Posts Tagged ‘401K’

How Can I Get Employees to Save for Retirement?

Wednesday, May 30th, 2012

401K Retirement Savingsby Jennifer Arntson
Tax Sheltered Compensation, Inc.

The most fulfilling part of my job as a Client Relations Manager at TSC is meeting with our clients and their advisors to review their company’s retirement plan.  Lucky for me, 50% of my time is spent doing just that.  In these meetings, I hear many of the same questions and concerns from business owners.  One of the most common questions that I hear is: “How do I get my employees to participate in the plan and appreciate the value of this benefit I am providing?”  This is where automatic enrollment in conjunction with a good education plan can really make a difference.

When the topic of auto enrollment is discussed, there are certain questions that inevitably come up. Does it work?  What if an employee wants to opt out?  Will my employees get upset with me for defaulting them into the plan?  Will I have to play “baby-sitter” with my employees’ retirement savings?  Based on my experience implementing auto enrollment for our clients, here are my answers to these questions:

Does it work?  Yes, it does, and not only for large companies (a common misconception).  Employees that don’t opt into the plan usually don’t opt out – all due to inertia.  This employee behavior has shown to be consistent regardless of the size of the company they are employed by.

What if an employee wants to opt out?  They can do so at any time by completing an enrollment or contribution change form.  In addition, many employers choose to allow an employee to remove the contribution made within the first 90 days of the automatic enrollment.

Will my employees get upset with me for defaulting them into the plan?  While the answer is generally no, I did have a client share an experience with me that I found very interesting.  An employee was defaulted into the plan at a rate of 3%.  The employee was going to opt out of the plan and ask for a refund of the first contribution made; however, upon reviewing the amount deducted and placed into the plan, she decided the amount did not have a significant impact on her take home pay.  Furthermore, she realized that if it weren’t automatically deducted she would never have made the election to contribute for herself and decided to continue to defer into the plan.

Will I have to play “baby-sitter” with my employees’ retirement savings?  You do not need to play baby-sitter if you adopt the auto enrollment provision.  You will need to make sure employees are aware of the provision and distribute the appropriate employee notice and enrollment forms.  From then on it works just as if they had made a positive election into the plan.

You may have asked yourself many of the same questions as above.  Based on what you have read, could your 401(k) plan benefit from auto enrollment?

TSC is a Certified Payroll Control Systems partner.  For more information, visit the TSC Website by clicking here.

Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.

Final Ruling to Improve Transparency of Fees and Expenses in 401(k)-Type Retirement Plans

Monday, March 26th, 2012

401k FeesFebruary 2012

The Department of Labor’s Employee Benefits Security Administration (EBSA) released a final rule that will help America’s workers manage and invest the money they contribute to their 401(k)-type pension plans. The rule will ensure: that workers in this type of plan are given, or have access to, the information they need to make informed decisions, including information about fees and expenses; the delivery of investment-related information in a format that enables workers to meaningfully compare the investment options under their pension plans; that plan fiduciaries use standard methodologies when calculating and disclosing expense and return information so as to achieve uniformity across the spectrum of investments that exist among and within plans, thus facilitating “apples-to-apples” comparisons among their plan’s investment options; and a new level of fee and expense transparency.


  • EBSA is responsible for administering and enforcing the fiduciary, reporting, and disclosure provisions of Title I of ERISA.
  • The agency oversees approximately 708,000 private pension plans, including 483,000 participant-directed individual account plans such as 401(k)-type plans.
  • A “participant-directed plan” is a plan that provides for the allocation of investment responsibilities to participants or beneficiaries.
  • An estimated 72 million participants are covered by these participant directed plans, which contain nearly $3 trillion in assets.
  • While workers in these plans are responsible for making their own investment decisions, current law does not adequately ensure that all workers are given the information they need or ensure that information, when provided, is furnished in a format useful to workers, particularly information on investment choices including associated fees and expenses.
  • In April 2007, EBSA published in the Federal Register a Request for Information (72 FR 20457) soliciting the views, suggestions and comments from participants, plan sponsors, plan service providers and members of the financial community, as well as the public in general, on whether and to what extent rules should be adopted or modified, or other actions should be taken, to ensure that participants and beneficiaries have the information they need to make informed decisions about the management of their individual accounts and the investment of their retirement savings.

