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 “” 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.

Image: HD Wallpapers

U.S. Supreme Court and Department of Labor Provide New Guidelines for ESOP Trustees

canstockphoto19117592 Best Practice
A recent court decisions and the Settlement Agreement in a Department of Labor (DOL) enforcement action against an institutional ESOP trustee provide new guidelines for trustees and other ESOP fiduciaries involved in the purchase or sale of company stock.

Bear in mind that all employee stock ownership plans (ESOPs) are set up to invest primarily in the stock of the sponsoring corporation. This requirement overrides the customary duty of plan trustees to diversify plan investments, but does it also affect the duty of ESOP trustees to exercise prudence in the purchase or sale of company stock?

Supreme Court Ruling

The United States Supreme Court recently considered this issue in Fifth Third Bancorp v. Dudenhoffer. ESOP fiduciaries had previously been protected by a judicial presumption that their transactions in company stock were prudent absent evidence of extreme circumstances to the contrary, such as the company’s imminent financial collapse. The Supreme Court in Dudenhoffer determined that, contrary to prior court holdings, ESOP fiduciaries are not generally subject to a presumption of reasonableness in their dealings with company stock.

The case was remanded to the trial court in order to allow the plaintiffs, plan participants who were adversely affected by a dramatic loss in value of their company stock accounts in the Fifth Third Bancorp ESOP and 401(k) plan, to amend their complaint. Because the plaintiffs’ lawyers failed to identify specific steps plan fiduciaries should have taken in oral argument before the Supreme Court, preparing an amended complaint that passes muster under the new ruling could still pose a problem for the plaintiffs (see HERE for a discussion of the plaintiffs’ dilemma in their presentation before the Supreme Court).

Department of Labor Settlement Agreement

The recent Settlement Agreement with the DOL in Perez v. GreatBanc Trust Co. et al. also provides guidance to ESOP trustees on the purchase of company stock from controlling shareholders and other insiders. The Settlement Agreement requires a $5.25 million payment from GreatBanc and its insurers for allegedly allowing the company’s ESOP to purchase stock from the company’s co-founder and top executives for a price in excess of the stock’s fair market value.

Although the price paid for company stock by the ESOP was justified by a valuation report from an outside valuation firm, the DOL attacked the validity of the valuation report as based on overly optimistic projections of the company’s future profitability and unjustified assumptions.

The Settlement Agreement also requires GreatBanc to follow certain procedures (“Process Requirements”) when it is involved in the purchase or sale of the stock of private companies. The Process Requirements include standards for determining the independence of the ESOP’s valuation firm, a requirement of a written opinion of the ESOP trustee as to the reasonableness of any financial projection relied on in the ESOP valuation report, and documentation of the ESOP trustee’s independent analysis of the valuation report.

Although these requirements apply only to GreatBanc and do not impose any formal legal requirements on other ESOP trustees, it is clear that, while the DOL wants to promote employee stock ownership, it does not want to allow ESOPs to be used, in the words of a DOL spokesperson, as “a way to create big cash-outs for owners and top executives.”


ESOP fiduciaries need to proceed with due care in the sale or purchase of company stock. If the company’s stock is publicly traded, investment decisions involving company stock should be placed in the hands of independent fiduciaries, not company insiders. This same approach makes sense for fiduciaries of 401(k) plans that offer company stock as an investment option.

For ESOP trustees responsible for the purchase and sale of the stock of privately owned companies, the GreatBanc Settlement Agreement and a number of other DOL enforcement actions make it clear that ESOP trustees cannot accept appraisal reports as the definitive determination of the stock’s fair market value until they independently review the valuation report and verify that its projections and assumptions are reasonable.

ESOP fiduciaries may want to engage an independent valuation firm to assist with this process. And, once again, these recent ESOP fiduciary cases underscore the need for fiduciaries not only to carefully consider valuation reports but also to document their deliberations.

Fiduciary decisions do not have to be perfect but they do have to reflect suitable deliberation by plan fiduciaries – and those deliberations should be documented.

Does everyone want to be an owner?

In theory, employee ownership through an Employee Stock Ownership Plan (ESOP) is an almost perfect idea, since it benefits employees and businesses equally and simultaneously.

Shares are allocated to, rather than purchased by, the employees, which puts ownership within the grasp of many who might never own a business otherwise. Employees have a strong incentive to work hard and effectively, since they will reap the reward.

Thinking like an owner helps employees to understand how their business is run, and encourages them to innovate and improve both day-to-day and long-term operations. Although an ESOP is no more a democracy than a conventional corporation is, employees often have more opportunities to be involved in corporate-level discussions, if not actual decision-making. During tough times, these informed and empowered employee-owners have a strong interest in helping the company pull through, rather than jumping ship.

