Inspired by today’s DOL-SEC Joint Hearing on Target Date Funds and Envestnet survey of employee understanding of target funds.
The EGTRRA Restatement Series: Part 2. Put It In Writing
This is the second in our EGTRRA Restatement Series, the purpose of which is to help retirement plan sponsors handle the required amendment and restatement of their retirement plans.
On Monday, I discussed Why A Law Passed In 2001 Is So Important To Retirement Plans In 2009.
Today’s post is about the written plan document requirement. Seems obvious, doesn’t it, that in order to have a plan, you have to have it in writing? Obvious, yes, but also it’s one of the fundamental requirements that make a retirement plan “qualified”.
A “qualified retirement plan” means that the retirement plan is afforded special tax treatment for meeting a bunch of requirements of the Internal Revenue Code (the “Code”). Some of the qualification requirements have to be met in the document, and others of which have to be met by the manner in which the plan is operated.
The plan document defines the rights and obligations of the plan sponsor, participants, and beneficiaries. It’s also the basis for the IRS determining that the plan is tax-qualified in its form.
Here’s a few things you may not know about plan documents:
First, contributions to a qualified plan’s trust must be made to a trust that is valid under "local law". That is, created and maintained as a domestic trust in the United States. So no offshore stuff.
Second, that doesn’t mean that all qualified retirement plans have trustees. The plan can be funded solely through annuity contracts issued by an insurance company or custodial account held by a bank.
Third, the plan doesn’t have to first be submitted to the IRS for approval to qualify for tax-favored status. Whether to submit the plan or not is one of those facts and circumstance questions. But that’s a matter I’ll discuss later.
Now here’s where the EGTRRA part applies. Just because a plan is not submitted to the IRS for approval, it still must be amended periodically. The plan can lose its tax qualified status if the plan sponsor fails to make required plan amendments on a timely basis – even if the changes don’t affect the plan’s operation.
So where do you get a plan document? The retirement plan marketplace offers a number of alternatives: individually designed or plans pre-approved by the IRS. And that will be the subject of my next post on Monday.
In the meantime, who says ERISA isn’t cool. The picture above is the My Document Laptop Case inspired by the My Document Windows icon. Well, maybe more geeky than cool. It can be found on the designboom website and can be bought directly from the designer in Taiwan.
Timely matters
Over at my other blog home, Slate’s Bizbox Blog today, I wrote about Staying Up-To-Date on Your Retirement Plan. Not up-to-date in terms of your plan document as I’m doing in our EGTRRA Restatement Series, but up-to-date in terms of the timely deposit of payroll taxes and employees’ 401(k) contributions.
So an article by way of Dave Baker’s BenefitsLink provided some practical suggestions in dealing with this issue. Attorneys Kelsey N. H. Mayo and David L. Woodard of the North Carolina law firm, Poyner Spruill LLP write about Audit Risk Rising—What an Employer Can Do Before an Audit Happens.
While their article is about payroll taxes, they address the issue I mentioned in my Slate column about businesses outsourcing the payroll function. Here’s what they have to say about that:
In addition, if you are an employer that has outsourced its payroll functions to a third-party, it is important to remember that the employer remains liable to the IRS for any employment tax violations. To identify and prevent issues you should:
* Receive regular documentation from your payroll vendor that shows how payroll taxes are being determined and paid.
* Periodically reconcile statements received from your payroll vendor to ensure employment tax amounts are being calculated and submitted correctly.
They also point out that
Given these impending audits, it is also important to remember that other agencies and states, including North Carolina, routinely share information with the IRS, including information regarding tax avoidance schemes and questionable tax practices. This information sharing could lead to additional investigations from other agencies and the state.
One of those information sharing agencies, by the way, is the Department of Labor.
ERISA: the new meeting place for the Department of Labor and the Securities and Exchange Commission
If you provide retirement plan services, here’s a "must read" blog post by our fellow blogger, Bob Toth, Of Counsel to Giller and Calhoun. Bob writes about The SEC’s and DOL’s Cross Agency Retirement Plan "Compliance Waltz". Bob’s post also includes a link to his article of the same name that appears in the May-June 2009 Issue of the Practical Compliance & Risk Management For the Securities Industry.