Overview of Final Rule

  • The final rule provides that the investment of plan assets is a fiduciary act governed by the fiduciary standards in ERISA section 404(a)(1)(A) and (B), which require plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries.
  • The final rule also provides that when a plan allocates investment responsibilities to participants or beneficiaries, the plan administrator must take steps to ensure that such participants and beneficiaries, on a regular and periodic basis, are made aware of their rights and responsibilities with respect to the investment of assets held in, or contributed to, their accounts and are provided sufficient information regarding the plan and the plan’s investment options, including fee and expense information, to make informed decisions with regard to the management of their individual accounts.
  • A plan administrator must provide to each participant or beneficiary certain plan-related information and certain investment-related information. These categories of information are described below.

Plan-Related Information

The first category of information that must be disclosed under the final rule is plan-related information. This general category is further divided into three subcategories as follows:

General Plan Information

  • General plan information consists of information about the structure and mechanics of the plan, such as an explanation of how to give investment instructions under the plan, a current list of the plan’s investment options, and a description of any “brokerage windows” or similar arrangement that enables the selection of investments beyond those designated by the plan.

Administrative Expenses Information

  • An explanation of any fees and expenses for general plan administrative services that may be charged to or deducted from all individual accounts. Examples include fees and expenses for legal, accounting, and recordkeeping services.

Individual Expenses Information

  • An explanation of any fees and expenses that may be charged to or deducted from the individual account of a specific participant or beneficiary based on the actions taken by that person. Examples include fees and expenses for plan loans and for processing qualified domestic relations orders.

The information in these three subcategories must be given to participants on or before the date they can first direct their investments, and then again annually thereafter.

Statements of Actual Charges or Deductions

In addition to the plan-related information that must be furnished up front and annually, participants must receive statements, at least quarterly, showing the dollar amount of the plan-related fees and expenses (whether “administrative” or “individual”) actually charged to or deducted from their individual accounts, along with a description of the services for which the charge or deduction was made. These specific disclosures may be included in quarterly benefit statements required under section 105 of ERISA.

Investment-Related Information

The second category of information that must be disclosed under the final rule is investment-related information. This category contains several subcategories of core information about each investment option under the plan, including:

Performance Data

  • Participants must be provided specific information about historical investment performance. 1, 5 and 10-year returns must be provided for investment options, such as mutual funds, that do not have fixed rates of return. For investment options that have a fixed or stated rate of return, the annual rate of return and the term of the investment must be disclosed.

Benchmark Information

  • For investment options that do not have a fixed rate of return, the name and returns of an appropriate broad-based securities market index over 1-, 5-, and 10-year periods (matching the Performance Data periods) must be provided. Investment options with fixed rates of return are not subject to this requirement.

Fee and Expense Information

  • For investment options that do not a have a fixed rate of return, the total annual operating expenses expressed as both a percentage of assets and as a dollar amount for each $1,000 invested, and any shareholder-type fees or restrictions on the participant’s ability to purchase or withdraw from the investment.
  • For investment options that have a fixed rate of return, any shareholder-type fees or restrictions on the participant’s ability to purchase or withdraw from the investment.

Internet Web site Address

  • Investment-related information includes an internet Web site address that is sufficiently specific to provide participants and beneficiaries access to specific additional information about the investment options for workers who want more or more current information.


  • Investment-related information includes a general glossary of terms to assist participants and beneficiaries in understanding the plan’s investment options, or an Internet Web site address that is sufficiently specific to provide access to such a glossary.

Comparative Format Requirement

Investment-related information must be furnished to participants or beneficiaries on or before the date they can first direct their investments, and then again annually thereafter. It also must be furnished in a chart or similar format designed to facilitate a comparison of each investment option available under the plan. The final rule includes, as an appendix, a model comparative chart, which when correctly completed, may be used by the plan administrator to satisfy the rule’s requirement that a plan’s investment option information be provided in a comparative format.


