What Advisors Need to Know About Retirement Plans: Presentation to Illinois CPA Society

I had the opportunity recently to make a presentation on qualified retirement plans to the Illinois CPA Society (ICPAS). Actually, it was using PowerPoint to begin a dialogue with the members of the ICPAS Investment Advisory Services/Personal Financial Planning Forum

The ICPAS describes their Forums as being “composed of members with shared interests who interact either in person and/or online to discuss topics of mutual interest, share best practices, ideas, problem-solving strategies and other information”. That was certainly my experience. Here’s the presentation that started the discussion.

Qualified Plan Overview for Advisors from National Benefit Services, Inc.

Employee Classification as Part-Time or Full-Time: Not the Same Under the Affordable Care Act and ERISA

Some of the most difficult and contentious provisions of the Affordable Care Act (“ACA”) are the employer mandate and upcoming reporting requirements effective in 2015.

“Difficult” because the employer mandate requires applicable large employers, generally those with 50 or more “full-time” employees, to offer coverage to full-time employees and dependents (other than spouses). If the employer mandate is not met, employers would be subject to penalties if a full-time employee receives government premium assistance through the marketplace. In addition, beginning this year, the ACA imposes new reporting requirements that will assist the Treasury Department in enforcing the employer and individual mandates.

“Contentious” because, well, the ACA is all about politics. Not surprisingly, the new Congress got off to a quick start. On January 8, the House passed the Save American Workers Act of 2015 which amended the Internal Revenue Code to change the definition of “full-time employee”, an employee who is  employed on average at least 30 hours a week.  The Act increases the threshold to 40 hours a week. The Act has been sent to the Senate where if passed will probably get vetoed by the President.

From a retirement plan standpoint, however, it’s different. While many employers do not want to include part-time employees in 401(k) plans for both cost and discrimination testing purposes, the IRS takes a decidedly dim view of any eligibility class that could exclude any employee who completes 1,000 hours of service. Indeed, the IRS issued guidance in 2007 regarding the extent to which part-time, temporary, seasonal, and project employees can be excluded under qualified retirement plans.

Retirement plans that improperly exclude these employees can be disqualified resulting in significant adverse tax consequences. Here are two takeaways for any concerns about this issue:

  1. Review the plan document to determine whether it has been properly drafted to exclude part-time and other non–full-time employees.
  2.  Determine whether any of those employees were correctly excluded from plan participation.

Any issues? Then take advantage of one of the available IRS correction procedures.

Taking credit for setting up a retirement plan

2014-2015As we near the end of the year, many business owners rush to establish retirement plans to capture calendar fiscal year tax deductions. If you’re one of those small business owners, you may also be eligible to receive a tax credit for expenses you incurred to implement your plan.

What’s the difference between a tax deduction and a tax credit? A  tax deduction is something that your business can use to reduce the amount of taxable income. A  tax credit can be used to reduce how much tax is owed.

But as with all things taxes, certain requirements must be met. Here is a brief summary:

  • The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) added a tax credit of up to 50% of the first $1,000 in retirement plan start up expenses for the first three years of a plan.
  • An employer is an eligible employer if, during the preceding year, there were 100 or fewer employees who received at least $5,000 of compensation.
  • The plan must cover at least one Non-Highly Compensated Employee.
  • The employer must not have established or maintained any employer plan during the three tax-year period immediately preceding the first tax year in which the new plan is effective.
  • Eligible plans include qualified plans such as 401(k) plans, profit sharing plans, traditional pension plans, cash balance pension plans, and employee stock ownership plans, SEP IRAs, and SIMPLE IRAs.
  • Eligible expenses include those incurred to establish the plan, administrative fees and costs incurred to educate employees about the plan.
  • To claim the credit, an employer must file IRS Form 8881 – Credit for Small Employer Pension Plan Start-Up Costs.

For additional information on the retirement plan tax credit, here is a link to our FAQs. Be sure to talk to your tax adviser to determine whether you can take advantage of it.

IRS issues updated Rollover Chart

What’s an eligible rollover distribution and what’s not can be a complicated and confusing matter. Here’s a recent and handy rollover chart by the Internal Revenue Service updated for new rules that may be helpful.

