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Horan Securities, Inc.
Protecting Your Future, Today |
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January 2008 |
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Andrew E. Sweeny, Jr.
Vice President
Registered Representative
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Thank you for your continued business. If you know of anyone that could benefit from my services, please feel free to forward this newsletter on to them.
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More Info |
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If you would like more information about these
topics or about
Horan Securities, Inc.,
please contact
Andy Sweeny at
(513) 745-0707.
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What to do with prior default contributions? |
By way of background, there are five types of investments that are eligible qualified default investment alternatives, or QDIAs, under the DOL new 404(c)(5) regulation. Each of those investments are eligible for the fiduciary protections afforded to default investments-but only three will offer long-term protection for future defaults. They are: a short-term QDIA, a grandfathered QDIA and three long-term QDIAs.
If the old default investment is a qualifying stable value investment, the plan sponsor may want to take advantage of the grandfather protection afforded in the regulation. If the plan's default is one of the three long-term alternatives, the plan sponsor can give a "transition notice" to participants explaining that the existing default is a QDIA. However, if the plan is using a default that is not QDIA eligible, the plan sponsor needs to decide whether to keep the previously defaulted amounts invested in its old default investment or whether to move those amounts into a new QDIA eligible default.
In cases where a plan sponsor is unable to determine for certain whether participants who are 100% invested in a prior default investment either (i) affirmatively invested in that option or (ii) were put into that option by default, the plan sponsor can still take advantage of the QDIA regulation. In those cases, the plan sponsor needs to send a notice to all individuals that are 100% invested in the prior plan default. To the extent those individuals do not complete an election form evidencing their affirmative election to remain in that prior default, the plan sponsor can move the old default accounts into the new QDIA and obtain into the new QDIA and obtain prospective fiduciary protection for both the existing default accounts and future additions. See full story, located at Reish Luftman Reicher & Cohen. |
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2008 Agenda |
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As we look to 2008, we see a list of changes that we know about already. The retirement plan industry is constantly in rapid change. And 2008 is no exception. There are plan document changes in store, and the Pension Protection Act of 2006 (PPA) calls for a number of changes to both defined contribution and defined benefit retirement plans.
Restatement of Preapproved Defined Contribution Plans. By March or April of 2008, the IRS will announce the release of opinion and advisory letters for preapproved defined contribution plan sponsors' documents. | |
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Final Section 415 Regulations Plan Amendment. The deadline for adopting the final 415 regulations is the end of the first plan year starting on or after July 1, 2007. Calendar year plans must adopt this amendment by December 31, 2008. Included in these regulations are the new post-severance compensation rules.
Direct Rollover to a Roth IRA. Under PPA, funds from a qualified plan like a 401(k) may be directly rolled over to a Roth IRA. We await guidance from the IRS on the taxation and reporting of this new transaction.
Nonspouse Beneficiary. The IRS has changed this from an optional plan provision to one that is required. This is effective as of 2008.
Automatic Enrollment Plan Testing Change. For any eligible automatic enrollment plan subject to ADP/ACP testing, the time frame for making a refund for a failed ADP/ACP test without a 10% penalty has been extended to the end of the sixth month after the end of the plan year being tested (i.e., June 30 for a calendar year plan).
See full story and other changes, located at McHay Hochman Co., LLC.
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| IRS sets 401(k) rules |
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Employers that want to add an automatic enrollment feature to their 401(k) plans and qualify for a safe harbor that exempts them from running a basic non-discrimination test now have new guidance on how to do this from the Internal Revenue Service.
Regardless of whether employers use automatic enrollment, they do not have to run an IRS non-discrimination test-used to determine that average salary deferrals of higher-paid employees do not exceed average deferrals of rank-and-file employees by a legally set amount-if they qualify for one of two safe harbors.
To qualify for one, an employer has to match 100% of employees' deferrals up to the first 3% of pay and 50% on deferrals on the next 2% of pay. This is the more popular option, according to benefits consultants. To qualify for the other safe harbor, an employer has to automatically make a contribution to employees' accounts equal to 3% of pay.
The IRS proposed rules on other design requirements that would exempt employers with 401(k) plan automatic enrollment from non-discrimination testing. Under those requirements, employees participating through automatic enrollment would have to defer a minimum of 3% of pay for up to the first two years, with the deferral contribution then rising by one percentage point annually until it hits 6%.
The rules also make clear that employees in automatic enrollment plans who decide to opt out can withdraw their contributions within 90 days. They will not be entitled to collect a matching contribution. Employees will be taxed on the distribution, but it will not be subject to the 10% penalty that generally is imposed on distributions made prior to age 59.
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Redrawing the route to retirement |
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The new super 401(k) is at the cutting edge of a trend that's reshaping retirement benefits. Traditionally, employees have wielded decision-making authority over their own 401(k)s, by electing whether and how to invest. But as a growing number of employers have scaled back or eliminated defined-benefit pension plans, government and corporate policymakers have realized 401(k) participants haven't done a very good job of managing their savings. Emboldened by recent legal and regulatory changes that shield employers from lawsuits, more are starting to make changes to 401(k) plans with the goal of taking the decision-making out of employees' hands.
As a result, these new 401(k)s are starting to look more like a traditional pension plan, in which the company makes decisions about funding and investments. The big difference, of course, is that if the investments don't work out, it's the employee's problem, not the company's.
See full story to read more about this tpye of plan; located at ASPAA.
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Do you have a question you would like addressed in our next issue?
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Striving to educate our clients in the ever-changing face of the
insurance & financial industry.
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Disclaimer
This eNewsletter is a digest of information published by a variety of web-based sources and is published as a service to our users. Horan Associates, Inc | Horan Securities, Inc. is not the author of the material unless specifically noted. We review each article to ensure that it is related to the interests of our subscribers. Horan Associates, Inc | Horan Securities, Inc. does not endorse the individual authors of these articles, although Horan Associates, Inc | Horan Securities, Inc. has reviewed these articles, for accuracy and completeness and your independent review for personal relevance should be undertaken. Reliance on this material should only be undertaken after an independent review of its accuracy, completeness, efficacy, and timeliness. All articles are copyrighted to their publishers. This publication is intended for general information only and not as legal advice. You should discuss specific details with your advisor.
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