The Rosenbaum Law Firm P.C. Blog

My latest article on JDSupra.com can be. found here.

I live in an unincorporated village on Long Island and I’m always amused by the people who want to lead the community without the best of good intentions. There are so many who do charity fundraising for the community and there are those who only do for the sake of doing business for themselves. They will get involved as long there is something that the community can do for them. This isn’t unique to my village; I have seen this behavior with my former synagogue. there are people who come with the best of intentions and there are those who do not.

There is nothing wrong with getting involved in charitable endeavors. I think there is something wrong if you do to get direct business. Sure, charitable work is a great thing to highlight your services because it gives potential clients and spheres of influence that there is something more to you than making a buck.

The issue for me is whether you’re in it for the right reasons and see that the organization is there as a platform to sell directly to those who are also involved in that charitable organization or to that organization itself. That’s what I have a problem with.

The Treasury and Congress’ Joint Committee on Taxation have provided new estimates of how much. Money is “leaked’ out of 401(k) plans and Individual Retirement Accounts.

Leakages come from three withdrawal sources: cash-outs when participants change jobs, hardship withdrawals, and defaulted plan loans.

The study by the Joint. Committee suggests that age-60 balances are reduced by 31%.

I hate moving. I’ve lived in the same house now for 16 years and I dread the idea of moving and I haven’t put the house up for sale. That’s why I always loathe when there has to be a change of third-party administrators (TPAs).

Many times it has to be made, for the sake of the 401(k) plan. Yet, when any change is made, you have to make sure the transition is smooth. The idea that conversion will force a 401(k) plan to get mothballed more than a few weeks isn’t ideal, I think it would be a terrible thing for a plan that gets mothballed for 3 months. I’ve seen situations where plans have had to seek counsel because they had to go through the trouble of opening bank accounts, just to keep the plan moving.

Changing plan providers need to buy like the trade of the baton in a relay race, it can’t afford to be dropped.

I think the one thing that 401(k) plan sponsors really forget is that the plan is an employee benefit. As with all benefits, it is a tool to recruit and retain employees. A great plan with great tools for participation and an employer contribution is going to be a lot more attractive than a plan set up with limited participant tools and zero education and contributions.

If you look at the experience and you think it’s dreadful, then you need to do something about it. You need a participant website and you need investment educational tools (or investment advice) that will engage the participants and get them to defer.

Like with health insurance, the coffee machine, and the break room, you need to focus that a 401(k) plan is a tool to help you with your employees. If you focus on that, you’ll also be able to minimize your fiduciary liability because it means you will focus on your plan and not neglect it like most plan sponsors.

Bonuses are nice, I wouldn’t know because in the 11 years I was an employee, I got $300 for the holidays after I started in September 1998 and never received one again. This article isn’t about my lack of bonuses, but it’s about bonus payments and 401(k) plans because if you pay one, you might have a problem that you didn’t realize.

401(k) plans are governed by their plan document and most plan documents use W-2 compensation (plus deferrals) as the point to measure salary deferrals and employer contributions. W-2 includes bonuses, so that means that salary deferrals and employer contributions should be made from bonuses (unless the plan document excludes it).

So I have found many plan sponsors having issues because they forget that, which means they owe corrective contributions for missed deferral opportunities and employer contributions that should have been made. The problem with those errors is that it’s usually discovered after years and years of failing to account for bonuses as compensation, which will require a lot of corrective contributions that will also have to be adjusted for earnings.

If you regularly hand out bonuses, make sure that your definition of compensation meets what you are currently doing.

When I draft a new 401(k) plan for a client, I’ll recommend a loan provision even though it can be an administrative headache. The reason that I add it is because I think participants need to have access to money if in their account if they need it.

However, there are some things that I put in place to take away some of the headaches. I always require a $1,000 minimum for loans, there is no reason a participant should take out a loan for $250 especially when the loan fee charged to their account is going to be $50 or $75. In general, you want it for people who need money and de minimis amounts aren’t going to meet that need.

I also like to have one loan outstanding at a time. I’ve seen plans where participants have 8-9 loans outstanding and it can be an administrative headache to make sure all of them are paid on time.

Even with these provisions, they often become a headache especially when payroll mistakes fail to pay off a loan and you may have a prohibited transaction on the books if quarterly payments weren’t made on the loan. There is nothing worse than to hand a participant a 1099 because you failed to make sure payroll pay off their outstanding loan.

They’re also a headache in the sense that most errors dealing with loans only get discovered on a government audit or when there is a change of third-party administrator. That means errors are discovered years after they take place, creating a migraine or a headache if you’re the plan sponsor that has to fix it.

So while you may want loans in your plan, be cautious in its operation.

With 2022 here, don’t forget about Cycle 3.

This “Cycle 3” restatement means that all qualified pre-approved 401(k) plan documents will need to be amended, certified by the IRS, and adopted by the plan sponsor by the deadline of July 31, 2022. This is a mandatory IRS requirement with penalties for non-compliance.

The Department of Labor’s Employee Benefits Security Administration (EBSA) released their final revisions to the Form 5500 and the Form 5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan for the 2021 plan year and includes changes that apply to pooled employer plans (PEPs).

The instructions to the 2021 Form 5500 for Part I, Line A (the multiple-employer plan checkbox) are being amended to note that:

·      a PEP operated by a pooled plan provider (PPP) that meets the definition under ERISA Section 3(43) is a multiple employer plan (MEP); and

·      like other ERISA-covered pension MEPs, a single Form 5500 Annual Return/Report is required to be filed for a PEP.

The 2021 instructions to the Form 5500 and Form 5500-SF for the MEP check box are amended to require MEPs to include a new data element on the currently required 2021 non-standard attachment, specifically the “Aggregate Account Balances Attributable to Participating Employer.”

The numbers of employers allowing Roth 401(k) savings have dramatically increased.

The percentage of 401(k) plans to offer the option grew to 86% in 2020, up from 75% in 2019 and 49% a decade ago, according to the Plan Sponsor Council of America, a trade group.

There was never a reason as to why a plan sponsor wouldn’t offer one since it didn’t impact testing. I think time, education, and the general feeling that tax rates will increase over time, have helped the surge of interest in adding them.