1 Qualified plans include, for example, profit-sharing, 401(k), money purchase and defined benefit plans
2 Beginning in 2015, only one rollover in any 12-month period. A transitional rule may apply in 2015.
3 Must include in income
4 Must have separate accounts
5 Must be an in-plan rollover
6 Any amounts distributed must be rolled over via direct (trustee-to-trustee) transfer to be excludable from income
For more information regarding retirement plans and rollovers, visit Tax Information for Retirement Plans.

Editor’s Note: Hat tip to BenefitsLink.

The Top Five 401(k) compliance matters that employers can’t delegate away

Harry S. Truman, the 33rd President of the United States, is pictured above with the sign he kept on his desk, “The buck stops here.” It meant that the President had to make the decisions and accept the ultimate responsibility for those decisions.

What does that have to do with a 401(k) plan? Everthing. It’s the plan sponsor who typically retains responsibility for overall plan operations as the “Plan Administrator.” So practically every 401(k) plan sponsor needs to deal with each of the following – sometimes without help from the plan’s current providers.

1. Fee Disclosures

Responsible plan fiduciaries need to evaluate service provider fees, the nature and quality of covered services, and compliance of provider fee disclosures with the applicable regulations.

Why This Matters

If the responsible plan fiduciary accepts a deficient service provider fee disclosure, the service provider’s agreement with the plan becomes a prohibited transaction with an associated excise tax and a requirement that the arrangement with the service provider be corrected. There also is a potential liability to plan participants who may be adversely affected by any excessive provider fees.

2. Investment Advice

Plans need to make investment decisions, including the designation of an array of investment funds for 401(k) participant selection and the designation of a default investment for participants who do not make their own investment decisions. Who makes that decision for your plan? Investment consultants and wealth managers who work for financial institutions do not work for your plan. They may even have personal incentives to have your plan select more expensive investment funds.

Why this matters

Only an investment advisor or investment manager acting in a fiduciary capacity is required to act in the best interests of your plan and its participants. Unless your company is in the financial services industry, or is otherwise qualified to make investment decisions for its 401(k) plan, the plan needs investment advice from an independent fiduciary who has no financial stake in your plan’s investment decisions. Selecting expensive or poor performing investment funds for your 401(k) plan is a basic mistake that can be avoided by having an investment professional work for your plan, not a financial institution.

3. Payroll Deductions

Participant 401(k) contributions made by payroll deductions need to be forwarded by the employer to the plan within certain time limits (as soon as reasonably possible for plans with 100 or more participants and within seven business days for smaller plans). DOL guidance suggests that a designated individual or “special trustee” should be assigned the specific responsibility for forwarding 401(k) contributions on a timely basis. Pre-approved 401(k) plan documents are now providing for the designation of such a special trustee, who typically would be an employee with control over the sponsor’s cash management.

Why This Matters

Late 401(k) contributions are a focus of DOL audits and frequently result in DOL recoveries. Late 401(k) contributions are subject to both a prohibited transaction excise tax and a civil penalty under Section 502(l) of ERISA.

4. Plan Audits

Plans subject to required annual audits by an independent CPA (generally plans with more than 100 participants) should pay attention to the audit results and resolve any compliance issues raised by the CPA. More important, make sure your CPA is experienced in auditing retirement plans and spends enough time with employees to understand how your plan operates.

Why This Matters

The Department of Labor (DOL) is likely to reject a deficient plan audit. Because the audit is included as part of the plan’s annual report on Form 5500, a deficient plan audit will, in turn, cause the annual report to be rejected. This can result in a late filing and penalties of up to $110 per day. Of course, the deficient plan audit will also have to be corrected – most likely at the employer’s expense.

5. Participant Releases

When 401(k) benefits are paid to a participant, the participant can be requested to sign a valid release of certain claims against the plan and its fiduciaries. Plan administrators should include a participant release along with their benefit distribution forms.

Why This Matters

Recent Supreme Court and related federal court decisions have expanded the remedies available to participants who are adversely impacted by the conduct of plan fiduciaries. Many of these claims can be released and waived by participants when they are paid their benefits. There’s no reason not to require such a release in the 401(k) plan document and summary plan description.


