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401k Distribution Rules – FAQ’s

If you participate in a 401(k) plan, you should understand the rules for withdrawing money from your account – otherwise known as taking a distribution – even if you don’t plan to touch this money for decades. 401(k) plans have restrictive distribution rules that are tied to your age and employment status.  If you don’t understand your plan’s rules, or misinterpret them, you can pay unnecessary taxes or miss distribution opportunities.

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Benefit Communications In An Electronic World

With communication mediums like email, text, and IM’s becoming the standard in business industries worldwide, plan sponsors are becoming increasingly interested in abandoning paper processes for a more electronic means of communication with plan participants and beneficiaries. Since e-delivery is not an “all or nothing” prospect, this new approach presents itself as an accessible and easily implemented process with many advantages. However, utilizing the various forms of electronic communication raises a few important questions for today’s plan sponsors:

  • Which documents do regulations allow to be e-delivered?
  • With a myriad of electronic delivery vehicles available to me, which am I allowed to use and how do I know I’m meeting the requirements mandated by law?
  • Which participants am I able to communicate with electronically?  Do I need their consent?
  • What are the benefits of using electronic communications for myself and my plan’s participants or beneficiaries?

Having the correct answers to these questions will allow you, the plan sponsor, to use electronic communications with confidence, effectively taking advantage of the inherent benefits they provide.

Common Participant Communications Acceptable via Electronic Delivery

Here are some participant communications that may be delivered via electronic delivery:

Summary Plan Description (SPD): The SPD is the main vehicle for communicating plan rights and obligations to participants and beneficiaries. As the name suggests, it is a summary of the material provisions of the plan document, and it should be understandable to the average participant of the employer.

Summary of Material Modifications (SMM): The Employee Retirement Income Security Act (ERISA) requires that a plan provides an SMM to plan participants any time there is a material modification to the plan itself, or any time there is a change to the information that is required to be provided in the SPD.

Summary Annual Report (SAR): The SAR is a narrative summary of the plan’s financial status and summarizes the information on the plan’s annual report (Form 5500).

401(k) Safe Harbor Notice: A timely notice to eligible employees informing them of their rights and obligations under the plan, and certain minimum benefits to eligible employees either in the form of matching or non-elective contributions.

Black Out Notice: This document notifies participants of a period during which they cannot affect changes to their account, such as investment changes, requesting distributions and loans.  For example, a blackout notice might be issued if the plan were moving from one investment provider to another.

Fee Disclosure Notices: This notice provides information to the participant on all fees paid by the plans assets pertaining to general plan services such as recordkeeping or legal and accounting charges.

Qualified Default Investment Alternative Notice (QDIA): This notice explains to the participant that if they do not make an affirmative election regarding their investments in the plan, their funds will be invested by the plan’s fiduciaries on their behalf.

Automatic Enrollment Notices: Notification to all employees who are eligible to participate in the arrangement between 30 and 90 days prior to the beginning of each plan year. For plans that automatically enroll employees immediately upon being hired, an employer may give employees the notice on their date of hire. A description of the automatic enrollment process and salary deferral percentage is necessary.

404(c) Notice: Notification to the plan’s participants that the plan intends to comply with IRC Section 404(c). 404(c) requires information about plan investment options, performance, and fees be provided before initial investment and subsequently on at least an annual basis.

Acceptable Methods of E-Delivery and their Requirements

While the regulations regarding e-communications do not require the use of any specific form of electronic media the following electronic delivery methods are acceptable:

  • Email
  • Attachment to email
  • Providing a link to documents posted on a web site
  • Provision of documents on magnetic disk, CD-ROM, or DVD

For safe harbor compliance, it is important for the plan sponsor to meet the following requirements:

  • Take appropriate steps to ensure that the system for furnishing electronic documents results in actual receipt of the transmitted information (e.g., using return-receipt or notice of undelivered electronic mail features, or conducting periodic reviews or surveys to confirm receipt of the transmitted information).
    Undeliverable notices should be followed up with an alternative form of delivery.
  • Provide notice to each recipient at the time e-documents are delivered regarding the significance of the document. Emails should be distinguishable from others in their inbox and, if you’re posting documents to an intranet site, participants need to be alerted to their presence.
  • E-documents must contain all required information and, upon request, participants must be provided a paper version of the document.
  • The system must be designed to protect the confidentiality of the personal information of the participant who receives the information.

