Special rules apply to your 401(k) Plan. Please call Cherokee Benefits if there is ANY change in your business organization
OWNER ONLY 401(K) – BASICS
Administration and Compliance Any qualified retirement plan requires the services of a professional third party administrator (TPA). Employee benefits laws are simply too complex to handle this in house. When you have The Cherokee Benefits Group, Inc. as your Third Party Administrator (TPA), you add us to your staff, but not your payroll and let Cherokee Benefits handle ALL of your employee benefit and benefits compliance needs for both welfare and pension plans. Special Administration Rates Apply to Owner Only 401(k) Plans: Set Up Fee: $500 (Prototype Plan, Adoption Agreement, SPD, and Board Minutes to adopt the Plan) Annual Administration Fee: $500 + $50 per participant (This includes the 5500 and annual prototype fee.) Regular Administration Fee Apply once the Plan is subject to testing and covers other than 5% owners. Your plan is effective as of the first day of the calendar year, even when it is adopted later in the year so as to permit the full annual deductions and deferrals during the first year. However, deferrals, of course, cannot be made until AFTER the plan is adopted. The deferral date is noted on page 2 of the Adoption Agreement A 5500 form must be filed annually with the DOL within 7 months following the close of the Plan Year (each July 31 for calendar year plans). Effective in 2007, all 5500 forms will be required to be filed electronically. In order for us to accurately report the assets and contributions, you need to properly administer all deferrals and report deferrals and assets to Cherokee Benefits Group as soon as possible following the close of the plan year. The Plan requires employees to have 1 year of service (12 months with 1000 or more hours of service) and be age 21. We recommend that plans always adopt a 1 year waiting period in order to exclude part time employees from the plan. If the waiting period is less than 1 year, there can be no minimum hours-worked requirement under the IRS Code to keep employees from becoming eligible. You may waive these eligibility requirements initially, if desired. It is most important that you notify us immediate if you hire any employees or there are employees who are not 5% owners. The first year is the first 12 months of employment and each subsequent Plan Year after the employee’s hire date. Employee must work 1000 hours during an eligibility year in order to have 1 year of service. Generally each January 1 and July 1 (the first day of the Plan Year and the first day of the 7th month of the Plan Year). (More liberal entry dates are permitted, but we recommend you use the statutory dates for administrative ease.) Employees may choose to have their deferrals deducted pre-tax (exempt from federal and state taxes) or ROTH (after tax) up to $15,000 (cannot exceed actual income less FICA taxes), if both types of deferrals are permitted by the Plan. ROTH deferrals are exempt from the normal ROTH limits, including the earned income limitation for regular ROTH accounts. ROTH deferrals are a HUGE advantage to highly paid employees under the age of 50 vs. regular ROTH. Even there are only Owner-Employees eligible to participate, you must maintain election forms on file and track regular 401(k) and Roth deferrals separately. Additional deferrals are permitted for employees who attain age 50 or older during the calendar year. The catch-up limit is $5,000 for 2006.
Adoption of Plan
Annual Reporting
Eligibility
Eligibility Service Entry Date Employee Deferrals
Employees 50 & up
Owner-employee Only 401(k) PLAN – BASICS (continued)
Employer Safe Harbor Contributions The plan permits you to amend your plan into a Safe Harbor Plan during the Plan Year should you acquire employees (see page 14 of the Adoption Agreement). If you amend the plan DURING the Plan Year into a Safe Harbor Plan the Non-elective 3% Safe Harbor Contribution applies to any eligible employee. You must adopt a Safe Harbor Plan at least 45 days prior to the beginning of any Calendar Year in order to have a Safe Harbor Match plan. Only those employees who elect to make deferrals must receive a 100% vested safe harbor match equal to a maximum of 4% of pay. The safe harbor match is 100% of the first 3% deferral and 50% of the next 2% deferred. Deferrals in excess of 5% of pay do not receive a match. A 100% vested non-elective contribution equal to 3% of pay must be made for each eligible employee. Employers who wish to make profit sharing contributions in addition to the safe harbor contribution or plans where there is virtually 100% participation by the employees should elect this safe harbor option. Can be permitted and are limited to the employee’s deferrals (without earnings) for (1) medical expenses not otherwise covered by insurance; (2) secondary education (tuition, educational fees, room & board) for any family member; (3) purchase of primary residence; (4) to prevent foreclosure or eviction; (5) funeral expenses or (6) catastrophic casualty losses. Withdrawal may not exceed actual financial need plus taxes. Hardship withdrawals are subject to taxation plus 10% premature distribution penalty. Any hour for which an employee is paid or entitled to pay, including vacation and sick pay, as well as any period they are not paid (leave of absence, FMLA) up to a maximum of 501 hours. Plan Sponsor determines whether to invest all funds as one pooled account and Cherokee Benefits Group allocates earnings, etc. annually, or may elect to permit participant directed accounts with a particular fund or firm. The “pooled” approach is applicable to Owner-Only plans and the Trustees direct all investments. This would continue to apply unless the plan is amended. New employees must be notified of their eligibility to participate and given a Summary Plan Description prior to their eligibility date. If the plan is amended to a Safe Harbor Plan, all eligible employees must be given an Annual Safe Harbor Notice at least 30 days and no more than 90 days prior to the beginning of EACH Plan Year. May be permitted (if elected by the Plan Sponsor) and are limited to 50% of the employee’s vested interest up to $50,000 maximum. Safe Harbor plans are automatically exempted from 401(k) testing so long as there are no common law employees eligible for the plan. The plan also becomes subject to Top Heavy Rules is ANYONE is eligible who is not a 5% owner. See page 21 If more than 60% of the assets are for HCE’s (highly compensated employees--includes 5% owners and anyone earning more than $100,000 in the prior calendar year) there is a minimum contribution required equal to the lesser of 3% of pay or the highest allocation to any HCE, including elective deferrals. The only way to avoid this is to amend plan to a Safe Harbor Plan. See page 14 and 25 of the Adoption Agreement. Non-safe harbor and discretionary contributions are subject to a vesting schedule—generally 20% per year after 2 years of service or 100% vesting after 5 years of service. Safe harbor contributions are always 100% vested. Any Plan Year in which the employee is credited with 1000 or more hours of service.
Match Safe Harbor
Non-elective Safe Harbor Hardship Distributions
Hours of Service Investments
Notice/Disclosure Requirements Participant Loans Top Heavy Rules & Nondiscrimination Testing Top Heavy Contribution
Vesting Vesting Service
For one-stop consulting, compliance, design and administration of your entire employee benefits program, on a cost-effective basis, call Gloria or Lou at Cherokee Benefits today!