Back Due Taxes Hardship Claims How To

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3rd Quarter 2010 | Volume 16, Issue 3

Hardship Withdrawals and Plan
Loans–Necessary Evils?
M      any 401(k) plans allow participants to take hardship withdrawals
       and loans from their plans. Plan sponsors generally believe these
features encourage participation since participants can access their funds.
    Although the purpose of a retirement plan is to save money for the
future, life happens! Participants sometimes find themselves in need of
extra cash for some unforeseen event. Therefore, the government allows
plan sponsors to include hardship withdrawal and loan provisions in
their retirement plans.
    Hardship withdrawals can only be taken for very specific reasons and
require documentation to prove the need. These withdrawals are limited
to the amount required to satisfy the specific need plus any taxes or pen-
alties that might be due on the withdrawal. They are taxable in the year
distributed and may also be subject to a 10% penalty if the participant is
under age 59½.
                                                      (continued on page 2)

contents                                                       Dorn’s Corner
1   Hardship Withdrawals and Plan

    Loans — Necessary Evils?
    Schedule SSA Gets a Makeover                              T   his quarter I want
                                                                  to talk about a
                                                              scientific theory called
                                                                                         determine whether or not life exists
                                                                                         on Mars?” This leads to the more basic
                                                                                         question: how do we define the line
3   Leased Employees
                                                              “Gaia Theory” or the       between life and non-life?
3   Health Care Reform:
                                                              “Gaia Hypothesis,”            In his research for NASA about
    Cafeteria Plans
                                                              and how a recent           defining life, Lovelock created the Gaia
4   Advantages of a KSOP                   movie and TV series embed this theory         hypothesis; that our earth itself is a liv-
4   Advantages of One Service              into their story.                             ing being.
    Provider                                   So what is this Gaia theory? The             Until recently, we had no reason to
4   Divorce and Your                       name comes from the Greek goddess             imagine our planet as an organism.
    Retirement Benefit                     of the Earth, named Gaia. In short, the       Peter Russell in his book, The Global
                                           theory assumes that our earth is a liv-       Brain, compares fleas that live on an
In Every Issue
1 Dorn’s Corner                            ing organism rather than a lifeless rock      elephant with us earthlings living on
                                           with some life on its surface. Sir James      our planet. “They chart its terrain…
5   What’s Happenin’
                                           Lovelock, a British atmospheric scien-        study its chemistry, plot its tempera-
                                           tist and chemist, was consulting with         ture changes — arriving at a reasonable
      Swerdlin & Company
           Actuaries and                   our space agency, NASA, in the 1960’s         perception of where they live. Then one
    Employee Benefit Consultants           to address the question, “How do we
                                                                                                    (continued on the back cover)

Hardship Withdrawals and Plan Loans–Necessary Evils?
(continued from page 1)

    To avoid taxes and penalties,         3. Convenience – can often apply              Some plans allow a participant to
many plan sponsors also offer                 online or over the phone.              have two loans at the same time, and
loans from the plan. When loans           4. Tax and penalty free when fully         we are often asked to explain how
are offered in addition to hard-              paid back to the plan.                 we calculate the amount available for
ship withdrawals, the law requires        Costs of taking a loan from a retire-      a second loan. Below is an example:
the participant to take a loan first.     ment account:
However, if the participant can           1. Fees – some plans charge setup
prove that making loan payments              and maintenance fees.                    Sample Calculation for Second Loan
will create an additional hardship,       2. Taxes – the loan is made from            Account balance               $10,000
the participant can skip the loan and        before-tax money and is paid              (excluding outstanding loan)
take the hardship.                           back with after-tax money. When          Current loan balance             5,400
    Although loans are popular and           the participant terminates, the
                                                                                      Total balance for calculation   15,400
preferable to hardship withdrawals,          entire distribution is taxed so
they are not beneficial to the partici-      the loan payments will be taxed          50% of total balance             7,700
pant’s long-term investment goals.           twice.                                   Less current loan balance       (5,400)
Most participants don’t understand        3. Penalties – if the loan is not repaid
that borrowing from their plan will          when the participant terminates,         Amount available                $2,300
ultimately reduce their retirement           the outstanding balance becomes
benefits.                                    taxable and, if the participant is
    With the steady increase in the          under age 59½, a 10% penalty is             It is never a good idea for a
number of loans, now is a good time          also incurred.                          participant to take money from his
to look at the benefits and costs of      4. Loss of future income – the partici-    account before retirement but, if it is
taking a loan.                               pant feels he is not losing income      necessary, taking a loan is the lesser
Benefits of taking a loan from a             because the interest paid on the        of the two evils. The loan is generally
retirement account:                          loan is going back into his account.    not subject to taxes and penalties,
1. Few restrictions on taking a loan         However, since the account bal-         and gets paid back into his account.
    – no credit check.                       ance is reduced by the loan, the            Your Swerdlin Representative can
2. Lower interest rates than many            long-term investment return may         answer questions you may have about
    commercial loans.                        also be reduced.                        loans and hardship withdrawals. n