It is important to note that current regulations state that localized computer destinations which participants have access to, like kiosks, don’t qualify for e-delivery because one can’t ensure actual receipt, even if
notification has been provided and the documents are available there.  All in all, it’s okay to use an assortment of electronic communication channels provided you can meet the requirements of the notice and verify the participants are receiving the information effectively and confidentially.

Participant Consent

For those who wish to comply with Safe Harbor e-delivery, the rules identify two categories of participants; those who are “Wired at Work” and those who must give “Affirmative Consent” to receive electronically delivered documents.  Often times employees operate outside of the confines of an office setting.  If you have employees that work from home, or perform a job without work related computer access, compliance for electronic communication may require prior consent from the participant.

To be considered “Wired at Work”, the participant must:

  • be able to effectively access e-documents at the location where they are expected to perform their duties; and
  • access the employer’s electronic information system as an integral part of their duties.

For those not wired at work, “Affirmative Consent” from the participant is required.  In order for the participant to give consent, the following information is required:

  • types of documents to which the consent applies;
  • knowledge that consent can be withdrawn, free of charge, and the procedures by which consent can be withdrawn;
  • be able to demonstrate the ability to receive e-delivered documents;
  • the right to request paper versions of any e-document and the disclosure of any costs associated with it;
  • all hardware and software required for accessing the e-delivered documents; and
  • the participant must provide an electronic address for the e-delivery of documents.

In the instance where an employer has employees that work from a home office, electronic delivery is still a readily available option provided the acceptable methods of e-delivery and safe harbor compliance are met, along with the “without consent” parameters.  If the criteria are met, then the participant no longer must:

  • Have the ability to print out a paper copy where they have computer access.
  • Consent to receive documents electronically.

The Benefits of Electronic Delivery

There are a multitude of reasons that you, and your plan’s participants, may benefit from moving further into the world of electronic delivery.  As internet access spreads, electronic delivery is becoming the norm in many settings. The growing advantages of electronic over paper delivery become more and more evident as technology inevitably evolves.  Here are a few points to consider:

Accessibility

In a world equipped with computers, smartphones, tablets, and other devices, electronic communication provides flexibility and convenience of access to plan information immediately and continuously. So, e-delivery benefits the
participants by:

  • allowing participants to interact with their accounts anywhere they can connect to the internet and with the use of whichever delivery system they prefer.  Plan updates and participant communications can happen
    instantaneously.  Unlike paper notices, electronic information is easily filed and retrieved in an organized system, ready to referenced at a moment’s notice;
  • depending on the type of e-delivery used, participants also may be able to instantly retrieve documents that they have lost or neglected to save;
  • e-documents easily adjust in font size, or can be read out loud via text to talk apps, for the visually impaired and even translated for those that call English their second language.  In previous times, where
    inaccessibility to the internet for the poor or for minorities may have been a drawback, the breakdown of the digital divide regarding internet connectivity has happened more quickly than even that of the telephone. If increasing participation in the plan is important, this kind of accessibility is a key component to success.

Financial and Environmental Benefits

Simply put, utilizing an electronic platform to send and receive plan information means cost reduction and less waste.  Using less paper means less overhead cost for producing, printing, labor, and postage.   This all translates into dollars and cents and reduces the overall fees of maintaining your company’s retirement plan.  For those that think “Green,” e-delivery greatly reduces the impact on the environment.    Less cost to the plan and it’s good for the environment?  Sounds like a win/win.

