PORTFOLIO

Employee Benefit Plans and Issues for Small Employers (Portfolio 353)

Tax Management Portfolio, Employee Benefit Plans and Issues for Small Employers, No. 353-4th, discusses the particular issues that arise in connection with the design and administration of retirement plans, both qualified and non-qualified, and in health, welfare and fringe benefit plans maintained by small employers.

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Tax Management Portfolio, Employee Benefit Plans and Issues for Small Employers, No. 353-4th, discusses the particular issues that arise in connection with the design and administration of retirement plans, both qualified and non-qualified, and in health, welfare and fringe benefit plans maintained by small employers. There are varying legal definitions of small employers and small plans for different purposes, but most employers with fewer than 500 employees (or plans with fewer than 500 plan participants) are considered a small employer (or a small plan) for purposes of the employee benefit rules.


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AUTHORS

BARRY KOZAK
Barry Kozak, University at Albany (B.S. 1994), The John Marshall Law School (J.D. and LL.M. in Employee Benefits, 2000); The University of Chicago Harris Graduate School of Public Policy Studies (M.P.P., expected in 2009). Attorney licensed in Illinois, Enrolled Actuary, Certified Pension Consultant, and Chartered Financial Consultant. Leadership Positions held at the American Bar Association Section of Taxation, the Chicago Bar Association Employee Benefits Committee, The Great Lakes Area TE/GE Advisory Council, and the American Society of Pension Professionals and Actuaries.

TABLE OF CONTENTS

Detailed Analysis

I. Scope of Portfolio

II. Establishment of a Pension or Welfare Benefit Plan

A. Introduction

B. ERISA – In General

1. Three Agency Structure

2. Internal Revenue Code Provisions

3. Requirements Under Title I of ERISA

C. Considerations in Establishing an Employee Benefit Plan

1. Business/Corporate Purpose

2. Employer Entity/Type

3. Employee Characteristics

4. Costs

a. In General

b. Plan Startup Cost Credit for Small Businesses

D. Employer and Service Provider Responsibilities in Establishing an Employee Benefit Plan

1. Employer Responsibilities

2. Services Needed

a. Legal Services

b. Recordkeeping Services

c. Investment Advisor

d. Actuary

3. Plan Maintenance

E. Steps to Establish an Employee Benefit Plan

1. Preparation

2. Plan Documentation

3. Implementation of the Plan

4. Ongoing Maintenance of the Plan

III. Pension Plan Design

A. Pension Plan Defined

1. Qualification Requirements in General

2. Effect of Plan Disqualification

B. Type of Pension Plan

1. Defined Contribution Plans

a. 401(k) – Cash or Deferred Arrangement

b. 401(k) Safe Harbor Plan

c. SIMPLE Plan

d. Profit-Sharing Plan

e. Money Purchase Pension Plan

f. Employee Stock Ownership Plan (ESOP)

g. Simplified Employee Pension Plan (SEP)