  • The rule provides plan administrators protection from liability for the completeness and accuracy of information provided to participants if the plan administrator reasonably and in good faith relies upon information provided by a service provider.
  • After a participant has invested in a particular investment option, he or she must be provided any materials the plan receives regarding voting, tender or similar rights in the option.
  • Upon request, the plan administrator must also furnish prospectuses, financial reports and statements of valuation and of assets held by an investment option.
  • The general disclosure regulation at 29 CFR § 2520.104b-1 applies to material furnished under this regulation, including the safe harbor for electronic disclosures at paragraph (c) of that regulation.
  • The final rule would also make conforming changes to the disclosure requirements for plans that elect to comply with the existing ERISA section 404(c) regulations.

Economic Benefits of the Final Rule

  • The Department estimates that the rule will be economically significant.
  • The anticipated cost of the rule is $425 million in 2012 (2010 dollars), arising from legal compliance review, time spent consolidating information for participants, creating and updating Web sites, preparing and distributing annual and quarterly disclosures, and material and postage costs to distribute the disclosures.
  • A significant benefit of this rule is that it will reduce the amount of time participants spend collecting fee and expense information and organizing the information in a format that allows key information to be compared; this time savings is estimated to total nearly 54 million hours valued at nearly $2 billion in 2012 (2010 dollars).
  • Over the ten-year period 2012-2021, EBSA estimates that the present value of the benefits provided by the final rule will be approximately $14.9 billion and the present value of the costs will be approximately $2.7 billion.

Effective and Applicability Dates

  • The July 1 effective date of the final regulation relating to service provider disclosure under section 408(b)(2) will impact when disclosures must first be furnished under the final rule on fee disclosures for participants. The transitional rule for the final rule on fee disclosures for participants was revised in July 2011 so that the first disclosures would follow the effective date of the 408(b)(2) regulation.
  • Consequently, for calendar year plans, the initial annual disclosure of “plan-level” and “investment-level” information (including associated fees and expenses) must be furnished no later than August 30, 2012 (i.e., 60 days after the 408(b)(2) regulation’s July 1 effective date).
  • The first quarterly statement must then be furnished no later than November 14, 2012 (i.e., 45 days after the end of the third quarter (July through September), during which initial disclosures were first required). This quarterly statement need only reflect the fees and expenses actually deducted from the participant or beneficiary’s account during the July through September quarter to which the statement relates.

Contact Information

For questions about the rule, contact EBSA’s Office of Regulations and Interpretations at 202-693-8500.

This fact sheet has been developed by the U.S. Department of Labor, Employee Benefits Security Administration, Washington, DC 20210. It will be made available in alternate formats upon request: Voice telephone: 202-693-8664; TTY: 202-501-3911. In addition, the information in this fact sheet constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996.

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Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.

New Limits Allow Higher Contributions

Saturday, February 25th, 2012

New 401K LimitFor those focused on saving for retirement, the recent increase in the defined contribution plan limits are great news. For defined contribution plans like 401(k) and 403(b), the maximum employee deferral has increased by $500 this year to $17,000, (up from $16,500 in 2011).  The “catch-up” contribution for participants age 50 and older remains unchanged at $5,500 for tax year 2012.

IRA contribution limits

The annual contribution limits for individual retirement accounts (IRAs) remain unchanged. Individuals age 50 or older before the end of 2012 may contribute up to $6,000 to a traditional or Roth IRA. You can split contributions between a traditional and a Roth IRA, but the combined limit is $6,000. Note that your annual income determines eligibility for a Roth IRA. See for additional details.

And don’t forget that there’s still time to make 2011 IRA contributions. You have until April 17, 2012!

Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.

Workplace Poster Requirements and Compliance Help

Monday, January 30th, 2012

Employment PostersSome of the statutes and regulations enforced by agencies within the Department of Labor require that posters or notices be posted in the workplace. The Department provides electronic copies of the required posters and some of the posters are available in languages other than English.