Plan service providers can help in their designated operational field. It is important to have good service providers but it also is important to understand those plan responsibilities that are not delegated to service providers. If your current service providers cannot fully assist with fee disclosure matters or protective plan provisions, get needed assistance from other consultants, investment advisors or legal counsel. Also bear in mind that communications with the employer’s corporate or benefits lawyers about 401(k) compliance issues may not be protected by attorney-client confidentiality. Consider addressing significant compliance concerns including fiduciary conduct matters with an independent benefits lawyer to preserve such confidentiality.

Editor’s Note:

The picture shown above is from the Truman Library. The expression itself, “The buck stops here”, is said to have originated from poker. Back in frontier days, a knife with a buckhorn handle  was used to indicate the person whose turn it was to deal. If that player didn’t want to deal, he would could pass the responsibility by passing the “buck”to the next player. Truman was an avid poker player and received the sign as a gift from a prison warden who was also an avid poker player.

Retirement Plan Limits for 2015

On October 23, 2014 the IRS announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2015. The chart below highlights the new limits for 401(k) and other defined  contribution plans.

2015 Plan Limits
The rest of the new limits and the fine print can be downloaded here.

Affordable Care Act “compliance season” begins November 15, 2014

There used to be a brief three month respite between October 15, the final due date for extended Form 5500s, and the following January 1, when the annual administrative cycle began again.

Not any more. The Affordable Care Act (“ACA”) provides another set of compliance deadlines starting on November 15, 2014. The new deadlines involve:

  1. Open Enrollment
  2. Health Plan Identifiers (“HPID”)
  3. Reporting Requirements for Self-Funded Group Health Arrangements
  4. Document Updates
  5. 2015 and beyond

Following is a brief explanation of each:

1. Open Enrollment

A three month open enrollment period begins on November 15, 2014. This is the first ACA renewal period and the first time all the related tax requirements will be in place. This presents a significant administrative challenge. Many employers also face their own November compliance deadline. Here’s what’s just around the corner:

2. Health Plan Identifier (“HPID”)

Both self-funded and insured, with annual “receipts” in excess of $5 million must obtain a ten-digit Health Plan Identifier (“HPID”) by November 5, 2014 (smaller plans have until November 5, 2015). In accordance with an official description, the sign up process requires users

to go through the CMS Enterprise Portal, access the Health Insurance Oversight System (HIOS), and apply for an HPID from the Health Plans and Other Entity Systems (“HPOES”).

Got that?

For insured plans, it is likely the insurer will apply for your plan’s HPID, but check to be sure. Self-funded plan sponsors may have to go it alone. The CMS has posted step-by-step instructions and an explanatory video. Allow some time because there are reported delays in the online registration system and there could be a rush of applications as the deadline approaches.

 2. Reporting Requirements for Self-Funded Group Health Arrangements

Self-funded plans are also required to report their average number of enrolled employees, spouses and dependents for the period from January 1, 2014 through September 30, 2014. The report is required by November 15, 2014 and is made by setting up an account at “Pay.gov” and then accessing the “ACA Transactional Reinsurance Program, Annual Enrollment and Contributions Submission Form.”

This will allow such plans to compute their transitional reinsurance fee, which is $63.00 per covered life payable during 2015 in installments ($52.50 per covered life on January 15, 2015 and $10.50 per covered life on November 15, 2015). Yes, this is another ACA fee and is not to be confused with the Patient-Centered Outcome Research Institute (“PCORI”) fee. For insured plans, the transitional reinsurance fee will be paid by the group health carrier.

3. Document Updates

In addition to the new filings, plan documents must be updated.

COBRA Election Notice

A model COBRA election notice with a beefed up description of “Marketplace” (ACA) coverage is available on the Department of Labor website along with a revised Children’s Health Insurance Program Reauthorization Act (CHIPRA) notice that mentions the Marketplace coverage option. Use of the model notices, with appropriate adaptation for specific plans, is optional but recommended because it assures compliance with the applicable disclosure requirements.

 Cafeteria Plans

Cafeteria plan rules have been modified by the IRS in Notice 2014-55 to allow additional ACA-related mid-year election changes. Under current rules, a cafeteria plan cannot provide participants an option to revoke their group health elections solely to enroll in ACA coverage. Under the IRS notice, cafeteria plans can allow plan participants to revoke their cafeteria plan elections if they incur a reduction in service below a 30 hours per week average but are still eligible for employer-provided coverage OR the employee wants to purchase ACA coverage but can’t do so without incurring a gap in coverage or a period of duplicate coverage (this happens when the employer-provided plan is not a calendar year plan because ACA coverage is based on the calendar year).

