In order for a qualified retirement plan (e.g., a 401(k) Plan, Profit Sharing Plan, or Defined Benefit Pension Plan) to qualify for special tax treatment*, the plan must conform to certain requirements.
* “Special tax treatment” in that contributions to such plans are deductible to the employer, but they are not taxable to the participant until taken as taxable distributions, usually after retirement. In other words, the IRS is forgoing current tax revenue in order to encourage companies to sponsor retirement programs for their employees.
In order to complete the takeover of an existing plan, and to assist our new clients in verifying that some of these basic requirements are being met, Benetech’s New Case team requires the following information for the plan:
- Plan documents
- Participant reports and plan testing for the plan year prior to Benetech’s takeover
- Participant valuation reports as of the date of asset transfer
Plan documents in takeover situations
One of the basic requirements for a plan’s “qualified” status is that the plan must be in a written document, and the language in the document must conform to current IRS requirements. A plan document is usually composed of an Adoption Agreement and an underlying Basic Plan Document that goes with the Adoption Agreement.
The plan document specifies provisions that dictate how the plan must be operated, and it must be kept in compliance with changing IRS regulations by updating those documents through plan amendments. The plan sponsor must maintain records of these documents and amendments.
If some of this documentation is missing, the IRS has a voluntary non-amender program for correcting such defects. Failure to maintain these records and operate the plan in conformance with the plan document could subject the plan sponsor to IRS sanctions, unless corrected using IRS programs.
Because of the importance of the IRS requirement to maintain these records, Benetech performs a basic initial review of your plan documents. Benetech’s acceptance of the plan is conditional on a favorable review of the plan documents.
Participant reports and plan testing
In order to properly account for plan benefits, Benetech will need to know the value of each participant’s benefit under that plan as of the end of the year immediately preceding Benetech’s first year as administrator.
Participant valuation reports
(as of date of asset transfer)
For plans that allow participant direction, the new recordkeeper must load participant account values as of the date of the asset transfer. These values must be in a data file or report provided by the prior recordkeeper.
For each participant, the data file must list the participant’s account value and activity by each type of contribution allowed under the plan. For example, a participant in a 401(k) Plan may have contributions to his/her account of salary deferrals, employer match, employer profit sharing and, if a participant loan is outstanding, the loan balance (for each loan, the amortization schedule and promissory note should be provided as well). For an accurate beginning balance on the new recordkeeping system, each of these values must be loaded separately for each participant.