits gone?

“I have a client who has worked in the banking industry for decades and has changed jobs numerous times. Many of his former employers have merged with other institutions or no longer exist. He is not currently receiving any retirement benefits from these past employers, but feels certain he should be. How can he locate his lost retirement plan benefits?”

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 from New Jersey is representative of a common inquiry related to locating lost retirement plan benefits.

Highlights of the Discussion

Given the frequency with which the average U.S. worker changes jobs throughout his or her career (i.e., 12 times)[1], and the merger and acquisition activity in the past decades, it should not be surprising that some workers have lost track of their retirement plan assets. The Employee Retirement Income Security Act of 1974 (ERISA) requires plan sponsors to make efforts to find missing plan participants.[2]

Former participants can take matters into their own hands and search for retirement benefits to which they believe they are entitled. Below is a list of options for locating lost retirement plan assets. There may be other resources as well.

  1. Contact former employer(s) directly if they still exist. Check old tax forms, Forms W-2 and other employment-related documents.
  2. Contact the plan’s recordkeeper or third-party administrator (TPA). This information likely appears on an old plan statement, if available.
  3. Search the Department of Labor’s (DOL’s) Form 5500 database of filings (Form 5500/5500-SF Filing Search) for plan administrator contact information. Many qualified retirement plans are required to file this annual plan report with the IRS and DOL. Using the employer’s tax identification number may be helpful in locating employers and plans that have been merged or changed names.
  4. Try the DOL’s searchable database of abandoned plans, which contains information on retirement plans that have been forsaken by their sponsors.
  5. The Pension Benefit Guaranty Corporation (PBGC) has two ways to assist in benefits searches. First, search the PBGC’s database for unclaimed defined benefit plan pensions. Searchers can also try to locate a plan by whether it is insured or trusteed by the PBGC. Second, search the PBGC’s list of missing participants. As of January 1, 2018, terminating defined contribution plans have the option of transferring missing participants’ benefits to the PBGC for eventual distribution.[3]
  6. Every state has some type of unclaimed property program. Plan sponsors who have failed to locate missing participants or beneficiaries may have escheated the retirement plan assets to their respective state programs. The National Association of Unclaimed Property Administrators is a not-for-profit organization that maintains a database of state programs to help individual’s find missing property.
  7. Searchers could check with The National Registry of Unclaimed Retirement Benefits to see if a former employer has listed a particular person as a missing participant. The registry is a nationwide, secure database listing of retirement plan account balances that have been left unclaimed.
  8. Watch for a notice from the Social Security Administration (SSA): Potential Private Retirement Plan Benefit Information. It is a reminder about private employer retirement benefits that an individual may have earned, also called “deferred vested benefits.” The IRS provides the information to the SSA. It comes from the plan administrators of the private retirement plans in which workers participated.
  9. The nonprofit organization Pension Help America may be able to link searchers with local and regional governmental offices to help locate retirement plan assets and/or solve other benefit issues.

Conclusion

Individuals who have lost track of their retirement plan benefits for whatever reason have several federal, state, regional and local resources available to help them find the retirement benefits to which they are entitled.

[1] https://www.bls.gov/news.release/pdf/nlsoy.pdf

[2] https://www.irs.gov/retirement-plans/missing-participants-or-beneficiaries

 

[3] https://www.pbgc.gov/prac/missing-p-defined-contribution

 

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Form 5500 and the “80-120 Rule”

“My client was told by the record-keeper for her plan that it would be filing the plan’s IRS Form 5500 annual report under the “80-120 Rule.” Can you explain what that rule is?

ERISA consultants at the Retirement Learning Center 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.

Highlights of the Discussion

Generally, plans with more than 100 participants are required to file the long version of Form 5500, Annual Return/Report of Employee Benefit Plan, as a “large plan.” However, there is an exception referred to as the “80-120 participant rule” that allows certain plans that would otherwise be considered large to continue to file as “small plans” following the streamlined Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan, requirements (see 2018 Form 5500 Instructions).

The DOL defines small plans for Form 5500 purposes as plans with fewer than 100 participants at the beginning of the plan year. Small plans file Form 5500-SF and Schedule I Financial Information—Small Plans, (instead of Form 5500 and Schedule H Financial Information), plus certain other applicable schedules. However, small plans, typically, are exempt from the independent audit requirement that applies to large plans.

Under the 80-120 participant rule, if your client filed as a small plan last year and the number of plan participants is fewer than 121 at the beginning of this plan year, your client may continue to follow the Form 5500-SF requirements for this year.

EXAMPLE: For the 2017 plan year, Smally’s Inc., had 93 participants, so the plan administrator filed a Form 5500-SF and applicable schedules as a small plan.  The number of plan participants at the beginning of the 2018 plan year rose to 112.  Under the 80-120 participant rule, Smally’s Inc., may elect to complete the 2018 Form 5500-SF, instead of the long-form Form 5500 and schedules, in accordance with the instructions for a small plans.

Conclusion

The 80-120 participant rule may allow some plans that would otherwise be required to follow the arduous large plan filing requirements for Form 5500 to, instead, continue to file under the streamlined Form 5500-SF process.

 

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Relief for delinquent Form 5500-EZ filers

“I have several clients who run owner-only businesses that have 401(k) plans that cover themselves and their spouses. I believe at least some of them should have been filing Form 5500-EZ, Annual Return of a One-Participant (Owners/Partners and Their Spouses) Retirement Plan or A Foreign Plan, but have not. Is there a way for them to correct this error without penalty?”

