J-1 Q: What does the term "constructive receipt" mean?

A: "Constructive receipt" is an income tax principle under which money or property must be included in income at the time the person has an unrestricted right to receive the money or property, even if the person does not decide to actually claim or receive the money or property. 

J-2 Q: I am self-employed. How much can I contribute to my 401(k) plans? -TOP

A: Under the TRA '97, the self-employed (including sole proprietorships and partnerships) may make both deductible employer matching contributions and the maximum employee deductible elective deferrals. Elective deferrals the self-employed can contribute are subject to the same limits and testing applied to regular employees.

J-3 Q: Can a 401(k) plan be offered as part of a cafeteria plan? -TOP

A: Although a cafeteria plan generally cannot include any plan or option that provides for deferred compensation, this restriction does not apply to 401(k) plans. Thus, elective deferrals and after-tax contributions may be made to a separate 401(k) plan through a cafeteria plan. The rules on change-in-family-status changes under a cafeteria plan cannot be applied to 401(k) plan contributions, and elective deferrals to a 401(k) plan should not be included in the benefits amounts that are tested under the Section 125 nondiscrimination test.

J-4 Q: May a 401(k) plan exclude part-time employees from plan participation? -TOP

A: No. In a field directive issued in November 1994, the IRS take the position that the exclusion of part-time employees is, in effect, service requirement that is subject to the limitations described here. According to the field directive, it does not matter that a 401(k) plan will satisfy the minimum coverage requirements after excluding part-time employees. 
Example. GHI Company sponsors a 401(k) plan that require one year of service (1,000 or more hours of service in an eligibility computation period) and excludes any employee who is regularly scheduled to work fewer than 30 hours per week. Bob has been a part-time employee (fewer than 30 hours per week) for five years but has completed more than 1,000 hours during each eligibility computation period. The 401(k) plan's exclusion of part-time employees has prevented Bob from becoming a plan participant even though he has completed five years of service. Because the part-time employee exclusion is treated as an indirect service requirement, GHI Company's 401(k) plan is subject to disqualification since it contains a length of service requirement in excess of that permitted under Code Section 410 (a) (1).

J-5 Q: What should a 401(k) plan investment policy cover? -TOP

A: Investment policies need to be flexible enough to adapt to an employer's specific situation and reflect the fiduciaries' attitudes and philosophies. For a typical 401(k) plan that allows participants a choice among investment funds, the policy should also recognize the participants' needs and goals. Further, the policy should deal with the number and types of funds to be made available. How many choices are enough? How many choices are too many? 
The policy should also cover how any loan program will affect investments and whether the withdrawal program is consistent with the types of funds selected. For example, if participants are expected to access funds through loans or withdrawals, do the investment funds allow for such withdrawals without penalty? 
Finally, the policy should deal with the regulatory issues, specifically the requirements of ERISA Section 404(c).

J-6 Q: Can an employer reduce or eliminate its fiduciary liability for investment decision making by giving participants investment control? -TOP

A: ERISA Section 404(c) says that if a participant is given control over the investment of his or her account, plan fiduciaries will not be held responsible for investment losses resulting from that exercise of control. There are very specific requirements, discussed more fully in chapter 6, that must be met before Section 404(c) can be claimed as a defense. 
Even if a plan satisfies the requirements of Section 404(c), plan fiduciaries cannot completely eliminate liability for investment decision making. Plan fiduciaries in a Section 404(c) plan typically remain responsible for the selection and monitoring of funds available for investment, for prompt and accurate execution of transactions, and for providing adequate disclosure.

J-7 Q: Who is an officer? -TOP

A: An officer is an individual who serves in any one of the following capacities for the parent organization: president, vice president, general manager, treasurer, secretary, comptroller, or any other individual who performs duties corresponding to those performed by individuals in those capacities. 

