Each year the IRS updates the Plan Limits for Qualified Plans. Following are the limits for 2006.
Code
Section
401(a)
Annual Compensation : $220,000
401k/ 403(b)Elective
Deferrals : $15,000
Maximum
Compensation : $220,000
SIMPLE
Maximum
Contributions : $10,000
Highly
Compensated
Threshold : $100,000
401k/403(b)
Catch-up
Contributions : $5,000
414(v)(2)(B)(ii)
Catch-up
Contributions : $2,500
415(b)(1)(A)
DB Limits : $175,000
415(c)(1)(A)
DC Limits : $44,000
416(i)(1)(A)(i)
Key EE : $140,000
457(e)(15)
Deferral Limits : $15,000
TWB : $94,200
With more than two decades of operational and management experience We have developed a sharp eye for how businesses get clobbered with retirement plan fees and limited investment options. We empathetically help other business owners create the retirement programs that get results through checkbook control and self directed investments.
Wednesday, March 22, 2006
Tuesday, March 21, 2006
Fidelity Investment Head Calls Congressmen's Abilities into Question... She Has the Answer.
In a rare February public appearance at the East Coast Defined Contribution Conference in Palm Beach Gardens, Florida, Abigail Johnson, president of Fidelity Investments’ Employer Services Co., said "It will take years before our political leaders figure out how to reform health care and fix Social Security."
"But there is a great deal that financial service providers and plan sponsors can do right now."
Citing Fidelity statistics, Johnson said that one-third of eligible employees do not participate in their 401(k) plans at all. One-fifth of participants don’t diversify and only invest in one investment option. Eighty-three percent do not seek out investment advice.
And once employees choose investments for their plans, they fail to reallocate as they grow older. The study finds that 401(k) plan participants are more likely than not to leave their retirement plan accounts unchanged over a 10-year period.
In an interview with Workforce Management following her presentation, Johnson emphasized the need to address low-income workers’ needs, since they seem to be the ones who are most at risk of not having enough money for retirement. Managed accounts, while often a good solution for some 401(k) participants, may not make sense for this group because they are expensive, she said.
By automatically enrolling employees in a lifecycle fund, companies could help low-income workers increase their retirement savings by 29 percent, she said.
If employers do this, "inertia will work in (employees’) favor in most cases," she said.
Would she apply Fidelity's approach to Employee Health Care too?
Want to retire with $1,127,376.04? With more than two decades of operational and management experience Lawrence Groves has developed a sharp eye for how businesses get clobbered with retirement plan fees and how they can retool for a sleeker, smoother, strategically focused retirement plan. As an entrepreneur who quickly built his own successful consulting business he also empathetically helps other business owners set priorities and create the retirement programs that get results.
"But there is a great deal that financial service providers and plan sponsors can do right now."
Citing Fidelity statistics, Johnson said that one-third of eligible employees do not participate in their 401(k) plans at all. One-fifth of participants don’t diversify and only invest in one investment option. Eighty-three percent do not seek out investment advice.
And once employees choose investments for their plans, they fail to reallocate as they grow older. The study finds that 401(k) plan participants are more likely than not to leave their retirement plan accounts unchanged over a 10-year period.
In an interview with Workforce Management following her presentation, Johnson emphasized the need to address low-income workers’ needs, since they seem to be the ones who are most at risk of not having enough money for retirement. Managed accounts, while often a good solution for some 401(k) participants, may not make sense for this group because they are expensive, she said.
By automatically enrolling employees in a lifecycle fund, companies could help low-income workers increase their retirement savings by 29 percent, she said.
If employers do this, "inertia will work in (employees’) favor in most cases," she said.
Would she apply Fidelity's approach to Employee Health Care too?
Want to retire with $1,127,376.04? With more than two decades of operational and management experience Lawrence Groves has developed a sharp eye for how businesses get clobbered with retirement plan fees and how they can retool for a sleeker, smoother, strategically focused retirement plan. As an entrepreneur who quickly built his own successful consulting business he also empathetically helps other business owners set priorities and create the retirement programs that get results.
Monday, March 20, 2006
IRS Attacks 401k Part-time Employee Exclusions and Your Determination Letter is useless
The IRS issued the February 14, 2006 Quality Assurance Bulletin (QAB) dealing with 401k plan exclusions of part-time, temporary, and seasonal (A.K.A. part-time) employees. This QAB revolutionizes the way IRS document examiners will look at 401k plan eligibility clauses and warns that inadequately drafted provisions dealing with part-time employees may be disqualifying, regardless of any plan determination letter.
Why the Attack ?
As 401(k) plans have matured, newly recruited employees are no longer willing to wait the traditional 1000 hour, one-year eligibility period to begin participating. Many employers are liberating their traditional 401k plans of a 1000 hrs year wait by allowing immediate eligibility, at least for the deferral portion of the plan.
