Maximize your 401(k) "catch-up" contribution

401(k) Plan Sponsors, do you know there are ways to maximize your “catch-up” contribution?


As you probably know, if allowed by the plan document, participants who attain the age of 50 or older are eligible to make an additional $5,500 “catch-up” contribution. This is in effect a free contribution, as it is not counted on the ADP test.

Although there are actually four ways to make a catch-up contribution, traditionally the catch-up is made in one of two ways:

1. You defer the $17,500 maximum (for 2013) and then you defer an additional $5,500, or

2. Your ADP test fails, and up to $5,500 of your refund is recharacterized as catch-up. This only works if you have not already deferred the catch-up.

So what happens if you are a Highly Compensated Employee (HCE), you are over the age of 50, and you are precluded from deferring the maximum $17,500 because the deferral percentage of the Non-Highly Compensated (NHCE) group will not support that deferral?

You amend your plan limit for HCE’s.

Example:

Let’s say you are an HCE and your compensation is $200,000.
$17,500 divided by $200,000 is an ADP percentage of 8.75%

The deferral percentage for the NHCE’s is 5%.
This will only support a deferral for you of 7%.

Solution:

Amend your plan so that the maximum plan limit for HCE’s is 7%. Anything over that would be considered catch-up.

Would you be able to defer the maximum $17,500 plus the catch-up? No. Would you be able to defer an amount that would not cause your ADP test to fail, plus defer the catch-up? Yes!

Of course there are some considerations with this. This example is merely to show that you have options. We want your plan to work for you as well as for your participants. Let us help you make your really great benefit even better!

What Plan Sponsors Need To Know About the Final 408(b)(2) Regulation

End of year checklist that will keep Plan Sponsors off the naughty list

By Yariel Chiong & Alison Murray

With the end of the year right around the corner there is more that you need to worry about than what you are doing on New Year’s Eve. Plan Sponsors should review if any legislative actions or disclosures are required for their Qualified Retirement Plan(s).

Proactive TPA’s will let their clients know if any actions are required for their plan before the clock strikes midnight on December 31, 2011. The following are a few housekeeping items that you should be aware of for 2012:

Safe Harbor 401(k) Plan Annual Notice
Plan Sponsors must provide participants and eligible employees with information about features of their 401(k) Safer Harbor Plan including the safe harbor nonelective contribution or matching contribution under the plan. You’ve already provided this notice by December 1, 2011 for existing participants if you declared your plan safe harbor for 2012. What you need to remember is don’t forget about your newly eligible participants during 2012. This notice needs to be provided to them as well, a reasonable period of time before they become eligible.

401(k) Automatic Enrollment Notice
Plan Sponsors must provide participants and eligible employees with information about automatic enrollment, including deferrals that will be made for a participant if no election has been made by them. You’ve already provided this notice by December 1, 2011 for existing participants if you declared your plan safe harbor for 2012. What you need to remember is don’t forget about your newly eligible participants during 2012. This notice needs to be provided to them as well, a reasonable period of time before they become eligible.

Qualified Default Investment Alternative Notice (QDIA)
Plan Sponsors must provide participants and eligible employees with information about how their funds will be invested absent their investment election. You’ve already provided this notice by December 1, 2011 for existing participants if you have a QDIA. What you need to remember is don’t forget about your newly eligible participants during 2012. This notice needs to be provided to them as well, a reasonable period of time before they become eligible.

Summary Plan Descriptions and Summary of Material Modifications
Don’t forget to hand out your Summary Plan Descriptions and Summary of Material Modifications to newly eligible participants or beneficiaries throughout the year.

Partnership Elections

Partnership Elections must be completed by December 31st. Even if a partner deferred out of their draw and has already deferred the maximum allowable for 2011, a partnership election must be completed.

Enrollment forms

Enrollment forms must be completed before a participant becomes eligible. You need to give the employee enough time to make an election before their entry date. If you do not do this, you may have caused a lost deferral opportunity which would result in an unanticipated employer contribution.

Minimum Required Distributions

You have an employee who terminated employment in 2011 whose already attained the age of 70 ½ and has a first minimum distribution due by April 1, 2012. Don’t forget to mention this to your TPA if you do not provide them with the 2011 census information early enough to make this determination.

The above is just a short list of what to look out for during this time of the year. Contact ACI if you have any questions regarding your plan.