                                          Schedule SSA
                                          Gets a Makeover
                                          B   eginning with the 2009 plan year, Schedule SSA will no longer be filed
                                              with Form 5500. Because of privacy issues associated with the public
                                          access to the new electronic filing of Form 5500, Schedule SSA is no longer a
                                          required attachment.
                                             Schedule SSA is being redesigned by the IRS and will be released at some
                                          future date as Form 8955-SSA. This form will be filed in hard copy format with
                                          the IRS and not the DOL.
                                             Until the IRS completes Form 8955-SSA and provides guidance on it, plan
                                          sponsors are not required to file. The IRS expects to release the form and guid-
                                          ance in 2011 and will provide a special due date for the 2009 filing.
                                             Please be aware that the special filing date for this form in no way affects
                                          the filing date for Form 5500 or Form 5500SF. n

Leased Employees
A    leased employee is employed by
     a leasing firm (often called a “Pro-
fessional Employee Organization” or
                                                  As always, there are exceptions —
                                              the leased employees are not treated
                                              as your employees if:
PEO). The PEO leases employees to                 n	they are less than 20% of your
companies for extended periods of                   non-highly compensated work
time. They handle all payroll taxes                 force; and
and other human resource functions                n	they are immediately covered
for these employees.                                under the PEO’s money pur-
    Many benefit plans exclude leased               chase pension plan with a 10%
employees. So, what effect does this                contribution rate and 100% im-           If you hire the leased employee
have on your plan? First, let’s review              mediate vesting.                     away from the PEO, for purposes of
the definition of a leased employee:              Generally, the leased employee is      plan entry and vesting, he must be
1. The employer must pay a fee to             treated as an employee of the employ-      given credit for years of service while
    the PEO for the services of the           er for all testing purposes — participa-   he worked for your company as a
    employee.                                 tion, coverage, vesting, limitations       leased employee.
2. The employee must provide ser-             on contributions, compensation, top            Determining if an individual is a
    vices to the employer on a sub-           heavy, highly compensated determi-         leased employee is not always clear
    stantially full-time basis for at least   nation and deduction limits. Even if       and simple. All of these employees
    a year.                                   your plan excludes leased employees,       must be reported on the census so
3. The employer must have primary             they must be considered for testing        they can be considered for compliance
    control or direction over the per-        purposes. If the plan fails any of these   testing. If you have questions about
    son’s services.                           compliance tests, you may be required      a person’s status, please contact your
4. The person must be on the leasing          to make a contribution to the leased       Swerdlin Representative or the plan’s
    organization’s payroll.                   employees.                                 attorney. n

Health Care Reform: Cafeteria Plans
T    he new Health Care Reform
     legislation has had a significant
impact on the administration of
                                              be affected. We are waiting for fur-
                                              ther guidance on what constitutes a
                                              medication for purposes of the restric-
                                                                                             For taxable years beginning on
                                                                                         or after January 1, 2013, FSA salary
                                                                                         reductions will be limited to $2,500
cafeteria plans offering a Flexible           tion. This will impact cafeteria plans     each year. This cap is a flat amount
Spending Account (FSA). As a result           that are subject to the “grace period”     and applies on a per-participant ba-
of the new laws, amendments must              (maximum period 2½ months after            sis. Non-elective employer contribu-
be made to the Cafeteria Plan Docu-           year end) since OTC claims incurred        tions to an FSA are not subject to this
ment, Summary Plan Description and            during the grace period will not be        $2,500 cap.
enrollment materials. These changes           reimbursed.                                    For years beginning on or after
make communication between the                    The new law affects the use of         January 1, 2011, a simple cafeteria plan
Plan Sponsor and participants more            debit cards for purchase of OTC            is available to employers who, on the
important than ever.                          medication on or after January 1, 2011.    average, have 100 or fewer employees.
    For expenses incurred in taxable          Debit cards can no longer be used to       The simple cafeteria plan requires a
years beginning on or after January 1,        purchase these items. Merchants must       safe harbor contribution which might
2011, there will be no reimbursement          reprogram their systems to reject pur-     allow more key employees to par-
by FSAs for over-the-counter (OTC)            chases of such items after December        ticipate. However, the cost of the safe
medication (except insulin), without a        31, 2010, and reclassify previously eli-   harbor contribution may outweigh the
prescription from a doctor. However,          gible OTC medication as dual purpose       benefits of this plan design.
items that are not considered medica-         items. Procedures must also be revised         Keep reading the Swerdlin Quar-
tion (e.g., bandages, blood-pressure          to require documentation for OTC           terly for updates as they become
monitors, crutches, etc.) should not          prescribed medication.                     available. n
                                                                                       Advantages of One
Advantages of a KSOP                                                                   Service Provider