J-8 Q: What happens if a plan fails to make a corrective distribution of excess aggregate contributions and allocable income? -TOP

A: If a plan fails to make a corrective distribution during the 12month period following the plan year in which the excess aggregate contribution arose, the plan will be disqualified for that plan year and for all subsequent plan years in which the excess aggregate contribution remains in the plan. If a corrective distribution is made before the end of the 12-month period but more than 2 1/2 months after the end of the plan year, the employer will be subject to a 10 percent excise tax on the amount of the excess aggregate contributions. The excise tax can be avoided, however, if the employer makes QNECs enabling the plan to satisfy the ACP test. To be taken into account in performing the ACP test, QNECs must be made no later than 12 months after the plan year to which they relate. Thus, in 401 (k) plans using the prior-year testing method in performing the ACP test, QNECs must be made no later than 12 months after the end of the prior plan year.

J-9 Q: What is a discretionary nonelective contribution? -TOP

A: A discretionary nonelective contribution in a 401(k) plan is an employer contribution that is allocated on the basis of compensation or in some manner other than on the basis of elective contributions or employee after-tax contributions. Discretionary nonelective contributions do not need to be included in any of the special nondiscrimination tests for 401(k) plans, but they are subject to the general nondiscrimination rules under Code Section 401(a)(4). Discretionary nonelective contributions may sometimes be used to satisfy the ADP and ACP test. A participant's right to receive an allocation of a discretionary nonelective contribution cannot depend on whether he or she has made elective contributions. 

J-10 Q: Who is highly compensated employees? -TOP

A: An employee is a highly compensated employee (HCE) for a plan year only if the employee performs services for the employer during the determination year. In addition, the employee must be a member of at least one specified employee group (see here, and here). 

J-11 Q: What must be included in a SAR? -TOP

A: 1. name of the plan and employer ID number 
    2. the period covered by the annual report 
    3. a basic financial statement of the plan 
    4. a notice advising the participant that a copy of the full annual report is available on request, that the individual may obtain additional info regarding the annual report, and that the individual may inspect the annual report at a designated location of the employer or at the DOL.

J-12 Q: What is the maximum amount of combined employee/employer funding that can be deferred on a pre-tax basis in a participant's 401(k) on an annual basis? -TOP

A: Maximum contribution funding in 401(k) from all employee and employer sources is $35,000, using a 401(k) combined with a money purchase plan. Without a money purchase plan the maximum is $22,500. Maximum annual employee 401(k) contribution: $10,500 Maximum annual employer 401(k) contributions: $12,000.

J-13 Q: Are some business owners prohibited from taking out 401(k) loans? -TOP

A: Yes. Non-owner employees are always eligible for 401k loans if the business owner(s) authorize loans in the company's plan. Business owners who are sole proprietors, or own 5% (or more) of a s-corporation, LLC, or partnership may not be eligible for 401k loans. Shareholders of traditional c-corporations are eligible for 401k loans. We suggest consulting with a qualified advisor for guidance if you are a business owner and intend taking out a 401k loan.

J-14 Q: Who does the 401(k) audit and what are the problems targeted in a 401(k) audit? -TOP

A: In the past, the IRS conducted the majority of 401(k) plan audits. Recently, however, the DOL has become a major player in the audit arena. Although there is some overlap, the IRS is primarily interested in plan documentation and plan operational compliance, while the DOL focuses on compliance with ERISA, particularly to ensure that plan participants' rights are not violated.
IRS Audits
The IRS recently issued a compliance profile of 401(k) plans. From 1995-1997, the agency's field offices audited 472 plans, 44% of which had defects.
Based on the law of averages, the chance of any plan having a violation is substantial.
DOL Audits
There are three primary areas the DOL currently has targeted for 401(k) audits:Plan Investments -- The DOL is interested in the prudence and propriety of the plan's investments and wants to ensure that each investment is examined thoroughly by the plan administrator and/or trustee before it is made and that it is reviewed on a regular basis.Timely Deposits of Plan Assets  -- The DOL has begun to examine how plan sponsors determine who pays various plan-related expenses. This area has been fraught with difficulties for plan sponsors because the agency previously provided little formal guidance as to which expenses are payable by the plan and which expenses must be paid by the employer or plan sponsor. The DOL recently issued new guidance, which should help employers in the determination, though complying with it will not necessarily be easy.
As part of the question of who pays for what, 401(k) plan sponsors in particular need to be aware of the fees being charged for plan administration, fees that might include more than just a base recordkeeping fee. For example, recordkeeping fees hidden in asset management fees might result in costs to the participant that are more than the industry standard. Plan sponsors must understand how their fee structure works and be able to show that these fees are being monitored on a regular basis.