Please note that posting requirements vary by statute; that is, not all employers are covered by each of the Department’s statutes and thus may not be required to post a specific notice. For example, some small businesses may not be covered by the Family and Medical Leave Act and thus would not be subject to the Act’s posting requirements. For information on coverage, visit the Employment Laws Assistance for Workers and Small Business (elaws) Poster Advisor. You may also contact the Office of Small and Disadvantaged Business Utilization, for assistance with these notice requirements.

To obtain posters or for more information about poster requirements or other compliance assistance matters, you may contact the U.S. Department of Labor at 1-866-4-USA-DOL (1-866-487-2365).

You can maintain your own poster requirements and do it for free by following the instructions found in our past blog post, Employment Posters Made Easy.

Costco has a program which provides all Federal and State required posters along with updates for just $29.95 per year.  Find out more by clicking here.

The Department of Labor also has many other helpful articles that will keep your business in compliance:

Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.

A Professionally Bundled Collaboration Brings Out the Best

Sunday, October 30th, 2011

TSC-PCS CollaborationSome of the most successful companies are those who do not venture beyond their core competency, but instead search for experts to handle specialized services that create a powerful collaboration. After all, just because a company offers a service, it does not necessarily mean they specialize in that particular area.

Tax Sheltered Compensation, Inc. (TSC) and Payroll Control Systems (PCS) have recently partnered to offer professionally bundled services to clients. TSC’s third-party administration of successful retirement plans and PCS’s quality payroll service provide more secure and simplified options for clients. The partnership means competency within compliance for both companies, and it is a win-win situation for their clients as well.

“There is a great value in partnering and not using false claims to say you can do it all,” said Gary Zurek, president of TSC.

The partnership is about convenience combined with trust. Together, the expertise and quality control of each company allows clients to have solid confidence in the services provided. More importantly, clients have confidence in the people who are providing the specialized services.

There are several advantages for employers to do business with a third-party administration firm that has integrated payroll services:

  • Simplifies tasks for the administrative personnel
  • Increases accuracy
  • Lowers the chances for error
  • Quickens turn around

This strategic collaboration strengthens both TSC and PCS by allowing them to offer clients complete, specialized services while staying within their own areas of expertise.

The right collaboration is a wonderful thing – especially when the result is effectively servicing clients.

Posted By:

Bob Willbanks
VP of Sales & Marketing
Payroll Control Systems
763.746.1934 Direct Email

Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.

Are You Retirement Ready?

Tuesday, April 26th, 2011

Are You Ready For Retirement

By: Gary Zurek

Do you know how much money is needed for your retirement? Do your participants know how much they need? Retirement readiness…what does that mean?

There are many Baby Boomers turning 65 this year who now know they don’t have enough money for retirement.  This year (2011) is the beginning of the Baby Boomer generation turning 65. Over the next 20 years, 78 million Americans will turn 65. Sixty-five has, in the past, been synonymous with retirement. However, a recent article in the Wall Street Journal entitled “Retiring Boomers Find 401k Plans Fall Short” talks about the lack of retirement preparedness. According to the article the typical pre-retirement baby boomer has less than 25% of what he/she needs in a 401k plan to retire.

Why are they so woefully unprepared for retirement? There are many reasons for this problem including procrastination, boomer imprudence, participant loans, apathy, too little investment advice and too little being saved. I believe the number one reason is the fact that too little money is being saved for retirement.  Unfortunately, many boomers will either need to work longer than they anticipated or scale back their lifestyle to conserve their retirement funds.

While the boomer generation, particularly those over 55, may not be in a position to change their retirement readiness, there is still time for younger boomers, Gen Xer’s and Gen Yer’s to achieve an adequate retirement benefit. How? It’s called Retirement Planning.

I am constantly reading about all of the participant features that produce a great 401k plan: online annual contribution increase, take-home pay calculator, custom date portfolio returns and more. All of these items are wonderful features and tools but none of them provides the one thing that every participant needs to know: How much money do I need in my 401k account to achieve a meaningful retirement benefit. Once a participant knows how much money he/she needs in their account they can then, with the help of their investment adviser, establish a plan on how to get there. You notice I said “a plan”. For all of the talk about features and educating the participants on how to invest we miss the most important piece – planning. You may have heard this before but we, as Americans, spend more time planning our vacations than we do our retirement readiness.