Security and Recordkeeping

While hacking or data breaches are often thought to be a risky proposition in electronic communications, the truth is e-delivery is safer than paper-based delivery.  Verification of accurate delivery and receipt using e-delivery supersedes that of standard mail and allows for better tracking and quicker correction of problems. A more complete set of security precautions surround electronic communication and easy access allows for updates and corrections as needed.   Electronic delivery also allows the plan sponsor to immediately recognize bouncebacks, or undeliverable electronic messages.  This doubles up as a convenient monitoring system for verifying that a participant is effectively receiving plan information and assuring that financial information isn’t being mailed indiscriminately.  It allows failed correspondence channels to be corrected and ensure prompt and dependable delivery of important information to plan participants and beneficiaries.

E-delivery is not just for retirement plan notices.  It may also be used in the delivery of health coverage related correspondence such as COBRA notices, Qualified Medical Child Support Orders (QMCSO), and HIPPA Certificates.  If utilized for this purpose, once again, the employer must take steps to assure compliance with HIPPA and other applicable laws governing the privacy and security of such information.

Conclusion

The substantial advantages today for the electronic delivery of important financial information illustrate how e-delivery is quickly becoming highly preferable to its paper counterpart. Due to technological advances and
widespread access to the internet, a major shift toward a greater reliance on electronic delivery of required information is upon us.  A variety of delivery methods, when instituted with proper compliance, represent a safe, efficient, and cost effective move towards better retirement plan communications.

See the original article on our partner’s site RPG Consultants.

Acquisition Or Merger? Don’t Overlook The Seller’s 401k Plan

If you’re a small business 401(k) plan sponsor considering the purchase of another company, the last aspect of the deal you’re probably considering is the seller’s 401(k) plan.  However, it’s important for you to have a strategy for that plan in place before your deal is closed.  Otherwise, you could be stuck with a 401(k) plan that includes costly protected benefits or uncorrected defects.

The good news?  Developing a strategy is simple.  There are only a handful of considerations.

Will your purchase be an asset or stock sale?

When you are planning to buy a company, your options for their 401(k) plan will depend upon whether the purchase is an asset or stock sale.  Under an asset sale, you purchase the seller’s assets and liabilities, but the seller retains possession of the legal entity.  Under a stock sale, you purchase the seller’s stock – thereby taking possession of the seller’s legal entity (in addition to their assets and liabilities).

Why is this distinction important to your 401(k) plan?  If your purchase is a stock sale, you have just two options for handling the seller’s 401(k) plan – merge it into your plan or retain it on a stand-alone basis (the latter being very rare due to IRS nondiscrimination rules).  Your options are limited because you and the seller are considered the same employer for 401(k) purposes in a stock sale.  However, you’re considered different employers in an asset sale, which gives you a third option – have the seller terminate their 401(k) plan before the acquisition.

Why terminate the seller’s 401(k) plan prior to acquisition?

In my experience, when a 401(k) plan sponsor buys another company with a 401(k) plan, they most often merge the seller’s plan into their own to grow plan assets and/or reduce the disruption to new employees.  However, there are reasons why you might be better off terminating the seller’s 401(k) plan when possible.  These reasons include:

  • The seller’s 401(k) plan includes “protected benefits” you don’t want to assume. While some protected benefits can be eliminated after a period of time (e.g., safe harbor contributions), others must be retained forever (e.g., liberal vesting terms or in-service distribution options).
  • The seller’s 401(k) plan includes uncorrected defects that you don’t want corrupting your plan. These defects become your plan’s problem once a merger occurs, making your plan vulnerable to IRS disqualification.
  • You want to treat the seller’s employees as new employees for purposes of your 401(k) plan. When you purchase a company in an asset sale, your plan is only required to credit employee service with the seller for eligibility and vesting purposes when a merger occurs.

Even when a seller’s 401(k) plan is terminated, your plan can still credit employee service with the seller.  You just need to explicitly credit that service in your plan document.

