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Archive for the ‘Retirement’ Category

401(k) Basics – Nondiscrimination Testing:

In 401(k), Planning, Retirement on February 3, 2011 at 6:08 pm

Test anxiety isn’t just for students. The words “nondiscrimination testing” can strike fear into even the bravest of benefit administrators. What is nondiscrimination testing, why is it necessary, and how can you avoid it?

Under a 401(k), employees can elect to have the employer contribute a portion of their wages to the plan. These plans enjoy several tax advantages: the employees’  deferred wages (elective deferrals) are not subject to federal income tax withholding at the time of deferral, and they are not reflected as taxable income on the individual income tax return. Employers can also make contributions to employees’ accounts. These contributions do not count as taxable income to the employee, and the employer may deduct them as business expenses.

In exchange for tax-favored status, a qualified benefit plan must meet these basic qualifications:

  1. Provisions in the plan document must satisfy the requirements of IRS Code.
  2. Plan sponsors must follow those plan provisions.
  3. The IRS limits the amounts each participating employee can defer per year; plans may have lower limits but not higher. The maximum an employee can contribute to a 401(k) in 2011 will remain at $16,500, the same as in 2010. As in 2010, individuals over the age of 50 can make an additional catch-up contribution of up to $5,500.
  4. The plan cannot favor highly compensated employees (HCEs) with respect to contributions, benefits, rights or features of the plan.
  5. A “top-heavy” plan must meet additional minimum vesting and allocation requirements to ensure that lower-paid employees receive at least a minimum benefit. A plan is considered top-heavy when, as of the last day of the preceding plan year (the determination date), the aggregate value of the plan accounts of key employees exceeds 60% of the aggregate value of the plan accounts of all employees under the plan. Note that the definition considers aggregate values, not annual contributions!

Types of Nondiscrimination Testing

If your plan allows employees to make salary deferral contributions, the plan administrator must do an annual nondiscrimination test to ensure that it does not favor highly compensated individuals. There are two types of test: the Actual Deferral Percentage test (ADP) and the Actual Contribution Percentage test (ACP).

Under the ADP test, the plan administrator calculates the average percentage of compensation that has been deferred, pre-tax, to the 401(k) plan by each employee. The deferral percentages of the HCEs and non-highly compensated employees (NHCEs) are then averaged to determine the ADP of each group. To pass the test, the ADP of the HCE group may not exceed the ADP for the NHCE group by 1.25 percent or 2 percentage points.

Similar to the ADP test, the ACP test applies to matching contributions and/or employee after-tax contributions. The plan satisfies the nondiscrimination requirements of the law if it passes the ADP and ACP tests.

Corrective Actions

If the plan fails the ADP and/or ACP tests, the plan sponsor must take corrective action to protect the plan’s qualified status. Laws and applicable regulations allow for a 12-month “correction period” after the close of the plan year in which the mistake occurs. “Corrective action” means making qualified non-elective contributions on behalf of the non-highly compensated employees. In simpler terms, the employer (rather than the employees) must make contributions to the accounts of NHCEs.

Smaller employers, or those whose workforce consists of a high proportion of NHCEs, might want to consider a safe harbor 401(k) plan. A safe harbor plan eliminates the need for annual nondiscrimination testing. In exchange, the plan must provide for employer contributions that are fully vested when made. These contributions may be employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals. Safe harbor 401(k) plans that do not provide any additional contributions in a year are exempted from the top-heavy rules.

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The information presented and conclusions within are based solely upon our best judgment and analysis.  It is not guaranteed information, but is intended to provide accurate and authoritative information in regard to the subject matter covered.  It does not necessarily reflect all available data, and is provided with the understanding that we are not rendering legal, accounting, or tax advice.  Any web links/addresses are current at time of publication but subject to change.  This material is being reproduced with the permission of the publisher via a paid subscription by Insurance One Management, Inc. dba Don Crawford & Associates, Midland, TX.

©2011 Smart’s Publishing – Employee Benefits Report – Volume 9, Number 2 – All Rights Reserved. – Website: http://www.smartspublishing.com

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Retirement Calculator – So, what’s “your number?”:

In Planning, Retirement on July 8, 2010 at 1:32 am

Really like these commercials from ING!  They are very thought provoking!  So seriously, what’s “your number?” Have you given it much thought? It’s never too early to start.

USE THIS RETIREMENT CALCULATOR TO GET THE PROCESS STARTED!

[Visualizing retirement: Translate numbers into a picture]

Retirement Plan Info. for Small Businesses:

In Retirement on June 4, 2010 at 2:41 pm