As a reminder, TSC’s 401k Health Check™ provides the piece of information that participants are often missing to enable them to plan. It tells the participant if they are on track to save and achieve a meaningful retirement benefit. In addition to the Health Check, our website has a retirement benefit calculator which allows participants to customize their benefit package based on investments held outside their 401k account. Go to, with your Health Check and see how you measure up for your retirement.

The only way to have a meaningful retirement benefit is to plan for it. At TSC, we make corporate retirement plans easy… Ask your participants the simple question: do you know what you’ll need to be retirement ready? Help your participants plan today for retirement before they are “sixty-five”.

Contributed By:

Gary Zurek
952.806.4343 Direct

Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.

401k Fees… Let’s Remember Value

Tuesday, April 26th, 2011

401KFees-ValueBy: Randy Reese
Boulay, Heutmaker, Zibell & Co. PLLP

If you Google “401(k) Fees” you may see the following headlines – Are Fees Draining your 401(k) Retirement Savings? – Hidden Charges Can Rob You of a Comfortable Retirement – The High Cost of 401(k) Fees – and the list goes on and on. While these are excellent questions and concerns, examining them out of context may do more harm than good. Instead of looking only at fees, a more reasonable approach would be to step back and 1) understand that specific services are necessary and must be paid for, 2) discover what total fees are being paid and how they are being paid, and 3) determine what value you are receiving for these expected and required services. Only after you have gone through these three steps would you have any basis for determining if your fees are reasonable.

Let’s start by acknowledging that some fees are necessary because services are necessary. Successful retirement plans need services ranging from compliance to investments. Compliance requirements are set forth in the Employee Retirement Income Security Act of 1974 (ERISA) and more recently the Pension Protection Act of 2006. These Acts set minimum standards for retirement plans in private industry. Investment services are necessary to assist in asset allocation decisions designed to achieve the investment objective of plan participants. By understanding that someone needs to get paid for providing this oversight, you have the opportunity to save for retirement in a tax efficient manner.

The second step is to determine what you are actually paying in fees, both direct and indirect costs. Direct costs are fees paid by writing a check. You may never see indirect costs because they are netted out of your investment return. A study conducted by AARP* revealed that 83% of 401(k) plan participants did not know how much they were paying in fees and expenses. The perception has been in some cases that there are no fees, that it is “no-cost.” This could not be further from the truth. Someone, somewhere, is getting paid somehow. The same study also discovered that 79% who make the decisions about their 401(k) investments said fees are an important consideration. If fees are that important, how can you rationalize your investment decision without knowing how much you are paying? To help uncover both direct and indirect costs, effective January 1, 2012, 401(k) plan vendors must start disclosing their fees to plan sponsors and plan sponsors must start disclosing fees to plan participants (see Doug Johnson’s article, 401(k) Plan Fee Disclosure Requirements by clicking here).

The third step is to determine if there is a fair ”balance” between fees you are paying and value you are receiving. Value can be viewed as both tangible and intangible. Tangible value may positively affect your investment performance while intangible value will benefit both the employer and employee.

How does tangible value affect your investment performance? It is easy to find many examples in the financial news on how a 1% difference in fees can have a dramatic affect on the value of your account at retirement. While that is very true in its most simplistic form, there is often no mention of the fact that the net performance of a particular investment with higher fees may be greater than an investment with lesser fees. As an example, if Fund A has a 2% investment fee but delivers a net return of 8% and Fund B has a 1% investment fee but delivers a net return of only 7%, Fund A has more “value.” If you were to make your investment choice based only on expenses, you would choose Fund B, overlooking the fact that other investments may offer the potential for a higher net return even with higher expenses.