Good news!  You have time to merge a 401(k) plan post-sale

When you decide to merge an acquisition’s 401(k) plan into your own, you have time to make that happen.  IRS nondiscrimination rules include special transition relief for 401(k) plan sponsors that buy another company with a 401(k) plan.  They allow you to test the two 401(k) plans separately for nondiscrimination until the last day of the plan year following the year of acquisition.

This extra time is helpful when an acquisition’s 401(k) plan includes protected benefits that can’t be eliminated until some future date – like safe harbor contributions.

Simple planning is the key to staying out of trouble!

When you’re planning a company acquisition, there is a lot to consider.  However, overlooking the seller’s 401(k) plan can be a costly mistake.  While you’re most likely to merge it into your 401(k) plan, you may want the seller’s plan terminated instead due to costly protected benefits, plan defects or how you want the seller’s employees treated by your 401(k) plan.

The good news? Developing a strategy for an acquisition’s 401(k) plan is usually straight-forward. Need help? An experienced 401(k) provider has probably helped hundreds of 401(k) sponsors make this decision.

See the original article on our partner’s site Employee Fiduciary.

Paylocity – Separating 401k Fact From Fiction

It is one thing to have confidence in your ability to make sound financial decisions for your future but it is something else entirely to have the knowledge to back up that confidence. That’s the paradox facing many of today’s workers. While they may understand the importance of contributing to their 401(k), they may not always know how that particular investment works with other long-term savings plans to ensure the best possible financial plan for retirement. In any case, employees should look to advice from qualified financial professionals to help them create the ideal financial portfolio toward retirement.

401(k) can come up short

One of the easiest ways to prepare for retirement is to adequately fund a 401(k), a practice that is no longer the norm. In fact, approximately half of Baby Boomers have set aside $100,000 or less for a retirement that could last 20, 30 or more years while approximately 15 percent saved more than $500,000, according to PWC’s 2016 Employee Financial Wellness Survey.

But even when properly funded, your clients should look beyond their 401(k) for their retirement savings. “If their employers do not offer a matching contribution, clients may be better off investing their retirement money in an IRA instead … Clients can also contribute to a 401(k) plan and an IRA at the same time, and the employer’s sponsored plan charges investment and other fees, according to Employee Benefit News.

For years, financial experts agreed that 401(k) contributors who retired at 60 could expect to withdraw 4.5 percent of the balance each year to financially sustain their life after work for 30 years. Today, that adage is on less firm ground, considering the increased length of people’s lives. It’s also important to consider whether or not you plan on leaving money to family members or other individuals or organizations.

Thinking beyond 401(k) accounts

While the 401(k) may be a huge element of retirement funding, it is far from the only option. In fact, according to USA Today, if employers don’t offer matching contributions, your clients may be better off investing retirement money in an IRA. Despite perceptions, today’s employees can contribute to a 401(k) plan and an IRA at the same time.

Employees can increase contributions to a 403(b), 457, 401(k), a Thrift Savings Plan, a flexible-spending account, a health savings account, and a dependent-care flexible spending account to build up retirement funds, according to Kiplinger.

Social Security benefits should be weighed carefully. Opting to take monthly payments at 62 will decrease your payments while deciding to hold off on collecting your benefits could result in a substantial increase. According to Money, the basic rule of thumb is that Social Security payments increase by 7-8 percent a year for each year retirement is delayed past 62.

See the original article on Paylocity.

Paychex – 3 On-The-Go Payroll Solutions

Payroll management is a function that impacts employees, managers, and HR staff. As teams increasingly work remotely and need access to key systems on the go, mobile access to payroll systems is receiving increased scrutiny and investment. In fact, the Society for Human Resource Management reveals that HR departments’ adoption of mobile technologies is expected to increase 17 percent in 2017. From submitting and approving hours on the go to providing easy access to reporting dashboards, the right mobile tools can help everyone in your organization. Here’s a closer look at how mobile technologies benefit different parts of the workforce, and why this trend is taking root in growing businesses in the year ahead.