The changes are effective September 18, 2014 but do not apply to cafeteria plan flexible spending arrangements (FSAs). Cafeteria plan documents will have to be modified to permit these mid-year election changes.

5.  2015 And Beyond

ACA “large employers” (those with at least 50 “full-time equivalent” employees including tax-exempt and government employers) must file annual returns with the IRS and provide coverage statements to their full-time (30 hour per week) employees. The IRS reporting is made on Form 1094-C (this contains the employer’s certification of all calendar months that it has offered minimum essential coverage to full-time employees and their dependents) and Form 1095-C (each full-time employee is to be issued a copy of this form to report the employee’s portion of the least costly monthly premium for employee-only coverage that satisfies the ACA minimum value requirements as well as the calendar months when such coverage was available to the employee).

The Form 1095-C for each covered employee is also filed with the IRS along with Form 1094-C much like Form W-2 and Form 1098, the W-2 transmittal form. The Form 1095-C must be issued to employees by January 31 of the following calendar year with the first deadline falling on February 1, 2016 (January 31, 2016 is a Sunday) with respect to 2015 data. The IRS filing is due by February 28 of the following year (March 31 if filed electronically) with the first filing deadline also falling on February 1, 2016. The IRS has published FAQs and draft instructions for completing the required forms that provide additional details.

Sponsors of self-funded health plans (not insured plans), regardless of size, must file an annual information return on Form 1095-B (“large employers” will use Form 1095-C mentioned above) and provide a statement to each covered employee to report the months during which the employee was enrolled in the plan. The purpose of this reporting is to police the individual mandate that requires individuals to maintain minimum essential coverage or pay a penalty (or is it a tax?). The deadlines track the rules above for Forms 1095-C and 1094-C with the first disclosure and filing due February 1, 2016 (the filing, if made electronically, can be made as late as March 31).


Annual returns due in 2016 sound like they are a long way off. However, employers, HR staff, insurers and third party administrators for self-funded plans need complete 2015 data in order to be in a position to provide individual information to each participant during the January, 2016 reporting window. For many employers, it will make sense to establish internal protocols to capture the required participant data as early in 2015 as possible. If that data is not readily available by early January, 2016, it could prove very difficult to distribute individual statements to all employees by the end of that month.

What we can learn from Ernest Hemingway in communicating 401(k) benefits to employees

That’s a picture of the second-story writing studio that adjoins the Key West house in which Ernest Hemingway lived in the 1930s. He wrote many of his best and most famous stories and books there. His house is now a museum, and the cat in the foreground is one of the approximately 59 others who are the sole residents.

A recent visit triggered some fond memories of reading some of those classics in my American Lit course:

  • For Whom the Bell Tolls
  • The Green Hills of Africa
  • The Snows of Kilimanjaro
  • The Short Happy Life of Francis Macomber

But Hemingway’s sparse and compelling style that appealed to me went for naught. Instead of writing the Great American Novel, I entered the world of ERISA trying to explain difficult and technical concepts, many of which prefaced by numerical references to Internal Revenue Code sections and Department of Labor regulations. Not a feeling of a job well done to see otherwise bright people getting that glazed-over look.

Kevin Morris on the Principal Blog reminds us of that danger when he writes, Is Jargon Getting in Your Way? Financial terms can be confusing and have negative connotations, he says, and provides some suggestions to improve our communication.

Avoiding the jargon trap was a lesson taught to me years ago by a business associate who counseled me, “Jerry, when I asked you time it was, you told me how to make a watch”.

But it’s not just the jargon to avoid. Words themselves can have underlying emotional meanings. Invesco points out in its white paper, New Word Order that there are “words to use” and “words to lose” when communicating with employees. They describe the four core communication principles from their research.

  • Positive: Don’t sell fear or risk
  • Plausible: Sell credible benefits
  • Plain English: Avoid jargon
  • Personalize: Personalize the benefits

So can we learn to write like Hemingway in communicating the value of 401(k) plans to employees?

No problem. There’s an app for that. Mobile and desktop versions available.

Now whether legal counsel and compliance officers will let us use it, well, that’s another story.