310 212-2600

October 20, 2011

Retirement Plan Limits for 2012 Announced

On October 20, the Internal Revenue Service announced the cost-of-living adjustments that will be applied to the dollar limits in all tax-qualified retirement plans in 2012. The limits apply to calendar year plans, if you have an off-calendar plan year end, contact your plan administrator to see if there are any changes to your plan.

Defined Benefit Plan Limits
The limitation on the annual benefit under a defined benefit plan is increased from $195,000 to $200,000.

Defined Contribution Plan
Individual Contributions
The limitation on contributions made on behalf of an individual to a defined contribution plan is increased from $49,000 to $50,000. Individuals will still be limited to contributions of 100% of compensation or $50,000, whichever is less.

401(k) Deferrals
This dollar limitation on employee deferrals into 401(k) plan is increased from $16,500 to $17,000. This is a calendar year limit regardless of plan year end.

Catch-Up Contributions
For individuals age 50 and over, the catch-up contribution remains unchanged at $5,500. This is a calendar year limit regardless of plan year end.

Annual Compensation Limits
The maximum annual compensation that may be recognized by a plan is increased from $245,000 to $250,000.

Key Employees
The dollar limitation for determining whether an employee is “Key” for officers in a top-heavy plan will increase from $160,000 to $165,000.

Highly Compensated Employees
The dollar limitation on compensation used to determine which employees are considered highly compensated is increased from $110,000 to $115,000. Thus, employees who earn in excess of $110,000 in the plan year beginning in 2011 will be considered highly compensated for the plan year beginning in 2012 and employees who earn in excess of $115,000 in 2012 will be considered highly compensated employees in 2013.

ACI makes the Los Angeles Business Journal’s Top 20 List

By Yariel Chiong

We’ve made the Los Angeles Business Journal’s list again of the Top 20 largest firms in L.A. County handling employee benefits. In this complex economy ACI continues to stand its ground never stepping down from a fight. We couldn’t have done it without putting the client first. Our deep understanding of the retirement industry helps us provide simplified administration and a comprehensive approach to managing your company’s retirement plan. We help bring efficiency to the process by providing vertical case management, consolidating all your plans administrative needs under one case manager. Navigating through new legislative updates and requirements can be daunting but it doesn’t have to be. We do this so you can focus on what’s most important: helping your employees retire.

Contact ACI for more information 310.212.2600 information@acibenefits.com

Safe Harbor Deadline Is October 1, 2011

By Yariel Chiong and Tobi Cogswell

One of the most popular plans for small business owners with employees is the Safe Harbor 401(k) Plan. Would Safe Harbor help you?

■ Does your Plan fail discrimination tests?
■ Is your Plan top-heavy?
■ Are you seeking to maximize deferrals and profit sharing allocations for highly compensated employees?
■ Is your company making significant matching contributions to a 401(k) plan to accommodate deferrals made by highly compensated employees?

If you answered “yes” to any of these questions, you might want to consider a safe harbor plan design. An existing 401(k) plan cannot become safe harbor until the first day of the next plan year (usually that will be January 1, 2012) but profit sharing plans that have never had 401(k) provisions can add safe harbor provisions for 2011. There is some urgency here because this must be inplemented by October 1st.. .

What is Safe Harbor?
401(k) plans that take advantage of “Safe Harbor” contributions avoid ADP and ACP testing. In practical terms, this means that highly compensated employees may defer the maximum allowable amount of compensation into the plan ($16,500 in 2011 plus a $5,500 catch up for anyone 50 or older) without worrying about deferral refunds due to failed ADP tests.

Plan sponsors have two contribution options: First, sponsors may make a 3% profit sharing contribution to every nonhighly compensated employee; or they may provide a minimum matching contribution of 100% of the first 3% of compensation deferred, plus 50% of the next 2% of compensation deferred to all deferring employees. ACI can help you decide which is right for you.

Disadvantages of Safe Harbor
The drawbacks for some employers are the size of the safe harbor contribution, the immediate vesting and no last-day requirements associated with the plan contribution. There is also a notice requirement to the participants.

The Reward of a Safe Harbor 401(k) Plan
This contribution makes non-discrimination testing a thing of the past. As long as the employer faithfully makes the promised contribution, the plan is deemed non-discriminatory. A safe harbor profit sharing contribution also satisfies top heavy, and the first 3% “gateway” if you have a cross-tested profit sharing allocation. It’s a beautiful thing.

Contact ACI to learn more about starting a Safe Harbor Plan.

Tobi Cogswell
Tobi.Cogswell@acibenefits.com
310 212-2623