And then there is the intangible side of value. Certain benefits should emanate from your retirement plan on which you cannot place a “dollar and cents” value. Some of these benefits should be:

  • Your employees are educated on the simplicity of making appropriate investment choices
  • Your service provider accepts responsibility to provide personal hassle-free, day-to-day support as an extension of your Human Resource Department
  • Your employees are encouraged to participate through regularly scheduled meetings to keep them abreast of market conditions and aware of 401(k) topics of interest
  • Your fiduciary responsibility is reduced because your 401(k) advisor monitors the 401(k) investment vendor who is providing fund choices for plan participants

After going through these three steps, you should realize that a successful 401(k) plan requires specialized services and fees necessary in order to obtain these services. Furthermore, if you have done your due diligence and uncovered all of the fees you are paying, you can now consider the original question of whether or not your fees are reasonable. Before you give a final answer to that question, maybe you should acknowledge that reasonable fees are not measured entirely in dollars and cents, but rather by the balance between fees paid and value received. If the fee side of the scale outweighs the value side, perhaps you should expect more from your service provider and increase the VALUE of your 401(k) plan. With this approach, everyone wins at retirement, even if it did “cost” a little more to get there!

Article Contributed By:

Randy Reese
Boulay, Heutmaker, Zibell & Co. PLLP 7500 Flying Cloud Drive, Suite 800
Minneapolis, MN 55344 952.893.9320 |

Boulay provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.


Why You Shouldn’t Hire Your Payroll Company To Run Your 401(k) Plan

Monday, February 28th, 2011

401K AdminBy Ary Rosenbaum, Esq.

In “The Outlaw Josey Wales” Josey, played by Clint Eastwood approaches a man in a bar and asks if he is a bounty hunter (there to kill Josey). The bounty hunter replies, “A man has to do something for a living.” and Josey replies, “Dying ain’t much of a living, boy.”

I have been an ERISA attorney for 12 years and I am always asked by people I meet whether I give financial advice as an advisor and/or whether I do plan administration as a third party record keeper. I tell these people that I do neither, that I stick to what I know as an ERISA attorney. While people may say that being a financial advisor and/or record keeper may be a nice segue from being an ERISA attorney, I believe that these expert positions are so vastly differently that I couldn’t effectively wear more than one hat. I follow a major rule in business; I stick to what I know.

Too often in the retirement plan industry, we have people that claim to be experts that are really hacks in disguise. Too often, inferior work is done. The retirement plan industry is such a highly specialized field; it’s the amateurs that make it extremely difficult for the expert to clean up the mess. While people may have to work as third party plan administrators for a living, being incompetent ain’t much of a living.

In the 401(k) world, the two largest payroll providers in the country feel that retirement plan administration is a natural segue from doing payroll. I respectfully disagree. Providing payroll service is an automated, computerized system that is dependent on getting the correct tax rates from the Federal, State, and Local Government. As long as the employer provides the weekly payroll, the numbers should be consistent.

If mistakes are made on payroll, most can easily be rectified without having to consult with attorneys, the Internal Revenue Service, and the Department of Labor. When I was taxed as a New York City resident when I happened to live in Long Island, the extra tax paid was eventually refunded when I filed a New York State tax return.

Retirement plans are highly structured tax exempt entities. They must continuously abide by the Internal Revenue Code, ERISA, Department of Treasury regulations, Department of Labor regulations, and the terms of its plan document. Errors in retirement plans can happen during contribution deposits, trade processing, determination of eligibility and vesting, discrimination testing, and the preparation of Form 5500. Retirement plans, especially 401(k) plans have so many moving parts, that an error that requires correction and reporting to the proper governmental authority can occur on a daily basis. Some errors may result in plan disqualification where prior employer deductions for plan contributions are disallowed and plan participants must immediately report their retirement plan contributions as income. This is why plan sponsors should carefully select who their third party administrator (TPA) will be.

Except for the withholding of salary deferrals, 401(k) plan administration has nothing to do with payroll. 401(k) plan administration is a highly specialized field, dependent on getting correct data from the Plan sponsor and making the correct calculations on the administrator side. Bad data will always get a bad testing result. So a large portion of what a 401(k) administrator might have to do is to check whether the data being provided by the client is error free.