The EGTRRA Restatement Series: Part 1. Why A Law Passed In 2001 Is So Important To Retirement Plans In 2009
Back at the end of last year, 403(b) plans had a looming deadline. It was the January 1, 2009 effective date for the new IRS 403(b) regulations. I blogged about that deadline in our series of posts we called 403(b) Crunch Time.
I was joined in that series by our blogging buddy Bob Toth, Of Counsel to the law firm of Giller and Calhoun. Bob, Evan Giller, and Monica Calhoun now have their own blog, The Business of Benefits, which you should check out.
One of the significant requirements added by the new IRS 403(b) regulations was that of a plan document. And now looming on the horizon is another IRS document requirement. This one is much more comprehensive since it covers all ERISA retirement plans.
It’s the requirement that retirement plans need to amended and restated no later than April 30, 2010 to comply with the 2001 tax law, The Economic Growth and Tax Relief and Reconciliation Act. That law “acronymized” to EGTRRA made significant changes to the Internal Revenue Code as it affected retirement plans.
It’s a complicated matter which I’m going to blog about in a series called The EGTRRA Restatement Series. Part 2 on Wednesday will be about the written plan document requirement for a qualified retirement plan. So stay tuned.
Top ten list of global risks
No, it’s not one of those Letterman things. It’s a lot more serious matter. The ability to manage increasingly complicated risks in today’s difficult economy can be the difference between business success and business failure.
Risk, of course, is in the eye of the beholder. A recent survey by Aon Corporation provides some insight as to how employers in the global economy measure and prioritize risk. In October and November 2008, 551 employers responded from more than 40 countries and across 31 industries responded to an AON survey to find out their views of emerging and escalating business risks, and the steps they are taking to address these challenges.
The results were published in Aon’s 2009 Global Risk Management Survey report which lists the top ten most pressing global risks:
- Economic slowdown
- Regulatory/legislative changes
- Business interruption
- Increasing competition
- Commodity price risk
- Damage to reputation
- Cash flow/liquidity risk
- Distribution or supply chain failure
- Third-party liability
- Failure to attract or retain top talent
The #1 risk, “economic slowdown”, came as no surprise to me. But what did pop out at me is #10, “failure to attract or retain top talent”. Maybe it’s because of the economy that some employers aren’t as concerned about that, but maybe it’s also a bit short-sighted.
You can download the complete survey here (registration required).
The psychology behind today’s economy
Remember the classic “Greed is good” speech by Gordon Gekko as played by Michael Douglas in the 1987 Oliver Stone classic, Wall Street. Here’s Douglas in his 1988 Academy Award winning role telling us why "greed is good":
https://youtube.com/watch?v=7upG01-XWbY%26hl%3Den%26fs%3D1
Fast forward to today at a time when greed is viewed quite differently. It’s one those psychological elements behind today’s economy that was explored by an an interdisciplinary panel at a recent conference called, "Crisis of Confidence: The Recession and the Economy of Fear.”
Over at my other blog home, Slate’s Bizbox Blog, I write about this conference sponsored by the University of Pennsylvania’s Department of Psychiatry and the Psychoanalytic Center of Philadelphia. Check out, Greed used to be good.
And here’s an interesting side note. Greed may no longer be good, but apparently power clothes are making a comeback. The ABA Journal Law News Now reports that Worried Lawyers Embrace Gordon Gekko’s Wardrobe. But as someone commented on the article, "It’s called Nordstrom Rack. It’s where law students, lawyers, and consultants facing tougher times now go to shop".
Automatic 401(k) enrollment update
Here is a link to my column in the May issue of Employee Benefit news about how automatic enrollment in 401(k) plans boosts 401(k) participation. (Free registration may be required). This is the first of the monthly columns I will be writing for Employee Benefit news – an employee benefit publication which provides free newsletters, seminars and podcasts from industry experts, and online content for plan sponsors. You can check it out here.
