McKay Hochman - Commentary

Eligible Employers

Employers who, for the prior calendar year, employed no more than 100 employees, each of whom earned at least $5,000. All employers eligible including units of government.

Employers who, for the prior calendar year, employed no more than 100 employees, each of whom earned at least $5,000. All employers eligible except units of government.

Corporations, rural electric cooperatives, limited liability companies, tax exempt organizations, partnerships, and sole proprietorships may sponsor a safe harbor 401(k) plan. Units of government are prohibited from adopting a 401(k) plan, unless established prior to May 6, 1986.

Same as
Safe Harbor 401(k)

Eligibility Requirements

All employees who received at least $5,000 in compensation from the employer during any 2 prior years and are reasonably expected to receive $5,000 during the current year. There are no age or service requirements

The employer can impose minimum age (no more than age 21) and service requirements (no more than 1 year of service to make deferrals).

Same as 401(k) SIMPLE

Excludable Employees

1. Employees who are part of a collective bargaining unit if retirement benefits have been the subject of good faith bargaining.

2. Nonresident aliens with no taxable income from U.S. sources.

Same as IRA SIMPLE plus any nondiscriminatory classification of employees.

Same as 401(k) SIMPLE

Exclusive Plan of Employer

The employer cannot maintain any other qualified plans to which contributions are made or benefits accrued during the same plan year.

Same as IRA SIMPLE

The employer may maintain other qualified plans. Also, the plan sponsor is permitted to include safe-harbor provisions in more than one plan.

Same as
Safe Harbor 401(k)

2007 Limit on Elective Deferrals; Catch-Up Limit

Lesser of $10,500, as indexed, or 100% of compensation for the calendar year.

Catch-Up limit of $2,500 for those are 50 or over.

Same as IRA SIMPLE

Lesser of $15,500, as indexed, or 100% of compensation for the calendar year.

Catch-Up limit of $5,000 for those are 50 or over.

Same as
Safe Harbor 401(k)

Definition of Compensation

Compensation means earnings from the employer or a related employer required to be reported on a form W-2 plus any elective deferrals of the employee. Compensation for the 2% nonelective contribution is limited to $225,000 as indexed.

Compensation can be W-2 earnings or can be defined differently in the plan document; for example as §3401(a) or as §415. Compensation is limited to $225,000 for 2007, as indexed, for all plan purposes.

Same as 401(k) SIMPLE

Compensation Cap

Compensation for the 2% nonelective contribution is limited to the §401(a)(17) compensation cap as indexed. For 2007, the limit is $225,000. There is no compensation cap on the matching contribution.

Limited to the §401(a)(17) compensation cap as indexed. For 2007, the limit is $225,000.

Same as 401(k) SIMPLE

Top Heavy

Top heavy rules are not applicable to SIMPLE plans.

If the only allocation are elective deferrals and safe harbor permitted contributions, the plan is exempt from being top heavy. Otherwise, the plan is subject to the top heavy rules.

Top heavy rules are not applicable to QACA.

Election to Defer or Change Deferral Percentage

An employee can elect to start deferring or to change his or her deferral percentage during the 60-day period before the beginning of any calendar year. The employee may elect to stop deferring at any time.

The plan document will specify when the employee can start deferring, change the deferral percentage or stop deferring.

Same as 401(k) SIMPLE.

Automatic enrollment as specified in document.
Minimally each participant to have a deferral rate of:
3%, year one
4%, year two
5%, year three
6%, year four.
Maximum deferral of 10%

NOTE: The minimal deferral rate is based on each individual employee's years of participation in the plan — and not the number of years the QACA arrangment has been in existence.

Participant Loans

Not permitted.

Permitted

Plan Year

Required to be the calendar year.

NOT required to be the calendar year.

Same as Safe Harbor

Required Contribution Formula

Employer selects one of two contribution formulas:

1. Matching Contribution

a. The employer must match participant deferrals on a dollar-for-dollar basis up to 3% of compensation.

b. Special election: The employer may elect to match deferrals dollar-for-dollar on a lower percentage of compensation (not less than 1%) for any year, upon reasonable notice to eligible employees. The election may not result in the percentage being less than 3% in more than 2 out of any 5 years. The employer must notify employees of this election within a reasonable period before the 60th day preceding the beginning of the calendar year.