Annual share allocations, along with vesting rules, also promote employee retention and minimize costly turnover. And when an employee leaves, the company “repurchases” his or her shares at the current share value (through a distribution similar to that of other pre-tax retirement plans)—and those shares are then reallocated to current employees.

So far, so good. But the theory behind ESOPs makes one assumption that is often overlooked and can cause problems in even the most well-intentioned ESOP. That assumption is that, given the opportunity, all employees would like to be (part) owners of the firm they work for. The idea of ownership as an ultimate goal and good is deeply ingrained in American society. However, like most assumptions, it is worthwhile to revisit it occasionally.

Why might a person not want to be an owner? Perhaps the most obvious reason is that ownership comes with responsibilities as well as rights. It is reasonable to expect that many people — from highly-trained senior staff to entry-level employees — feel that their responsibility to their company extends to doing their job well, and no further.

They may consider opportunities to provide input into bigger-picture company issues as incursions on their time that take away from their primary job. Similarly they might feel that the time spent in ownership education — learning to read and understand the company’s financial report, for instance — would be better spent doing the work they were hired to do.

Another reason is that an employee — again, at any level — might feel that he or she lacks the training, experience, or expertise necessary to be an effective owner, and is either uninterested in acquiring the additional skills, or lacks confidence in the ability to do so.

Finally, group ownership may not seem like “real” ownership, since it generally doesn’t include individual control over decision-making. So, even a person who does aspire to own a business might not see employee-ownership as equivalent, or even as a stepping stone, to a more autonomous model of ownership.

As those experienced in employee ownership know, these (and other) barriers to employee ownership can be surmounted or accommodated, in most cases, by training and clear communication about expectations for employee involvement, both at the initial interview/hiring stage and on an ongoing basis. But in order for such training and communication to be effective, every employee-owned company needs to recognize that not all employees, or potential employees, are equally or automatically interested in ownership.

Keeping this possibility in mind will allow an ESOP to take whatever steps are needed to bring reluctant owners into full and productive partnership; simply assuming they are already on board may result in losing them altogether.

Editor’s Note: This post originally appeared as an Op-Ed in the Deseret News. Frances Laskey, Mr. Hoffmire’s colleague at Progress Through Business, did the research. 

Image: CanStock Photo

DB(k) Plans: A Good Idea at the Time

Remember DB(k) plans?

If you were in the retirement plan business back in 2006, you probably do. If you’re new in the business, you may not know about them at all.

A DB(k) Plan, formally called an “Eligible Combined Plan”, is a hybrid retirement plan that was created by Congress as part of the Pension Protection Act of 2006 under Section 414(x) of the Internal Revenue Code.

The idea behind DB(k) was simple. By combining a defined benefit plan and a defined contribution plan, a “small employer” (at least two but less than 500 employees) could potentially reduce the cost and administration requirements of maintaining two separate plans. The two components of the DB(k) have to be generally structured as follows:

1. Defined Benefit Component

  • An employee must receive at least 1% of pay for each year of service, not to exceed 20 years.
  • Benefits must be fully vested after 3 years of service.

2. 401(k) Component

  • There must be an auto-enrollment provision with a 4% contribution rate unless the employee elects to reduce this rate or opt-out.
  • The employer must match 50% of the employee’s 401(k) contributions, up to 4% of compensation, or a 2% maximum match.
  • Employees must be fully vested in the matching contribution when made.

There are still certain general non-discrimination requirements that have to be met, but the plan automatically satisfies the 401(k) and top-heavy requirements.

Sounds intriguing, yes? An employer could have streamlined plan administration with the plan being treated as a single plan for annual Form 5500 reporting.

But after the January 1, 2010 effective date for Section 414(x), DB(k)s didn’t take off. Since then, there have been very few DB(k) sightings.

It wasn’t a case of DB(k)s being a bad idea. Rather, right from the start, DB(k)s had to overcome some difficult hurdles.

First, the Internal Service in Revenue Procedure 2011-6 announced it would issue determination letters for DB(k) Plans under the following conditions. Even if one or both components utilized pre-approved plan documents, the IRS considered the DB(k)Plan to be an individually designed plan. This meant that in order to receive a Determination Letter as a qualified plan, the employer would have to submit the DB(k) Plan with two Form 5300s, one for each component, and 2 user fees.

Second, for many small employers, the math simply didn’t work. Using existing tax law, two separate plans, a traditional defined benefit or cash balance plan paired with the 401(k)plan, could provide larger benefits and contributions to the owners and highly compensated employees.

Third, the expectant reduction in administration expenses didn’t materialize in many cases. As noted above, only one Form 5500 has to be filed for the DB(k), but the two components still have to be administered separately. An actuarial valuation still had to be done for the defined benefit component, and administration still had to be done for the 401(k) component.

Let’s not consider DB(k) plans a failure. They were an innovate attempt to address the critical problem of adequate retirement income for employees. We should encourage more innovation with that objective.

Image: CanStockPhoto