“What are you doing?” in the work place
If you’re one of the estimated 6 million people on Twitter as I am, you’re familiar with the question in the headline. If you’re not quite sure about exactly what Twitter is, then take a look at the video explanation by the extremely creative video producers at Common Craft called Twitter in Plain English.
Much of Twittering takes place at work. And sometimes that can cause problems in terms of time spent or inappropriate tweets. I discuss that matter including a Twitter policy in my blog post, Twitter in the Workplace. It appears over on at my other blog home, BizBox by Slate, a special promotion by OPEN from American Express.
Thinking outside the box to increase low-income employee participation in 401(k) plans
Suppose you’re a plan sponsor that wants to increase 401(k) participation among your low income employees, what do you do?
You know, of course, that employee financial education programs by themselves are not enough to influence a change in employee behavior. You might consider automatic enrollment.
Automatic enrollment has been shown to raise 401(k) participation rates dramatically when it is applied to new hires, particularly new hires who are low earners. In one important study, automatic enrollment increased 401(k) participation rates of those making under $20,000 annually from 13 percent to 80 percent.
Research from the Retirement Security Project (a member of the Retirement Made Simpler coalition) indicates that low-income individuals can, and will, save given the right circumstances.
So what exactly are the right circumstances? If you are thinking outside the box like Staples, you partner up with Progress Through Business, a nonprofit organization focusing on poverty alleviation issues, and H&R Block to offer discounted tax preparation to low-income employees of Staples, Inc. thorough a pilot program called Tax Break first rolled out in January 2007 and run again in January 2008.
What follows are the highlights of a study of this unique program prepared by John Hoffmire, PhD Director of the Center on Business and Poverty University of Wisconsin-Madison, Wisconsin School of Business and Thomas Harms, Treasurer, Progress Through Business, for the filene Research Institute.
What made Tax Break unique was the inclusion of opportunities for low income employees to enroll in both employer and government benefit programs in the tax preparation process. The result was a significant increase in employee participation in such employer-sponsored plans as 401(k) retirement plans, employee stock purchase plans, and tuition reimbursement programs. Enrollment in government benefits also increased, with higher incidences of the Earned Income Tax Credit, child care credits, renters credits, education credits, and various advantages that are available to but sometimes not accessed by eligible low-income taxpayers.
The employees screened for benefits in 2007 showed a 29% increase in 401(k) plan enrollment, a 16% increase in Employee Stock Purchase Plan enrollment, and a 42% increase in scholarship program enrollment. In terms of just the 401(k) plan, employees benefited by accumulating retirement saving and receiving a 50% match by Staples on the first 6% an employee contributed.
The program worked out well for Staples. After one full year of tracking, those who participated in the program during the 2007 tax season showed a 32% improvement in retention over those who did not participate. This improvement in retention more than covered the costs incurred by Staples.
In fact, according to Hoffmire, “For each dollar that Staples invested in the program, they got back more than $6 in retention benefits related to having to hire others and train others who they did not want to lose. This calculation was based on the cost that McDonalds faces when they lose a worker they did not want to see leave the company. In fact, the savings were even greater for Staples, because their costs related to unwanted turnover are even higher than McDonald’s.”
So why the excellent results? Because someone thought outside the box and recognized tax filing is the single largest financial event of the year for that for low income employees. And it presented a unique “teachable moment”. That is, a time at which an individual is most receptive to learning something.
In addition, the researchers found other advantages that accrued to Staples and its employees. Hoffmire said, “On certain days, when the tax program was being promoted in Staples’ large distribution centers, you could notice an improvement in the error rates as employees seemed to show more care for their work as they felt they were being offered a benefit that was worth the equivalent of a 2% raise just through the tax preparation component of the program.”
Here is a link to the complete study, The Economics of Serving Low-Income Employees at Tax Time: Implications for Credit Unions (PDF, 63 page).
Picture credit: red mountain communications.