Picture credit: The Hemingway Home and Museum.

How safe is your retirement nest egg from creditors?

So, you’ve transferred your 401(k) retirement nest egg into an individual retirement account (IRA). This gives you more control over management and distribution of IRA assets. But, you may have concerns about creditors and their ability to attack your retirement assets, which are now conveniently consolidated from several employer plans into one convenient IRA. Will those IRA assets be protected from creditors regardless of what happens to you?

Employer Plans in Bankruptcy

Employer sponsored retirement plans, such as 401(k) plans, are protected from creditors by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “Act”) as well as a specific ERISA statutory provision. The Act also protects other “retirement funds” like IRAs, in an aggregate amount of up to $1,000,000 (indexed for cost of living increases and now set at $1,245,475). The protection from creditors is implemented through an exemption from the assets available to creditors in bankruptcy, and this protection is available on a nation-wide basis (individual states can elect alternative exemptions).

Inherited IRAs as “Retirement Funds”

Do “inherited” IRAs set up on the death of an IRA holder for a named beneficiary fall within the category of “retirement funds” protected by the Act? The U.S. Supreme Court recently considered this issue in Clark v. Rameker, a case involving the assets of a mother’s IRA inherited by the named beneficiary (her daughter) upon the mother’s death. The daughter subsequently filed for bankruptcy and the IRA assets were claimed to be part of the daughter’s bankruptcy estate to be shared by her creditors.

The Supreme Court concluded that such inherited IRAs are not retirement funds in the hands of the beneficiary (in this case, a non-spouse beneficiary) who may be a younger family member many years from retirement, and so such inherited IRAs are not protected from creditors by the Act. Left undecided by the Supreme Court is the status of inherited IRAs benefiting surviving spouses (favorable language in the lower court opinion in Clark suggests that inherited IRAs in the hands of a surviving spouse continue to be retirement funds).

IRAs and State Bankruptcy Exemptions

The Supreme Court’s decision does not deal with bankruptcy protection of retirement funds like IRAs in those states which have bankruptcy exemptions that are not based on federal law. For example, Illinois law provides an exemption for assets of “retirement plans” in bankruptcy. Although inherited IRAs with non-spouse beneficiaries are generally regarded as not protected by the Illinois statutory exemption, the status of inherited IRAs in the hands of surviving spouses remains an open question.

Inherited IRAs and Beneficiaries

When an IRA owner dies, an inherited IRA is created by simply changing the title to the existing IRA. For example, if a family trust is the beneficiary, the inherited IRA might be retitled the “Individual’s Family Trust as Beneficiary of the Individual’s Inherited IRA.” Funds do not have to be transferred from the IRA to the beneficiary except as otherwise required by the required minimum distribution (RMD) rules. Bear in mind that if the deceased IRA owner had attained age 70 ½ and had been taking required minimum distributions, any distributions not yet made for the year of the owner’s death will still have to be made to the designated beneficiary by the end of that year.

An inherited IRA is not like the beneficiary’s personal IRA unless the beneficiary is a surviving spouse. A surviving spouse can roll over funds into and out of an inherited IRA. A non-spouse beneficiary cannot although non-spouse beneficiaries can make direct trustee-to-trustee transfers to a different IRA custodian (but be careful – it’s still an inherited IRA, not your IRA, and a non-spouse beneficiary cannot make any additional contributions to it).


Overall, IRA funds dwarf the amount of retirement assets held in employer sponsored retirement plans. Those IRAs will offer tempting targets to creditors when they pass on death to beneficiaries other than a surviving spouse.

  1. Consider leaving retirement assets in your employer sponsored plans, where protection from creditors is assured, as long as possible.
  2. Alternatively, for assets currently held in an IRA, consider retaining the spouse as the primary beneficiary (that appears to be safe for now) and naming only a spendthrift trust as the alternative beneficiary (this can get complicated, so proceed with caution – and professional advice).

Other asset protection strategies may make sense for assets held outside retirement accounts, but carefully consider those options with advice from an experienced tax or benefits advisor.

The above material is intended for general information purposes and should not be relied on or construed as professional advice. Under the applicable Illinois Rules of Professional Conduct, the contents of this article may be considered to be advertising material. The transmission of this information is not intended to create, and receipt of it does not create a lawyer-client relationship.

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