Employee Benefits for Small and Mid-Sized Employers addresses the particular issues that arise in connection with the design and administration of pension, profit-sharing, and welfare benefit plans and other employer fringe benefits maintained by small and mid-sized employers. This Portfolio, written by Janine H. Bosley, Esq. and Martha L. Hutzelman, Esq., discusses common issues that are often encountered by employers with a relatively small workforce, focusing on issues that arise as a direct result of the size of the employer's workforce and/or as a result of the common methods by which such small employers establish and maintain the employee benefit programs they offer. Plan design and operational requirements are emphasized.
This Portfolio covers the rules governing employee benefit plans that may be maintained by all types of employers very generally and briefly. The exceptions, limitations and special rules that apply to plans maintained by small employers are discussed in detail. Further, issues and problems that are generally encountered by small employers are specifically addressed. Specific topics explored include document, annual return and employee communications issues; remedial amendment periods; plan distributions; top-heavy testing; merger/acquisition considerations; welfare plan compliance, including the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Consolidated Omnibus Budget and Reconciliation Act of 1985 (COBRA), using third-party administrators, and more.
Employee Benefits for Small and Mid-Sized Employers allows you to benefit from:
This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which covers every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.
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
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
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
(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
b. Minimum Benefits
(2) Meaning of “Applicable Percentage”
(3) Computation of “Average Compensation”
(4) Meaning of “Annual Retirement Benefit”
c. Minimum Contribution
(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
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
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
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
A. Health and Disability Plans
1. Health Plan Nondiscrimination Testing
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
VI. Welfare Plan Operational Requirements
4. Other Plan-Related Documents
B. Annual Information Returns/Reports
a. Determination of Number of Participants Covered
b. Determination of Plan Year
c. Code Reporting Requirements
d. Penalties for Failure to File Annual Return
C. Fiduciary Obligations
2. Fiduciary Bond
D. Plan Administrative Procedures
E. Merger/Acquisition Issues
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
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
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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