OR

2. 2% Nonelective Contribution Instead of the matching contribution in (1) above, the employer may elect to make a nonelective contribution of 2% of compensation for each eligible employee for the current year. The employer must notify employees of this election within a reasonable period before the 60th day preceding the beginning of the calendar year.

3. Other Contributions None permitted, except for a rollover from a SIMPLE IRA..

Employer elects one of two contribution formulas:

1. Matching Contribution

The employer must match participant deferrals on a dollar-for-dollar basis up to 3% of compensation.

OR

2. 2% Nonelective Contribution Instead of the matching contribution in (1) above, the employer may elect to make a nonelective contribution of 2% of compensation for each eligible employee for the current year. The employer must notify employees of this election within a reasonable period before the 60th day preceding the beginning of the calendar year.

3. Other Contributions None permitted.

Employer elects one of two contribution formulas:

1. Matching Contribution

With the Basic Match formula, the employer must match deferrals of NHCEs on a dollar-for-dollar basis up to 3% of compensation and 50% on deferrals that exceed 3% but not in excess of 5% of compensation. An enhanced matching contribution may be greater than the minimums specified for the basic match. Also, the rate of match for HCEs may not exceed the rate of match for NHCEs.

OR

2. Nonelective Contribution Instead of the matching contribution in (1) above, the employer can make a nonelective contribution of 3% (or more) of compensation for each eligible employee for the current year.

Notice Requirement: Each eligible employee must be given, within a reasonable period (defined as 30 to 90 days) before any plan year, written notice of the employee’s rights and obligations under the plan.

3. Other Contributions
Permitted.

Employer elects one of two safe harbor contribution formulas:

1. Matching Contribution

Dollar-for-dollar basis up to 1% of compensation and 50% on deferrals that exceed 1% but not in excess of 6% of compensation.

OR

2. Nonelective Contribution Instead of the matching contribution in (1) above, the employer can make a nonelective contribution of 3% (or more) of compensation for each eligible employee for the current year.

Notice Requirement: Each eligible employee must be given, an automatc enrollment notice:

a. at hire,

b. when eligible to participate within a reasonable period of (defined as 30 days) before automatic deferrals start, and

c. once per plan year, within a reasonable period of (defined as 30 days) before the beginning of the plan year.

The notice is to inform the participant that he or she is permitted to opt out of deferrals or to increase or decrease the deferrals.

3. Other Contributions
Permitted.

Vesting

All contributions must be 100% vested and nonforfeitable.

Same as IRA SIMPLE

Safe harbor matching and safe harbor nonelective contributions must be 100% vested.

Other employer contributions may be subject to normal vesting schedules.

Safe harbor matching and safe harbor nonelective contributions must be 100% vested within two years.

Other employer contributions may be subject to normal vesting schedules.

Time in Which Employer Must Deposit Salary Deferrals

Deferrals must be deposited as of the earliest date that the deferrals can reasonably be segregated from the employer’s general assets. (No later than 30 days after the end of the month during which the amount was withheld.)

Deferrals must be deposited as of the earliest date that the deferrals can reasonably be segregated from the employer’s general assets. (No later than the 15 days after the end of the month during which the amount was withheld.)

NOTE: Forthcoming DOL guidance is expected to address and clarify these rules.

Same as 401(k) SIMPLE.

Limit on Deductibility of Employer Contributions

(Deferrals are excluded from the employer deduction.)

No contribution deduction limit. Contributions are deductible per 404(m).

Contributions fully deductible if they do not exceed 25% of eligible employees' compensation.

Same as 401(k) SIMPLE

Limitation on Annual Additions

Not applicable

Elective deferrals and employer contributions may not exceed the lesser of 100% of compensation or $40,000, as indexed, $45,000 for 2007.