2. Defined Benefit Plans

a. Traditional Defined Benefit Plan

b. Hybrid Plan

(1) Floor Offset Plan

(2) Cash Balance Plan

3. Eligible Combined Plans

C. Pension Plan Document Options

1. Master and Prototype Plan Document

a. Master and Prototype Plan Structure

b. Standardized and Nonstandardized Master and Prototype Plan Structure

(1) Standardized Master and Prototype Plan

(2) Nonstandardized Master and Prototype Plan

2. Volume Submitter Plan Document

3. Individually Designed Custom Plan Document

4. Remedial Amendment Period for Master and Prototype and Volume Submitter Plans

5. Cyclical Remedial Amendment Periods

a. In General

b. General Remedial Amendment Period Extension

c. Interim Amendments

d. Pre-Approved Plans

e. EGTRRA Remedial Amendment Period

6. Determination Letter Application User Fee Waiver for New Plans

D. Sponsorship of Pension Plan by Unincorporated Employer

1. Background

2. Elimination of H.R. 10 or Keogh Plan Distinctions

3. Special Restrictions Applicable to Unincorporated Employers

a. Compensation Definition for Annual Contribution Limit

b. Compensation Definition for Deduction Purposes

c. Elective Deferral Contributions

d. Plan Investment in Life, Health and Accident Insurance

e. Determination of Reasonable Compensation

f. Prohibited Transaction Exemptions

g. Lump Sum Distribution Treatment

h. Definition of Employer

E. Automatic Enrollment

1. Automatic Deferral

2. Contributions

3. Notice

4. ERISA Preemption

5. Top-heavy Rules

IV. Pension Plan Operational Requirements

Introductory Material

A. Employee Communications

1. Summary Annual Report

2. Summary of Material Modifications

3. Summary Plan Description

4. Other Plan Related Documents

5. Annual Participant Benefit Statements

B. Contribution Requirements

1. Salary Deferral Agreements

2. Time Limit for Forwarding Employee Deferrals

C. Annual Nondiscrimination Testing

1. Highly Compensated Employee (HCE)

2. 410(b) - Minimum Coverage or Benefit Test

3. 401(a)(26) - Minimum Participation Test

4. 401(a)(4) - Benefits, Rights, and Features

5. 401(a)(5) - Permitted Disparity

6. 401(a)(10)(B) and 416 - Top-Heavy Test

7. 401(a)(17) - Compensation Limit

8. 401(k)(3) - Actual Deferral Percentage (ADP) Test

9. 401(m)(2) - Actual Contribution Percentage (ACP) Test

10. 414(u) - Requirements for Employees on Leave for Military Service

11. Contribution Limits

a. 402(g) - Elective Deferral Limit

b. 415 Limit - Annual Contribution or Benefit Limit

c. 404 Limit - Contribution Deductibility Limit

d. 408(q) Limit - Deemed IRA Contribution Limit

e. 25B - Income Tax Credit for Elective Deferral Contributions

D. Distribution Requirements

1. Required Minimum Distributions

2. Loans

3. Hardship Withdrawals and Other In-Service Distributions

4. Rollovers

5. Involuntary Cash-outs and Automatic Rollovers

6. Joint and Survivor Annuity Requirements

7. Vesting

E. Annual Information Returns/Reports

1. Form 5500 Annual Return and Report

2. Summary Annual Report

3. Annual Audit by Independent Public Accountant

4. Summary of Material Modifications

5. Summary Plan Description

6. Other Reports - Form 1099-R

F. Fiduciary Obligations

1. In General

2. Default Investments

3. Investment Policy

4. Fiduciary Bond

5. Prohibited Transactions

G. Plan Administrative Procedures

H. Annual Top-Heavy Testing

1. Background

2. Determining Whether Plan Is Top-Heavy and Definitions for Rules

a. General

(1) Section 416

(2) Testing Methods Under the Regulations

b. Key Employees

(1) General Rule

(2) Determining Who Are Officers

(a) In General

(b) Limits on Number of Officers

(3) Determining the 10 Employees with Largest Ownership Interest in Employer

(a) In General

(b) Changes in Ownership Interest

(4) Determining Percentage Owners

(a) Five Percent Owner

(b) One Percent Owner

(c) Constructive Ownership Rules

(d) Applicability of Aggregation Rules

(5) Non-Key Employee

(6) Treatment of Beneficiaries

(7) Self-Employed Individuals

c. Top-Heavy Plan

(1) Single Plans

(a) Defined Benefit Plans

(b) Defined Contribution Plans

(c) Cumulative Accrued Benefits

(d) Distributions During Preceding Five Years

(2) Aggregated Plans

(a) General Rule

(b) Aggregation Group

(i) Required Aggregation

(ii) Permissive Aggregation

(c) Top-Heavy Group

(i) General Rule

(ii) Simplified Employee Pensions

(3) Special Rules Applying Top-Heavy Definitions

(a) Rollover Contributions

(b) Employee Contributions

(c) Ceasing to Be a Key Employee

(d) The Determination Date

(e) “Year” to Which Rules Apply

(4) Employees Covered by Collective Bargaining Agreements

(5) Frozen and Terminated Plans

3. Vesting Requirements

a. General Rule

b. Three-Year Cliff Vesting

c. Six-Year Graded Vesting

d. Application of the 411 Vesting Rules

4. Minimum Benefit and Contribution Requirements

a. General Rule

b. Minimum Benefits

(1) General Rule

(2) Meaning of “Applicable Percentage”

(3) Computation of “Average Compensation”

