Common Questions

Will Downeast Pension Services (DPS) help close a sale with a Financial Advisor? Yes!

Will DPS share its experiences with Advisors and Plan Sponsors to help a company select a superior investment and recordkeeping platform? Yes!

Does DPS understand all the fees associated with a plan, including giving objective advice? Yes!

Types of plans

What is a 401(k) plan? A 401(k) plan is established by a company for its employees to save for retirement. Employees will be able to contribute money from their pay checks each pay period and have that amount automatically deposited into an investment account. These amounts are withheld from the employee's pay before federal and state taxes are assessed. The money remains tax-deferred while it is in the 401(k) plan.

What is Roth 401(k)? If an employer has a 401(k) plan, the employer also has the option to have a Roth 401(k) feature. This allows employees to contribute to the plan through payroll deduction, similar to traditional pre-tax 401(k) contributions as mentioned before, but these contributions would come out of the employee's pay after taxes are withheld. If the funds are not withdrawn until at least age 59 ½ and 5 years from the date of the first deposit, the earnings on these contributions will be tax free.

What is profit sharing? An employer may make a "profit sharing" contribution at its discretion, according to the formula in the plan's document. This is a tax deductible contribution to the employer.

What is a 403(b) plan? A 403(b) plan may be established by some non-profit companies for their employees. Similar to a 401(k) plan, employees can contribute money from their paychecks on a pre-tax or Roth-after-tax (if elected) basis into the plan. The company also may make a matching or other employer contribution.

Plan documents

What is the plan document? 401(k) and profit sharing plans are required to have a plan document that spells out the specifics about the plan's provisions. The document talks about when employees become eligible, the types of contributions allowed, when distributions are allowed, and other provisions. Generally speaking, a plan's document must be submitted to the IRS for approval.

DPS offers a prototype plan document, what is that? This means that a prototype of the plan document was already submitted to the IRS for approval. The provisions in the prototype are therefore already pre-approved, and each individual plan sponsor does not need to apply to the IRS for a determination when using that plan document.

DPS also offers a volume submitter plan document, what is that? This is similar to a prototype document, but it means that several (a volume) of identical documents were submitted to the IRS for pre-approval. The volume submitter document allows a little more flexibility in the new comparability type of profit sharing allocations, so it's not quite as simple as the prototype. To the plan sponsor, it will be just as simple as using the prototype. It's just a difference in the approval process.

Plan testing issues

What is 401(k) discrimination testing? A plan that offers a 401(k) feature is subject to discrimination testing. This testing compares the average contribution rates of the highly compensated employees to the average contribution rates of all other employees to determine if the plan discriminates in favor of the highly compensated employees. If discrimination exists, there are two methods to satisfy the test: 1) some or all of the highly compensated employees may have contributions returned to them from the plan, and these contributions would go back into their taxable income, or 2) the company may make an employer contribution to the plan. If your plan is subject to this testing and corrections are needed, we would go over the options with you.

Is there a way around 401(k) discrimination testing? The government does allow you to avoid this discrimination testing if you make a safe harbor contribution. In order to satisfy the safe harbor rules, an employer would need to either: 1) contribute 3% of each eligible employee's compensation into the plan, or 2) make an employer matching contribution. There is some flexibility in the match contribution formula, but the minimum formula is a 100% match on the first 3% an employee contributes from his/her pay, and an additional 50% match on the next 2% an employee contributes. In either case, the safe harbor contributions are 100% vested at all times. Please click this link for a more detailed look at discrimination testing and safe harbor options.

What is a Top Heavy plan? In order to determine a plan's Top Heavy status, we compare the account balances of the Key employees (generally owners and officers) to the balances of the non-Key employees. If more than 60% of the plan's assets belong to the Key employees, the plan is Top Heavy. In a Top Heavy plan, the employees may need to receive a minimum contribution from the company. In many cases, either the safe harbor contribution or a profit sharing contribution satisfies the Top Heavy requirements. We would discuss these requirements with you in detail if your plan is Top Heavy.

What is cross-testing? A plan that has a new comparability profit sharing formula is subject to cross-testing. These are plans that divide their participants up into groups or classes in order to allocate profit sharing. This is a complicated series of tests that starts with a "gateway" test. The gateway test is satisfied if the non-highly compensated employee with the lowest contribution percentage is receiving at least 1/3 of the percentage the highly compensated employees are receiving, or 5%, whichever is less. If this test is satisfied, then we move on to the 401(a)(4) test, which is a type of discrimination test. This test takes the contributions and account balances for each participant and comes up with projected values at retirement age. Then a discrimination test is run to ensure that these projected retirement values do not discriminate in favor of the highly compensated employees.

What is coverage testing? A 410 (b) coverage test compares the number of highly compensated employees that are benefiting from the plan with the number of non-highly compensated employees that are benefiting. If that ratio is more than 70%, your plan does not have coverage issues. Coverage testing becomes a concern if the plan document excludes certain employees that would otherwise be eligible, or if eligible employees that work less than 1,000 hours or terminate employment are excluded from receiving a profit sharing contribution. If the plan has coverage issues, some of those excluded employees would need to receive a contribution to pass the test.

Plan provisions

When can employees take distributions? The government would really like to see employees leave their money in tax-deferred accounts until they retire. Therefore generally if an employee takes their funds out of the plan in cash before age
59 ½, the employee will be subject to a 10% income tax penalty for early withdrawal when he/she files his/her tax return for that year. Once an employee terminates employment, he/she can take a cash distribution, roll the money tax deferred into an individual retirement account (IRA), or roll the money tax deferred into another employer's qualified plan. The plan document can allow distributions while employed, but the government doesn't allow distributions from 401(k) money and safe harbor contributions before age 59 ½ while still employed. Therefore we recommend that if you want to allow in-service distributions, you restrict the availability of those distributions to employees over either age 59 ½ or the plan's designated normal retirement age.

What are hardship distributions? The plan can allow employees who meet certain financial hardship criteria to take a hardship distribution from the plan. There are some restrictions on the money available to an employee as a hardship distribution, and the distribution is subject to taxes and the 10% early withdrawal penalty for those under age 59 ½, except for the medical criteria.

What are plan loans? 401(k) and profit sharing plans can allow participants to borrow money from their accounts. There are costs involved, usually the fees can be taken directly from the specific participant's account. You can allow loans for any reason, or you can restrict them to financial hardship reasons. Loans allow participants access to their money in a pinch, where a distribution is probably not available to them.

Can employees roll money into the plan from other plans? You can allow employees to roll money into your plan from their previous employer's plan or IRA. This is an option selected in the plan document.

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