Below are some of the more important aspects of sponsoring a qualified retirement program.
Definition of Compensation: Plan compensation reported should include all W-2 wages, including bonuses, overtime, etc. Alternative definitions of compensation could result in special discrimination testing (this also applies to salary deferrals for a 401(k) Plan).
- Owner – Corporations: Only W-2 wages may be considered as compensation for plan purposes.
- Owner – Sole Props & Partnerships: Report earned self-employment income (SEI) prior to the application of the self-employment tax deduction or contributions to a retirement plan. Please consult with your tax adviser for more information regarding SEI.
Special Ownership Arrangements: In certain situations, employees of separate businesses must be combined for discrimination testing based on a determination of “Controlled” or Affiliated” Group status. For this reason, it is important that a company considering adopting a qualified retirement plan review any outside ownership arrangements with their counsel. Benetech does not provide legal advice, and thus cannot make these determinations. The following is a general description of some of these arrangements.
- Controlled Group of Companies: In general, a Controlled Group of companies may exist when a company or the company’s owners – together or separately – own 80% or more (directly or indirectly) of another company.
- Affiliated Service Group of Companies: If a company provides “Professional Services” (as defined by IRS, e.g., medical, legal, etc.), and if the owner has ownership in another company that provides associated services, the related companies may form an Affiliated Service Group of companies (note: other arrangements may also result in an ASG).
- Spousal Attribution of Ownership: If an owner has a spouse who owns a separate company, for plan purposes, the owner is typically attributed the spouse’s ownership in the other company. For this reason, a spouse’s ownership in a separate company must be considered in determining Controlled or Affiliated Group status.
Controlled/Affiliated Companies Adopt Same Plan: Employees of a Controlled or Affiliated group of companies must be combined for plan discrimination testing. For this reason, it is recommended that companies that constitute a Controlled Group or an Affiliated Service Group all adopt the same plan.
No “Multiple Employer” Plans: Benetech does not provide services to “multiple employer” plans. Therefore, Employers that are not part of a Controlled Group or Affiliated Group must sponsor separate plans.
Census Data: The accuracy of illustrations and ongoing record-keeping depends on the completeness and accuracy of the census data provided. Always include census data on all employees who were paid during the plan year being considered. Important considerations include:
- 1,000 hours equivalent to Full-Time Status: Employees working 1,000 hours per year or more are generally treated the same as full-time employees for plan testing purposes.
- Terminated Employees May Still Affect Testing: Report date of termination and hours worked for all terminated employees.
- Report Excluded Employees: Employees excluded from participation by provisions in the plan must still be included in plan testing.
Top Heavy Notice: Plans with more than 60% of trust assets (including deferrals) held in accounts of “Key Employees” (owners, most immediate relations, and certain other employees) are considered “Top Heavy.” Such plans may be required to make a 3% “Top Heavy Minimum” employer contribution to all eligible non-Key employees.
Safe Harbor Match & Top Heavy Contributions: In certain situations, a plan making Safe Harbor matching contributions may be subject to Top Heavy contribution requirements.
Plan Year End should match Fiscal Year End: The Plan Year End must match the company’s Fiscal Year End in order for the company’s deduction limit to be verified.
Bonding Requirement: The sponsor of a plan with common-law employees must obtain a fidelity bond covering at least 10% of the plan’s assets.
Independent Plan Audit Requirement: Plans with over 100 employees must engage an accounting firm to provide an annual independent audit of the plan. Plans with fewer participants may also require an audit if more than 5% of plan investments are in “non-qualifying assets” (as defined by IRS) and these assets are not covered by a fidelity bond.
Excluded Employer Types: Benetech does not provide record-keeping services for the following types of companies: leasing companies, government agencies, hospitals, municipalities, union plans, or companies with Davis-Bacon arrangements.
Sole Proprietors Use EIN#: All plan sponsors must have a federal Employer ID Number, and cannot use their Social Security Number for plan reporting purposes. An EIN# is easy to obtain at www.irs.gov (type “SS-4” in the search box for instructions).