M      any companies have a 401(k)
       plan and some also have an
Employee Stock Ownership Plan
                                            plan components and how they are
                                                If you have separate ESOP and
                                                                                       n   Transmit census data to only
                                                                                           one location;

(ESOP). These two types of plans            401(k) plans, many of the required         n   Avoid duplication of effort;
do not have to be separate, so why          compliance tests must be performed         n   Avoid miscommunication
not combine them? An ESOP that is           on both plans as if they were one.             between parties;
combined with a 401(k) plan is called       These tests include top-heavy analy-
a KSOP.                                     sis, annual addition limits, and the       n   Less chance of overlooking
    By combining the plans, the             maximum deductible contribution                compliance issues;
company has only one plan docu-             limit. Since most of the testing must      n   Only one point of contact;
ment to maintain, one Form 5500 to          be performed on a combined basis, it
file, and one plan audit, if applicable.    is especially helpful when one Third       n   Generally less expensive; and
As a result, the cost of maintaining a      Party Administrator (TPA) is re-           n   Gives a clearer view of service
KSOP is generally less than the cost        sponsible for the administration and
                                                                                           provider responsibilities.
of maintaining two separate plans.          recordkeeping of both the ESOP and
     Although the KSOP is one plan,         401(k) plan components.
the document can allow for different            Ideally, KSOPs are administered
provisions for each plan component.         by one service provider. However, it     there is only one plan.
For example, the timing of distribu-        is still possible to use one company         Swerdlin & Company is one of the
tions and forms of benefit may be           to administer the ESOP and another       few service providers in the country
defined differently for the ESOP            to recordkeep the 401(k), even when      that is able to meet the needs of both
and 401(k) accounts. One document                                                    ESOPs and 401(k) plans under one
governing all plan components is                                                     roof. We have extensive experience
helpful, because the individual or                                                   in administering KSOPs. If you are
firm drafting and maintaining the                                                    interested in learning more, just give
plan document is aware of all the                                                    us a call. n

Divorce and Your Retirement Benefit
                                            (QDRO), which is separate from the       DRO (generally before payment has
                                            divorce decree. Rules on QDROs are       been made). For example, the new
                                            part of the plan document.               DRO might increase or decrease the
                                                On June 10, 2010, the Department     amount as a result of a renegotiation
                                            of Labor finalized the regulations       of the divorce settlement.
                                            regarding QDROs. The final regula-           If there is a delay in determin-
                                            tions do not change any rules already    ing if a DRO is qualified, the Plan
                                            in place.                                Administrator must separately ac-
                                                During or after a divorce has been   count for the DRO benefits for up to
                                            finalized, a Domestic Relations Order    18 months while a determination is
                                            (DRO) is prepared, generally by the      made. Should the DRO not be quali-
                                            attorney representing the spouse         fied, the separated funds revert back
                                            with the retirement benefit. It should   to the participant.
                                            then be reviewed by the Plan Admin-          We recommend you send a draft
                                            istrator, and after approval, sent to    of the DRO to your Swerdlin Rep-

D    uring a divorce, most spouses find
     the top three issues to be children,
the house and retirement benefits. The
                                            the Court for the judge’s signature.
                                            When signed, it is deemed to be
                                                                                     resentative for review before it is
                                                                                     submitted to the Court. This saves
                                                                                     the participant time and unnecessary
division of retirement benefits is ac-          It is important to note that even    expense if it has to be filed again be-
complished by a legal document called       after the QDRO has been approved,        cause of missing language or incor-
a Qualified Domestic Relations Order        it can be modified by a subsequent       rect information. n

   Our canine friends visit the office.

                                              Clay Isom holding Axl Rose
                Tiffany Born’s pride          (brother of Krull from the movie       Graeme Hefner’s
                and joy, Caesar.              How To Lose A Guy in 10 Days).         Sadie Lady