Other employers, while permitting immediate eligibility, wish to also avoid covering part-time employees because of :
(1) the negative effect on the ADP test as part-timers seldom contribute and will be counted as a zero.
(2) the administrative costs of adding and deleting new employees and
(3) the part-timers zero balance will prescribe a top heavy contribution.
Employers are now looking to provide immediate deferral entry and simultaneously exclude part-timers as a classification .
The Problem:
Treas. Reg. §1.410(a)-3 notes that a service condition requiring more than one thousand hours year of service is invalid. In other words what matters is that the plan as written, could have a service requirement in excess of the Code §410(a) limits, which is enough to disqualify the plan. Therefore, as a class part-timers can not be excluded.
IRS additionally addressed this issue in the following:
1.A 1994 Field Directive instructed IRS examiners to challenge plans which had these service requirements.
2.The IRS modified Publication 794, which accompanies determination letters, added the following :
3.A 2002 Recurring Issue Focus (RIF) told IRS examiners that this would be an audit issue, not a determination letter matter.
IRS 401k Attack
Effective with the February 14, 2006 QAB the IRS examiners will again challenge 401k plans with the part-time exclusions. Examiners will not ,however, be challenging an exclusion classification that is defined without reference to hours of service (e.g., hourly paid employees). The QAB states:
Employers 401k Triumph
Plan sponsors should carefully examine their 401k plans if they currently exclude part-time employees from participation. If the plan does not have a fail-safe to assure that the plan will comply with Code §410(a), the sponsor should consider amending the plan.
The employer could regain the provision by including fail-safe language for the condition where the employee works more than 1,000 hours of service during a plan year. The plan can exclude part-time employees as a classification until they meet the year of service requirement, even though full-time employees enter immediately.
Want to retire with $1,127,376.04? With more than two decades of operational and management experience Lawrence Groves has developed a sharp eye for how businesses get clobbered with retirement plan fees and how they can retool for a sleeker, smoother, strategically focused retirement plan.
Why the Attack ?
As 401(k) plans have matured, newly recruited employees are no longer willing to wait the traditional 1000 hour, one-year eligibility period to begin participating. Many employers are liberating their traditional 401k plans of a 1000 hrs year wait by allowing immediate eligibility, at least for the deferral portion of the plan.
Other employers, while permitting immediate eligibility, wish to also avoid covering part-time employees because of :
(1) the negative effect on the ADP test as part-timers seldom contribute and will be counted as a zero.
(2) the administrative costs of adding and deleting new employees and
(3) the part-timers zero balance will prescribe a top heavy contribution.
Employers are now looking to provide immediate deferral entry and simultaneously exclude part-timers as a classification .
The Problem:
Treas. Reg. §1.410(a)-3 notes that a service condition requiring more than one thousand hours year of service is invalid. In other words what matters is that the plan as written, could have a service requirement in excess of the Code §410(a) limits, which is enough to disqualify the plan. Therefore, as a class part-timers can not be excluded.
IRS additionally addressed this issue in the following:
1.A 1994 Field Directive instructed IRS examiners to challenge plans which had these service requirements.
2.The IRS modified Publication 794, which accompanies determination letters, added the following :
A determination letter may not be relied on with respect to whether a plans exclusion classifications, if any, violate the minimum age or service requirements of section 410 by indirectly imposing an impermissible age or service requirement.
3.A 2002 Recurring Issue Focus (RIF) told IRS examiners that this would be an audit issue, not a determination letter matter.
IRS 401k Attack
Effective with the February 14, 2006 QAB the IRS examiners will again challenge 401k plans with the part-time exclusions. Examiners will not ,however, be challenging an exclusion classification that is defined without reference to hours of service (e.g., hourly paid employees). The QAB states:
Specialists should take note that the issue of whether a plan is providing a direct or indirect service requirement is not limited to part-time or seasonal employees. Any exclusion classification, whether it be part-time, seasonal, temporary, or any other classification of employees, should be closely scrutinized. Specialists should require that any such classification be clearly defined.
Employers 401k Triumph
Plan sponsors should carefully examine their 401k plans if they currently exclude part-time employees from participation. If the plan does not have a fail-safe to assure that the plan will comply with Code §410(a), the sponsor should consider amending the plan.
The employer could regain the provision by including fail-safe language for the condition where the employee works more than 1,000 hours of service during a plan year. The plan can exclude part-time employees as a classification until they meet the year of service requirement, even though full-time employees enter immediately.
Want to retire with $1,127,376.04? With more than two decades of operational and management experience Lawrence Groves has developed a sharp eye for how businesses get clobbered with retirement plan fees and how they can retool for a sleeker, smoother, strategically focused retirement plan.
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