HR Managers: Access to Payroll Anywhere

For human resource managers, payroll management can benefit from access to a variety of dashboards. From ensuring that all workers have submitted their hours on a timely basis and they’ve been approved by managers, to verifying that wage payments have been processed correctly, access to information is critical. Questions that arise and need to be answered outside of standard working hours are easier to address when HR managers can do so away from the office.

In addition, HR managers often need access to reporting and compliance information. With mobile tools, a payroll-related question that comes up in a meeting can be quickly answered with accurate, real-time data, rather than becoming an action item for follow-up.

Managers: Answering Questions On the Go

Managers play a critical role in the payroll process. Often, when members of their team submit time, it’s important that managers have access to that information to approve it in a timely fashion. There may be a short window between when a worker submits their time and when the manager has to review, approve, or reject, in order to make regular payroll cycles.

Mobile payroll management tools allow leaders to access this information at any time. For example, if a payroll submission comes in when a manager is attending meetings offsite, they’re able to use their mobile device to complete the process. Managers may also need to access payroll information for budget planning, confirming compliance, or to answer staff questions. Mobile access provides the opportunity to manage payroll processes as needed, without unnecessary delays.

Workers: Real-time Payroll and Time Data

With the increase in flexible work arrangements, employees may be anywhere when the deadline to submit their time arrives. With mobile payroll and time and attendance tools, it’s easy to file the hours that have been worked from a smartphone, tablet, or home computer. And clearly, employees want to have this capability on their smart devices. In fact, according to original Paychex research, the number one reason that employees log into HR software is to view their paycheck and pay history. Other popular tasks include viewing accrued sick time and vacation time, looking at tax documents, or updating tax and deduction information. Whether they need to answer a supervisor’s question or simply check their paystubs, employees can use mobile tools that add new levels of flexibility and convenience to self-service.

Efficient payroll management is an essential part of keeping your business moving forward. Making the change to mobile payroll tools ensures that your HR processes are keeping pace with changing business models. Workers and managers appreciate the flexibility and are able to adhere to payroll-related timelines with ease. For HR managers or executives who need to approve time or access reporting, improved tools allow for seamless process management.

See the original article on Paychex Worx – Knowledge At Work.

Benchmark Your Plan’s Fees

The Pension Protection Act of 2006 mandates that plan sponsors benchmark their plan’s fees every 3-5 years to ensure that the fees charged to participants are not egregious and consistent with the services provided.  The benchmarking analysis is required to be in writing and readily accessible should your retirement plan be audited by the Department Of Labor…more

Should You Join Your Company’s 401k Plan

YES!  “Seven days a week and twice on Sunday,” as the saying goes.  Besides joining for the obvious reason that you will need money to take care of yourself when you get older, you also receive a huge financial reward NOW!

Here’s how it works…Let’s assume you are a single person making $30,000 of taxable income.  Under 2016 rates you pay $4,036 in federal income tax.  If you had joined the 401k plan and put in $2,000, you would deduct that from your income resulting in a tax bill of $3,736 – a savings of $300!

Three hundred dollars may not sound like a lot, until we put it in context.  For starters, you did a smart and savvy thing by saving money and you should be applauded.  And from an investor’s perspective, you hit it out of the park!  You achieved $2,000 in savings, yet you only saved a net $1,700 to get there because you received an additional $300 back on your taxes.  This equates to an IMMEDIATE return of 17.64% in your 401k account.  How good is 17.64%?  Let’s just say EPIC!  If you average 9% annual investment returns over your lifetime, you will have done extremely well.  You nearly double that return every time you add money to your 401k account.

No matter your previous experience with personal finance, your employer has made it possible for you to become an INVESTOR.  This is something you can be very proud of.  Most working Americans do not have access to a 401k plan and will never become investors, because the opportunity will never present itself like it has for you.

I am thankful you work for a company that cares enough about their employees to have a 401k plan.  Join the plan and save as much money as you can.  This is YOUR life and nobody is going to take care of you when you get older.  You’ll have to do this for yourself!