Same as 401(k) SIMPLE

Penalty on Distributions Before Age 59½

Withdrawals before age 59½ are subject to 25% penalty during the first 2 years of participation, and 10% penalty if the withdrawal occurs after the first 2 years of participation, unless meet one of the exceptions under Code §72(t).

10% penalty for withdrawals before age 59½ , unless one of the exceptions under Code §72(t) is applicable.

Same as 401(k) SIMPLE

Rollovers

Can roll into another IRA-based SIMPLE at any time. Can roll to an IRA on a tax-free basis after a 2-year period beginning from the time an employee first participates in the SIMPLE plan. If the employee is over age 59½ or meets one of the Code §72(t) exceptions, the SIMPLE account can be rolled over into an IRA at any time.

Participant can roll into a traditional IRA, another qualified plan. a 403(b) or a 457(b) as provided in the employer's plan. Can not roll into a SIMPLE IRA.

Same as 401(k) SIMPLE

Notice/ Reporting Requirements /
Other

1. The employer must notify each employee immediately before the 60-day period preceding the start of the plan year of the employee’s right to make an election to participate in the plan or change his or her deferral amount. The notice must include a copy of the summary description at 2 below.

2. The trustee must provide a summary description to the employer each year containing the following information:

(a) the name and address of the employer and trustee,

(b) the requirements for eligibility for participation in the SIMPLE plan,

(c) the benefits provided with respect to the SIMPLE plan,

(d) the time and method of making elections with respect to the SIMPLE plan, and

(e) the procedures for, and effects of, withdrawals (including rollovers) from the plan;

3. The trustee must provide, within 30 days after the close of each calendar year, an account statement to each participant showing the account balance as of the close of the calendar year and the account activity during the calendar year;

4. The trustee must file an annual report with the IRS by January 31 following each calendar year.

The Plan Administrator must:

1. provide a Summary Plan Description to all participants on the later of 90 days after they begin to participate or 120 days after the plan is adopted,

2. file annual report (Form 5500) with the IRS within 7 months after the close of the plan year,

3. provide participants with a Summary Annual Report within 9 months after the close of the plan year,

4. provide participants who are eligible to receive payment of their benefit with a notice describing the normal form of payment and any optional forms of payment, and

5. provide notice of the special tax rules on eligible rollover distributions.

The Plan Administrator must:

1. Provide each eligible employee within a reasonable period (defined as 30 to 90 days) before the beginning of each plan year, written notice of the employee’s rights and obligations under the plan,

2. provide a Summary Plan Description to all participants on the later of 90 days after participation commences or 120 days after the plan is adopted,

3. file annual report (Form 5500) with the IRS within 7 months after the close of the plan year,

4. provide participants with a Summary Annual Report within 9 months after the close of the plan year,

5. provide participants who are eligible to receive payment of their benefit with a notice describing the normal form of payment and any optional forms of payment, and

6. provide notice of the special tax rules on eligible rollover distributions.

In addition to the automatic enrollment notice mentioned above.

The Plan Administrator must:

1. Although we do not have guidance at this time, it is most probable that a safe harbor notice will be required for the QACA as it is a safe harbor type-plan: Provide each eligible employee within a reasonable period (defined as 30 to 90 days) before the beginning of each plan year, written notice of the employee’s rights and obligations under the plan,

2. provide a Summary Plan Description to all participants on the later of 90 days after participation commences or 120 days after the plan is adopted,

3. file annual report (Form 5500) with the IRS within 7 months after the close of the plan year,

4. provide participants with a Summary Annual Report within 9 months after the close of the plan year,

5. provide participants who are eligible to receive payment of their benefit with a notice describing the normal form of payment and any optional forms of payment, and

6. provide notice of the special tax rules on eligible rollover distributions.

7. Qualified Default Investment Arrangement (QDIA) Notice will be required before any QDIA investment is made and annually within a reasonable period before the beginning of each plan year.

PPA created the QDIA concept to foster automatic enrollment plans by creating rules for a fiduciary safe harbor from investment return liability, if the QDIA rules are followed by the employer. Click here for an article on QDIA.