J-15 Q: What are the two different 401(k) correction programs? -TOP

A: 401(k) Correction Programs
Because plan disqualification has a significant adverse affect on participants and sponsors, the IRS and DOL have implemented comprehensive programs for plan sponsors to identify defects and violations and to make corrections.
* The IRS recently issued a revised 90-page procedure for its Employee Plans Compliance Resolution System (EPCRS). The EPCR's programs provide for self-correction (SCP), voluntary correction with IRS approval (VCP), and corrections when the violation is found upon an audit (Audit CAP). The SCP does not require a fee or impose a monetary sanction, but it is not foolproof against a future audit. The VCP requires a submission fee and Audit CAP assesses a monetary sanction against the plan sponsor. But under both programs, the correction is approved by the IRS.
Therefore, the issue will not be raised in a subsequent audit covering actions that occurred prior to the correction date.
* The DOL's Voluntary Fiduciary Correction Program, a mere 34 pages, does not require a fee nor does it impose a monetary sanction. Under this program, plan fiduciaries may voluntarily apply for relief from civil or criminal penalties under ERISA--but not under the tax code--as a result of certain fiduciary violations. It covers violations such as delinquent employee contributions, prohibited loans, improper valuation of assets, and payment of excessive plan expenses.
Both programs require adherence to specific procedures, detailed documentation, and possibly negotiations with either the IRS or DOL (or both). Plan sponsors may wish to consider using the services of benefits compliance experts to help navigate a corrections program.

J- 16 Q: What do we say when we are asked about Payroll Interface? -TOP

A: For companies of less than 25 persons, our testing shows that it is actually faster for the employer to key-in the monthly payroll and 401(k) contribution data directly into 401(k) Easy. We offer a money-back guarantee to small companies that they can completely run their 401(k) Easy in 20 minutes a month of the company's time, and that includes the time it takes to enter the payroll and contribution data.
Larger companies have been asking us for a Payroll Interface, and it is on our agenda to be included in the Year 2002 release of 401(k) Easy.

J- 17 Q: How much money can the employer contribute the employee's 401(k)? -TOP

A: Beginning in 2002, an employee can elect to have up to 25% (as opposed to 15%) of his/her salary deferred to a 401(k) up to $11,000. This is regulated under 402(g). In addition, the employer can provide matching and/or non elective contributions up to the lesser of 100% of the employee's compensation, less the employee's voluntary contribution, OR $40,000 less the employee's voluntary contribution. In no case may more than $40,000 from all sources be added to the employee's account annually. This is regulated under 415(c).
Current 415 maximum DC contribution is the lesser of $35,000 (soon to be $40,000) or 25% of employee' compensation. In the future the 25% limit will be removed, allowing the employer to put up to $40,000 in matching contributions or non-elective deferrals into each employee's 401(k), so long as the employee earns $40,000+ annually. What the employer contributes to the employee's account is limited by how much the employee contributes. The employee's contribution plus the employer's contribution cannot exceed $40,000.

J-18 Q: What is the separate accounting rule? -TOP

A: Under IRS regulations, a 401(k) plan must maintain "acceptable" separate accounting systems for elective contributions and for all other contributions. To be acceptable, the separate accounting system must allocate, on a reasonable and consistent basis, all gains, losses, withdrawals, credits and charges to each of the separately-tracked categories.

J-19 Q: Do we have to allow employees to enroll as soon as they become eligible? -TOP

A: No, although there is a limit on the time that may elapse before an eligible employee is allowed to enroll. Eligible employees must be permitted to begin participating in the plan no later than the earlier of two deadlines: 
(1) the first day of the first plan year beginning after the date on which the employee becomes eligible; or 
(2) six months after the date on which the employee becomes eligible. Most plans meet this requirement by providing monthly, quarterly or semi-annual entry dates.