Too often, I find that payroll providers who act as TPAs run retirement plans the way they run payroll. I have seen too many instances where the client provides completely wrong key and highly compensated employee information and the payroll provider TPA will run the tests with the wrong data. I remember one case when an employer did not know the definition of key employee and checked off everyone as a key employee because they were “key” to the operation of the company. So the folks making $30,000 were considered key. It was no surprise that the payroll provider TPA found the Plan to be Top Heavy even though a skilled TPA would have contacted the company about the correctness of the data.

I have had a client for the last eight years because the Plan consistently failed ADP (actual deferral percentage) and ACP (actual contribution percentage) testing for salary deferrals and matching contributions. The payroll provider TPA never bothered to explain about the benefits of 401(k) safe harbor design or that if my client would make a $7,000 qualified non-elective contribution, the owner would avoid a $10,500 ADP deferral refund. Perhaps this was because the plan was small enough that the payroll provider TPA offered a “team” approach by not allotting a dedicated administrator to that Plan. Regardless, I have always find the better TPAs to go above and beyond when it comes to correcting plan design and plan data defects. They also offer a highly experienced, dedicated plan administrator to each client because the team approach allows too many balls to be dropped and the client always wants one person in charge to talk to.

I have another client who typically has a plan error every six months with their payroll provider TPA, usually dealing with eligibility. The company had changed their eligibility requirements to immediate, but the human resources director at a subsidiary still treated the eligibility requirements as three months. If the TPA is a payroll provider shouldn’t have they asked whether newly hired employees should be treated as a participants once they showed up on payroll? Payroll provider TPAs usually mention the “seamless” integration of 401(k) plan administration with payroll as a strong selling point. After discussions with many of their unhappy clients, I understand that this integration may not be as seamless as they claim. As I stated before, 401(k) plan administration has very little to do with payroll, so many errors will be able to fall through the seams.

One major component of setting up a retirement plan is to maximize retirement plan savings for the plan participants. This can be done through a proper choice of among many different plan types and plan designs. The highly regarded TPAs (along with an ERISA attorney) are the firms that can take plan participant data and determine whether a 401(k) plan with a pro rata employer contribution is the right fit or whether the employer can augment retirement savings with a safe harbor or new comparability plan design, or whether the use a of a defined benefit plan like a cash balance plan should be added as well. Payroll providers tend to only administer 401(k) plans, so they will not likely discuss the merits of new comparability, floor-offset arrangements, or cash balance plans. They also tend to only offer cookie cutter 401(k) plan design through the use of prototype plan documents that may not fit all the needs of the 401(k) sponsor if they have a provision that may be outside the box that the prototype has set. A good TPA will be able to service the plan sponsor in all their retirement plan needs. A payroll provider TPA will only be able to service the plan sponsor in all their retirement plan needs, as long as all those needs can be met in a cookie cutter 401(k).

Another problem I have with the payroll provider TPA is the fact that they play a little too close to the role of a financial advisor/co-fiduciary. Many plans of these payroll provider TPAs do not have an advisor or broker to give them a level of protection for a participated directed ERISA 404(c) 401(k) plan. So while these payroll provider TPAs offer financial experts who select their menu of mutual funds and meet their clients, they do not offer any financial advice nor do they offer any co-fiduciary role.

I had a client with one of these payroll providers with $10 million in assets. While this Plan was large enough to have its own dedicated plan administrator/contact person, they had no financial advisor. I was at a meeting with the client, their payroll provider TPA administrator, and one of the TPA’s financial “advisor.” This advisor suggested that the Plan needed to add a small cap fund to the lineup, but he then insisted that he was not offering any advice; it was just a suggestion because he could not legally give advice. I jokingly called it a wink and a promise because while the advisor was offering a suggestion, the client could not legally rely on this suggestion.

In 2010, I cannot fathom how any TPA could offer financial suggestions from one of their advisors, knowing that these suggestions cannot be legally relied on and allowing their clients to function without the use of broker or registered investment advisor. No participant directed 401(k) plan should ever operate without the use of a broker or financial advisor and no TPA should ever take the any role where any client may think their winks on selection of mutual funds is financial advice.