ERISA consultants at the Retirement Learning Center 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 from Colorado is representative of a common inquiry related to plan reporting requirements.

Highlights of the Discussion

An owner-only business with a qualified retirement plan that covers the owner, partners and spouses, such as a “solo (k)” or “individual (k),” must begin filing an annual Form 5500-EZ when the total value of the plan assets exceeds $250,000 at the end of the plan year. Regardless of plan asset value, an owner-only business must file a Form 5500-EZ to report the final plan year of the plan (See the Instructions for Form 5500-EZ.)

Initially, the IRS did not provide any penalty relief for delinquent Form 5500-EZ filers. That changed with the IRS’s release of Revenue Procedure 2015-32, which made permanent a 2014 pilot program that allowed owner-only businesses to correct late Form 5500-EZ filings. Without the program, a plan sponsor faces late filing penalties of $25 per day, up to $15,000 for each late Form 5500-EZ, plus interest, and $1,000 for each late actuarial report (for a defined benefit plan, if needed).

The IRS’s Form 5500-EZ Later Filer program is separate from the Department of Labor’s Voluntary Fiduciary Correction Program (VFCP), which is available to late filers of Forms 5500, Annual Return/Report of Employee Benefit Plan. Form 5500-EZ filers do not qualify for the VFCP.

In order for late filers of Form 5500-EZ to qualify for penalty relief, the business owner must meet the following criteria. He or she

  1. Has not been informed of a late filing penalty (i.e., the business owner has not received a CP 283 Notice from the IRS);
  2. Submits all delinquent returns for a single plan together;
  3. Prepares a paper Form 5500-EZ for each delinquent year, including any required schedules and attachments, if any. Use the Form 5500-EZ return that applied for the delinquent plan year. However, if the return is delinquent for a year prior to 1990, use the Form 5500-EZ for the current year (see prior year Forms 5500-EZ);
  4. Writes in red letters at the top of each paper return: “Delinquent Return Filed under Rev. Proc. 2015-32, Eligible for Penalty Relief;”
  5. Attaches a completed one-page transmittal schedule (Form 14704) to the front of each late return;
  6. Pays the required fee. The fee is $500 per delinquent return, up to $1,500 per plan. Make checks payable to “United States Treasury;” and
  7. Mails the returns to the following address (Note: Electronically filed delinquent returns are not eligible for penalty relief).

First class mail

Internal Revenue Service

1973 North Rulon White Blvd.

Ogden, UT 84404-0020

Private delivery services

Internal Revenue Submission Processing Center

1973 North Rulon White Blvd.

Ogden, UT 84404

Conclusion

Some owner-only businesses with qualified retirement plans must file an annual Form 5500-EZ. If they fail to do so when required, IRS penalties could result. Since 2015 there has been a permanent penalty relief program for Form 5500-EZ late filers to follow in Revenue Procedure 2015-32.

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IRA
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Payroll Deduction IRA vs. Employer-Sponsored IRA

Is there a difference between payroll deduction IRAs and employer-sponsored IRAs?”

ERISA consultants at the Retirement Learning Center 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, 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 from New Jersey is representative of a common inquiry related to workplace IRAs.

Highlights of the Discussion

Payroll deduction IRAs and employer-sponsored IRAs are similar, but they have important differences. A key difference is level of involvement by the employer.

The IRS views payroll deduction IRAs as arrangements that merely allow employees to make contributions to IRAs by having amounts deducted from their paychecks by their employers which are then directed to IRAs for deposit. There are no employer contributions. All the standard IRA rules apply. Further, if a payroll deduction IRA program follows the IRS’s safe harbor rules for structure, it is not considered an employer pension plan and, therefore, exempt from the rules of the Employee Retirement Income Security Act of 1974 (ERISA) (see DOL Reg. 2510.3-2(d) and Interpretive Bulletin 99-1).

Generally, a payroll deduction IRA is not considered an ERISA plan if

  1. it is voluntary;
  2. there are no employer contributions;
  3. the employer does not endorse a particular IRA provider (although limiting the number of IRA providers is permitted within limits); and
  4. the employer receives only reasonable compensation for administrative services.

In contrast, IRC Sec. 408(c) and IRC Sec. 219(f)(5) allow employers and employee associations to establish employer-sponsored IRA arrangements and make employer contributions to employees’ IRAs or a common trust fund that separately accounts for the employees’ contributions. Employers who want an IRS ruling on their employer-sponsored IRA plans may file IRS Form 5306, Application for Approval of Prototype or Employer-Sponsored Individual Retirement Arrangement. These are savings arrangements other than simplified employee pension (SEP) plans under IRC Sec. 408(k) or savings incentive match plans for employees (SIMPLE) IRA plans under IRC Sec. 408(p). Consequently, all the standard IRA rules apply.

Any amount contributed by an employer to an IRA that is employer sponsored under IRC Sec. 408(c) shall be treated as payment of compensation to the employee (other than for a self-employed individual), deductible by the employer and subject to Social Security and unemployment taxes. Employees may be able to deduct such contributions under the standard rules that apply for the deductibility of traditional IRA contributions [Treasury Regulation 1.219-1(c)(4)]. In this scenario, the employer-sponsored IRA arrangement is considered an ERISA plan for certain purposes, for example, they are subject to limited Form 5500 Reporting (See “IRA Plans” IRS Form 5500 instructions).

Conclusion

While payroll deduction IRAs and employer-sponsored IRAs have similarities, the DOL views them differently, depending on the level of involvement by the employer.

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