(4) Meaning of “Annual Retirement Benefit”

c. Minimum Contribution

(1) General Rule

(2) Special Rule When Maximum Contribution is Less Than Three Percent

(a) Limited by Contributions Made for Key Employees

(b) Maximum Compensation Used in Determining Percentage

(c) Aggregation Group

(3) Employer Contribution Attributable to Salary Reduction

d. Contributions and Benefits Under the Social Security Act

e. Requirements for Two or More Plans

5. Compensation Limits

6. Section 415 Adjustments

7. Required Top-Heavy Plan Provisions

a. In General

b. Collectively Bargained Plans

c. Where No Employee Is Eligible to Participate in Both a Defined Benefit and a Defined Contribution Plan

d. Where Regular Plan Provisions Satisfy the Top-Heavy Rules

e. Where Employees Can Participate in Both a Defined Benefit and a Defined Contribution Plan

I. Merger/Acquisition Issues

1. In General

2. Elimination of Optional Forms of Benefit

a. Background

b. Final Regulations

(1) Permitted Amendments to Optional Forms of Payment Under Defined Contribution Plans

(2) Voluntary Direct Transfers Between Plans

(a) Direct Rollover

(b) Distributable Event Transfer

(c) Transaction or Employment Change Transfer

(3) In-Kind Distributions

(4) Effective Date

c. Application of Final Regulations in Merger/Acquisition

d. Employee Communication when Eliminating Optional Forms of Benefit

e. Elimination of Optional Forms of Benefit Under EGTRRA

3. Same Desk Rule

a. Background

b. Revenue Ruling 2000-27

c. Application of Same Desk Rule in Merger/Acquisition

d. Elimination of “Same Desk Rule” Under EGTRRA

4. Vesting During Short Plan Year

5. Defined Benefit Plan - Controlled Group Member Liability

V. Welfare Plan Designs

Introductory Material

A. Health and Disability Plans

1. Health Plan Nondiscrimination Testing

2. Plan Documentation

3. Special Health Plan Requirements

a. Health Insurance Portability and Accountability Act of 1996 (HIPAA)

b. Consolidated Omnibus Budget and Reconciliation Act of 1985 (COBRA)

c. Mental Health Parity Act

d. Newborns’ and Mothers’ Health Protection Act

e. Women's Health and Cancer Rights Act

f. Continued Coverage of Dependent Students

B. Group-Term Life Insurance Plans

C. Cafeteria Plans

1. Nondiscrimination Requirements

2. Plan Documentation

VI. Welfare Plan Operational Requirements

Introductory Material

A. Employee Communications

1. Summary Annual Report

2. Summary of Material Modifications

3. Summary Plan Description

4. Other Plan-Related Documents

B. Annual Information Returns/Reports

1. Form 5500 Annual Return and Report

a. Determination of Number of Participants Covered

b. Determination of Plan Year

c. Code Reporting Requirements

d. Penalties for Failure to File Annual Return

2. Summary Annual Report

3. Annual Audit by Independent Public Accountant

4. Summary of Material Modifications

5. Summary Plan Description

C. Fiduciary Obligations

1. In General

2. Fiduciary Bond

D. Plan Administrative Procedures

E. Merger/Acquisition Issues

1. In General

2. Nondiscrimination Test Failure in Cafeteria Plans

3. Continuation of Group Health Coverage under COBRA

4. Certification of Creditable Coverage under HIPAA

VII. Use of Third Party Administration

A. Selection of Third Party Plan Administrator

B. Sample Questions to Ask a Prospective Third Party Plan Administrator (TPA) Regarding Plan Administration Services

C. Third Party Administrator as Plan Fiduciary

1. Background

a. Services Limited to Administrative Functions

b. Contractual Limitation on Services

2. Review of Fiduciary Status

3. Statutory Definition of Plan Fiduciary

4. DOL Interpretation of Statutory Definition of Plan Fiduciary

5. Case Findings

a. IT Corporation

b. Klosterman

c. Six Clinics Holding Corporation

d. Joseph F. Cunningham Pension Plan

e. CSA 401(k) Plan

6. DOL Enforcement Actions

7. Contractual Provisions Sought by Employers

8. Consequences for TPAs


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 IRS Publication 560 - Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans)

Worksheet 2 DOL Regs. 2520.104-41 and -46 – Simplified Annual Reporting Requirements and Waiver of Independent Qualified Public Accountant Audit for Small Employee Benefit Plans

Worksheet 3 IRS and DOL Publication 4222 401(k) Plans for Small Businesses

Worksheet 4 Comparison Chart of Retirement Plans for Small and Mid-Sized Employers

Bibliography

OFFICIAL

Statutes:

Legislative History:

Treasury Regulations:

Department of Labor Regulations:

Treasury Rulings:

Cases:

UNOFFICIAL

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