Having your 401(k) plan administered by a payroll provider is like having a proctological exam performed by a pediatrician. Like a pediatrician in the area of proctology, payroll providers have a limited background and capability in administering retirement plans. Like hiring a proctologist to examine that area of trouble, it’s important to hire retirement plan experts as your TPA and ERISA attorney.

Payroll providers provide a necessary function at an affordable price. I have yet to be swayed that they can do the same job as a 401(k) TPA. While they may be the largest 401(k) TPAs in terms of number of 401(k) plans serviced, this has less to do with their skill at administration and more with their standing as payroll providers. As we also know in business, bigger is not better.

The Rosenbaum Law Firm P.C.
734 Franklin Avenue, Suite 302
Garden City, New York 11530
(516) 594-1557

* Used with the permission of Ary Rosenbaum

Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.

IRS Updates on Forms, Limits and Credits

Sunday, October 31st, 2010

IRS RatesIR-2010-103, Oct. 12, 2010

WASHINGTON — The IRS today issued a draft Form W-2 for 2011, which employers use to report wages and employee tax withholding. The IRS also announced that it will defer the new requirement for employers to report the cost of coverage under an employer-sponsored group health plan, making that reporting by employers optional in 2011.

The draft Form W-2 includes the codes that employers may use to report the cost of coverage under an employer-sponsored group health plan.  The Treasury Department and the IRS have determined that this relief is necessary to provide employers the time they need to make changes to their payroll systems or procedures in preparation for compliance with the new reporting requirement. The IRS will be publishing guidance on the new requirement later this year.

Although reporting the cost of coverage will be optional with respect to 2011, the IRS continues to stress that the amounts reportable are not taxable. Included in the Affordable Care Act passed by Congress in March, the new reporting requirement is intended to be informational only, and to provide employees with greater transparency into overall health care costs.

IR-2010-108, Oct. 28, 2010

WASHINGTON — The Internal Revenue Service today announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2011. In general, these limits will either remain unchanged, or the inflation adjustments for 2011 will be small. Highlights include:

  • The elective deferral (contribution) limit for employees who participate in section 401(k), 403(b), or 457(b) plans, and the federal government’s Thrift Savings Plan remains unchanged at $16,500.
  • The catch-up contribution limit under those plans for those aged 50 and over remains unchanged at $5,500.
  • The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are active participants in  an employer-sponsored retirement plan and have modified adjusted gross incomes (AGI) between $56,000 and $66,000, unchanged from 2010. For married couples filing jointly, in which the spouse who makes the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $90,000 to $110,000, up from $89,000 to $109,000. For an IRA contributor who is not an active participant in an employer-sponsored retirement plan and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $169,000 and $179,000, up from $167,000 and $177,000.
  • The AGI phase-out range for taxpayers making contributions to a Roth IRA is $169,000 to 179,000 for married couples filing jointly, up from $167,000 to $177,000 in 2010. For singles and heads of household, the income phase-out range is $107,000 to $122,000, up from $105,000 to $120,000. For a married individual filing a separate return who is an active participant in an employer-sponsored retirement plan, the phase-out range remains $0 to $10,000.
  • The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $56,500 for married couples filing jointly, up from $55,500 in 2010; $42,375 for heads of household, up from $41,625; and $28,250 for married individuals filing separately and for singles, up from $27,750.

For More information, click here.

Changes to Flexible Spending Arrangements (FSA, FLEX 125, HSA, MSA)

Effective Jan. 1, 2011, the cost of an over-the-counter medicine or drug cannot be reimbursed from Flexible Spending Arrangements or health reimbursement arrangements unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer’s plan. A similar rule goes into effect on Jan. 1, 2011 for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs). Employers and employees should take these changes into account as they make health benefit decisions for 2011.

For more information, see news release IR-2010-95, Notice 2010-59, Revenue Ruling 2010-23 and our questions and answers.


IR-2010-103, Oct. 12, 2010

Small Business Health Care Tax Credit

This new credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. Learn more by browsing our page on the Small Business Health Care Tax Credit for Small Employers.


Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.