This is our last piece in the 401(k) rules series. Here we address the other tests, (Coverage and Non-Discrimination) Distributions, Reporting and Statements.

• Minimum coverage test.  If the plan covers all of the HCEs, then it must cover at least 70% of the NHCEs.  If a person is eligible to defer, but chooses not to, then they are considered “covered” for purposes of this test.  This test may fail if certain classes of employees are excluded from participating, or if the plan document requires that match or profit sharing contributions be made only to employees who worked 1000 hours during the year, or were still employed on the last day of the plan year.  A small employer who loses 3 of 4 eligible employees during the year may end up having to make a contribution to 1 or 2 of those employees to meet this coverage test.
• Non-discrimination.  The 401(k) rules do not allow the plan contributions to be higher for HCEs than NHCEs except within certain parameters.  Some profit sharing contributions are tested with values projected at Retirement age instead of values as of the date of contribution.  In either case, we need to prove that the contribution is not discriminatory.
• Distributions.  Generally, distributions can only be paid to a participant when a “triggering event” occurs:
  • Attainment of retirement age (as defined by the plan document)
  • Death
  • Disability
  • Termination from service

Distributions paid in cash are subject to regular income tax in the year they are withdrawn, and if the participant is not age 59 ½ a Federal excise tax of 10% also applies.  Distributions may be rolled over to avoid taxation.  All distributions are reported on a Form 1099R in January of the year following the distribution.  Special codes on the form let the government know whether the distribution was taken in cash, rolled over, due to death or disability, etc.

• In-service withdrawals.  Exceptions to the withdrawal restrictions include hardship withdrawals, and other in-service withdrawals.  Special rules for these distributions apply.
• Loans.  The plan may offer loans, but they are not included in all plans.  Most 401(k) loan withdrawals are taken directly from the participant’s account, and payments are made back to their account with interest.  In general the loan rules outlined in the 401(k) rules are as follows:
  • Minimum loan: $1,000
  • Maximum loan: 50% of the vested account balance up to a maximum of $50,000
  • Payments: must be made each pay period, monthly or quarterly.
  • Loan term; the loan must be paid within 5-years (certain exceptions may apply for mortgage loans).
  • Interest rates; often the loan interest is the prime rate of interest plus 1% or 2%
  • Loan restrictions; some plans restrict the number of loans a participant can have outstanding at any one time.
• Bonding.  If the trustee of your plan is not a bank or insurance company, the trustees must carry a bond to protect the plan participants.  The Department of Labor requires that the plan have a bond that covers at least 10% of the plan assets up to a maximum bond of $500,000.  Plans with illiquid assets may require additional bonding. 
• Reporting.  Annual filings for the plan must be submitted to the Department of Labor.  This filing is called a Form 5500.  These filings are due 7-months after the end of the plan year, and may be extended for 2 ½ months.  Depending on the type of plan, the number of eligible participants, and where the assets are held, different schedules must be attached to the filing.  All filings are submitted electronically.  Very small plans that cover the company owner only have to submit filings after assets exceed $250,000.
• CPA Audit.  For plans that have over 100 eligible participants, a CPA audit report must be attached to the Form 5500 filing. 
• Statements.  Plans that allow the participants to self-direct the assets in their own accounts must provide statements to the participants at least once per quarter.  Otherwise the plan must provide participant statements at least once per year.  Beginning July 1, 2012 the quarterly participant statements must show fees paid by the account.

So after this series on 401(k) rules you're a pro right?  If not, that's OK. Having a Third Party Administrator to help guide you through the 401(k) rules can save you a lot of time, headache, and possibly money! So call us with questions, that's why we are here!

CLICK TO VIEW 401(K) RULES - PART 1 OR 401(K) RULES - PART 2