RSM Resources

Because of their complexity and potentiallong-term impact on the bottom line, retirement plans are among the mostvisible sources of frustration in any organization. Many companies implement aplan when they start doing business but revisit it only when their third-partyadministrator, or vendor, recommends a change.

But most vendors cannot focus their energies onone company, and many prefer to sell and maintain "off-the-shelf"plans for the sake of efficiency and profit. With that in mind, experts saysmart finance and human resources managers should stay abreast of ever-changinglaws and consider a comprehensive third-party plan design review every three tofive years.

These reviews can quickly identify current orpotential opportunities or problems and ensure that your business iscost-effectively complying with retirement laws, while providing employees withup-to-date benefit opportunities.

Legal changes past and present
Qualified retirement plans, such as 401(k)or profit-sharing arrangements, have been affected in recent years by a numberof legislative changes. For example, writing for the Martindale-Hubbell legaldatabase, attorneys William Freedman and Ben Wells note that changes to recentlaws should have been adopted by qualified retirement plans no later than oneof the following dates (depending upon the plan and certain circumstances):Feb. 28, 2002; Sept. 30, 2003; or Jan. 31, 2004. The varying amendmentdeadlines applied to the following laws:

• General Agreement on Tariffs and Trade/Uruguay Round Agreements Act (GATT)
• Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA)
• Small Business Job Protection Act of 1996 (SBJPA)
• The Taxpayer Relief Act of 1997 (TRA 1997)
• The IRS Restructuring and Reform Act of 1998 (RRA 1998)

More recently, the Economic Growth and Tax Relief Reconciliation Act of 2001(EGTRRA) brought extensive changes to retirement plan regulations. Accordingto the Internal Revenue Service, EGTRRA affects a wide range of issues,including:

• Elective deferral amounts
• Catch-up contributions for participants 50 years old and up
• Annual addition limits in defined contribution plans
• Annual benefit limits in defined benefit plans
• Eligible compensation dollar limits
• Vesting schedules
• Tax credits for low-income participants
• Hardship distributions
• Key employee and "top heavy" plan definitions
• Plan loans for owner employees
• Rollover rules among different types of retirement plans

New legislative changes also affect automaticrollover of mandatory cash-out distributions, as well as taxation on Rothcontributions to 401(k) plans. Here’s how these changes can affect yourbusiness:

• Automatic rollover rules. Some companies require a cash-out of an employee’s retirement plan balance upon termination of employment. However, in a change that became effective earlier this spring, mandatory cash-outs of more than $1,000 must be transferred directly into an IRA unless the participant elects to receive it or roll it into another retirement plan. Employers have two options regarding this new law: comply with the automatic rollover rules or eliminate mandatory cash-outs. Eliminating cash-outs may require the employer to maintain small accounts for short-term former employees and incur the associated administrative costs for these accounts. On the other hand, complying with the mandatory cash-outs requires a new process and an IRA provider to handle the rollovers.
• Roth contribution option. Effective Jan. 1, 2006, employers sponsoring 401(k) plans may allow plan participants to choose whether to pay taxes upfront on employee deferrals — thus avoiding future taxes on any income generated by the account — or make contributions on a tax-deferred basis and pay taxes when they withdraw funds from the account. Offering this option will require companies to make changes to their 401(k) or 403(b) plan to authorize such funds to accommodate the pre- or post-tax election, plan documents, benefits materials and other retirement administration functions.

Review your plan regularly
Not sure if your company is in compliance?You’re not alone. With the complexity and frequent changes in retirement planlegislation, most executives don’t have the time or expertise to keep pace.Ideally, a company’s third-party administrator will take the lead in suggestinga review process. However, if that does not happen, experts recommend that keyHR, benefits and finance staff meet with an outside retirement planprofessional to conduct a plan review every three to five years.

Typically, there are two types of retirement planreviews. A plan design review takes into account your company’s particulargoals and needs, employee demographics and turnover, total compensationpackages, and legislative changes that may make your company’s retirement planbetter for employees, more cost-effective for you, or both.

On the other hand, a compliance review is adetailed assessment of all retirement plan documentation, amendments, annualadministrative testing and governmental reporting to ensure regulatoryrequirements are met. A good time to conduct this type of review is aftercertain "triggering events," such as a change in third-partyadministrators or the departure of a key internal benefits staff member.

These steps can benefit your business in threemain ways:

• Avoiding penalties for noncompliance. For example, if the vendor that manages your 401(k) plan is acquired, sold or merges with another company, plan amendments may be lost or overlooked. Missing a required amendment deadline could disqualify the plan from tax-favored treatment, meaning that a company could be forced to pay taxes on the nonvested amount of plan contributions, while employees could be required to pay tax on vested amounts. While it is best to avoid actions that could disqualify the plan, a compliance review can be a proactive tool to discover and correct problems before the IRS knocks at your door.
• Minimizing costs and maximizing savings. Recent business-friendly legislation means that a second look at your company’s retirement benefits may boost your company’s bottom line. Here’s an example: If a smaller company with about 30 employees is using old contribution formulas to allocate retirement plan dollars, it may well be paying tens of thousands of dollars over what is required under the current statutes and regulations.
• Rewarding your best employees. A regular review of retirement benefits enables you to adjust a retirement plan to better reward the employees most responsible for your company’s success. This review also allows you to consider changes in your company’s vesting schedule, which could save money and provide financial rewards for long-term employee loyalty.

By taking these steps, you can protect yourcompany from potentially expensive legal and compliance risks, while improvingyour ability to attract and retain top talent.