FAQ - Retirement Services

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1. Why is nondiscrimination testing done?In order to comply with the Internal Revenue Code, various nondiscrimination tests are performed each year to ensure that a 401(k) plan does not discriminate in favor of key employees or highly compensated employees (HCEs). If a test is failed, it usually results in refunds to the HCEs or additional contributions by the company.

2. When is a plan in jeopardy of failing the Actual Deferral Percentage or Actual Contribution (ADP/ACP) test or the top-heavy test?Typically, a plan is at risk of failing if there is poor overall participation in the plan and particularly if there is poor participation among the non-highly compensated employees (NHCEs) or non-key employees.

1. Why add the Safe Harbor provision?Safe Harbor 401(k) plan provisions allow a 401(k) plan to automatically pass the ADP/ACP and top-heavy tests for the plan year, which means no refunds to highly compensated employees or required top heavy minimum contributions from the company.

2. How can a Safe Harbor provision enable a plan to satisfy ADP/ACP and top-heavy testing requirements?A Safe Harbor provision requires that the employer commit to a prescribed level of contributions to the plan, and that those contributions be 100% vested.

3. What are the prescribed contribution levels that must be met?The employer contribution can be either of the following: (1) A 3% non-elective contribution to all eligible employees, regardless of whether those employees are making contributions, or (2) A dollar-for-dollar match up to the first 3% of compensation contributed to the plan as elective deferrals, plus half of the next 2% of compensation contributed to the plan as elective deferrals.

4. What are other benefits of a Safe Harbor provision? In addition to satisfying testing, a Safe Harbor provision may benefit participants by matching contributions that are 100% vested, which may encourage participation. Also, HCEs may be able to contribute more to the plan.

1. What is automatic enrollment?If the plan sponsor selects automatic enrollment, all employees who meet the eligibility requirements set forth in the plan document will be automatically enrolled in the plan. As soon as the employee become eligible, the first contribution to the plan will be automatically deducted from the employee’s next paycheck and credited to the employee’s account under the plan.

2. How will employees be notified about their automatic enrollment in the plan? At least 30 days prior to their entry date, eligible employees will receive a notice explaining the plan’s automatic enrollment feature and how to opt out of the plan. In addition, automatically enrolled employees will receive an annual notice explaining their right to stop contributions and to change their contribution rates.

3. What if an employee did not opt out of the plan before being enrolled, but does not want to participate? The employee may still stop contributions at any time. In addition, the employee may withdraw, penalty-free, any automatic contributions that were made (including any earnings) by making an election no later than 90 days after the first automatic contribution was made.

4. How much will be automatically deferred? In its election agreement, the company may choose a default contribution rate between 1 percent and 10 percent of pay.

5. How will automatic contributions be invested? Unless the employee chooses a specific investment fund or funds, automatic contributions will be invested in a qualified default investment alternative (QDIA) as directed by the plan sponsor.

6. What is a QDIA? A QDIA is a qualified default investment alternative. Under the Pension Protection Act of 2006, if a participant has been given the opportunity to make an investment election and fails to do so, the participant’s contributions (such as 401(k), matching and profit sharing contributions) may automatically be invested in a QDIA. Generally, the plan’s fiduciaries will not be responsible for investment losses incurred as a result of investment in the QDIA.

7. What types of investment funds qualify as QDIAs?Generally, a mutual fund that is a “life-cycle” or “targeted retirement- date” fund or a “balanced” fund may qualify as a QDIA.

A “life-cycle” or “targeted-retirement-date” fund is designed to provide varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed-income exposures based on the individual participant’s age, target retirement date or life expectancy. Such a fund changes its asset allocation and associated risk level over time with the objective of becoming more conservative with increasing age.

A “balanced” fund is designed to provide long-term appreciation and capital preservation through a mix of equity and fixed-income exposures consistent with a target level of risk appropriate for participants of the plan as a whole. A new or additional investment fund product or model portfolio may be required to take into account significant changes in the demographics (e.g., age) of the plan’s participant population. A QDIA may not impose financial penalties or otherwise restrict the ability of a participant to transfer out of the QDIA. In addition, a QDIA must be diversified so as to minimize the risk of large losses.

The foregoing requirements are based on proposed regulations and may change once final regulations are issued.

8. Who chooses the QDIA? It is the responsibility of the plan sponsor to select and monitor the QDIA.

1. What is a Roth 401(k)?A Roth 401(k) refers to contributions made to your 401(k) plan on an after-tax basis - similar to Roth IRA contributions. They are subject to federal and state income tax, like regular pay, at the time they are contributed to the Plan; however, the earnings on the Roth contributions will be tax-free if you take a qualified distribution. To qualify, the funds must be distributed after five years from the first day of the year in which Roth contributions were first made to the Plan, and you must be at least age 59½ (deceased or totally disabled) when the funds are withdrawn.

2. Who is permitted to make Roth contributions? Unlike a Roth IRA, there are no income restrictions; anyone who is eligible to make regular pre-tax contributions may make Roth contributions.

3. May an individual have both a Roth IRA and participate in Roth 401(k) plan? Yes.

4. Can a participant make regular pre-tax contributions and Roth contributions in the same year? Yes. However, the maximum amount of combined pre-tax and Roth contributions to a plan cannot exceed the IRS limit on elective deferrals.