What’s Happenin’
On June 23, Adrian Farnon, Kathy          Cynthia Navan-Clark and Glenda         We welcome new employee Scott
Latour and Kim Hall attended a            Devechio attended the Employee         Foreman, who joins the Blue Team as
seminar on 403(b) Plans presented         Benefits Institute of America (EBIA)   a Pension Administrator.
by the American Society of Pension        Advanced Cafeteria Plans Confer-
Professionals and Actuaries (ASPPA).      ence held in Seattle July 14-16.       Anniversaries we celebrate this
                                                                                 quarter: Melissa Spencer, 18 years;
June 25 was National Bring Your           Dorn Swerdlin attended the Actu-       Glenda Devechio, 15 years; Kathy
Dog to Work Day. Nineteen be-             arial Foundation Trustee meeting       Latour, 12 years; Michele Gresham
loved pets were brought to work by        held in Chicago June 14-15.            and Patti Williams, 7 years; Kristin
our employees for a day of fun and                                               Ellis, 4 years; Trevor Braunius, 3
pampering. See some of the photos         On September 21, Swerdlin pre-         years; Lorene Pierre, Rita Teague,
above.                                    sented its second workshop on          Tammy Fiacco and Tianna Barran, 2
                                          Health Care Reform legislation,        years. n
                                          focusing on the Patient Protection
                                          and Affordable Care Act ( PPACA).
                                          Ron Bachman, FSA, MAAA, was a
                                          guest speaker at the workshop.
  Swerdlin & Company                                                                                                     PRSRT STD
  Actuaries and Employee Benefit Consultants                                                                            US POSTAGE
  5901 Peachtree Dunwoody Road                                                                                              PAID
  Building B, Suite 170                                                                                                COLUMBUS, GA
  Atlanta, GA 30328                                                                                                    PERMIT NO. 99
  phone 770.396.6601
      fax 770.396.0067

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Dorn’s Corner
(continued from page 1)
day a few of the fleas take a huge leap             the human inhabitants. The destruc-                    planet. If you consider this hypothesis,
and look at the elephant from a dis-                tive people endanger the island and are                your world view will shift.
tance and see that it is alive.”                    eliminated. The “healthy” people (those                    In the meditation I teach, we talk
    Another reason we haven’t thought               who recognize the island’s life) can feel              about our “extended bodies.” This
of the earth as a living being is that              a connection with the island and sup-                  distinction between our physical bodies
we don’t experience its changes over                port its evolution. This self-regulation               and our environment is an illusion; our
time. Our time frames are very differ-              is a characteristic of life.                           bodies are in constant interchange with
ent. Russell says, “If we could speed                   Another story can be interpreted as                our environment as we breathe and eat,
up time appropriately, we would see                 containing symbolism for the Gaia the-                 etc. Our bodies are more like a flowing
the atmosphere and ocean currents                   ory. The very successful movie, Avatar,                river than a fixed, solid structure; our
swirling round the planet, circulating              is somewhat the opposite of the War                    lungs are the trees; our circulatory sys-
nutrients and carrying away waste                   of the Worlds. In War of the Worlds,                   tem the waterways. We are connected
products, much as the blood circulates              an alien army attacks us on our home                   to our planet and if we know this or
nutrients and carries away waste in our             planet. In Avatar, we are the bad guys                 believe this, our attitude towards our
own bodies.”                                        who invade an alien planet, Pandora,                   planet will change.
    When our astronauts saw the earth               to exploit its natural resources. The                      Hope you had a great summer. I’ll
as a “blue pearl” hanging in space, their           natives of Pandora are much more con-                  be back next quarter. n
connection with mother earth caused                 nected to their home planet and the life
a profound shift in their beliefs about             they share with other beings. Although
our world. The sixth man to stand on
the moon, Edgar Mitchell, is quoted as
saying, “It was a beautiful, harmoni-
                                                    their outward technologies are far be-
                                                    hind, their physical and mental capaci-
                                                    ties are far ahead of ours. We can learn
                                                                                                                Swerdlin Quarterly Committee
ous, peaceful looking planet, blue with             lessons from this movie. On Pandora,
white clouds, and one that gave you                 the inhabitants connect physically and                      Chairman:
a deep sense…, of home, of being, of                mentally with their animals to become                         Carol Friend
identity. “                                         one being. On earth, if we had more                         Committee Members:
    The television series, Lost, gener-             respect for and connected with our ani-                       Donna Martin, Dorn Swerdlin,
                                                                                                                  Joanne Swerdlin, Julie Isom and
ated many interpretations and web-                  mals, who are already attuned with the
                                                                                                                  Ricky Cox.
sites reflecting people’s thoughts. One             mother planet, we could become better
interpretation focuses on the Gaia                  citizens of earth.                                          Editorial Assistance:
                                                                                                                  Dee Robbins and Mary Butina
theory. For those of you who haven’t                    Although the Gaia theory is just
seen the series, there is a mysterious              that — a theory, more people including                      Additional Contributors:
island which seems to have a life of its            many scientists are considering this                          Adam Stone
own. The island self-regulates through              theory to be a true description of our                      Photos:
                                                                                                                  Adrian Farnon and Kirsty Simmons

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