Frequently asked questions (FAQs) Compensation questions Q: Must the limitation year for 415 compensation be twelve months long? A: Yes, with limited exceptions. The limitation year is twelve months even if you have a new plan with an initial short plan year. An exception exists when the limitation year is amended, which creates a short limitation year. For example, if you amend your plan to change the plan and limitation year from 6/1–5/31 to 1/1–12/31, a short plan year and limitation year would exist for the period 6/1–12/31. In addition, a short limitation year would exist for the plan of a new company that did not exist before the start of the limitation year. Q: Do I need to provide Plan Compensation — Full Year, Partial Year (A) and Partial Year (B) for midyear participants if my plan recognizes compensation from the first day of the plan year? A: Yes. Plan Compensation — Full Year will be used for allocation purposes and Partial Year is used for testing purposes. If your plan is a single eligibility plan as described in “Date of Eligibility and/or ELIG (A)/ELIG (B),” then Partial Year (B) is not necessary. See “When to complete Plan Compensation — Full Year, Partial Year (A) and/or Partial Year (B).” Q: How do I report compensation if I have an initial short plan year? A: Report compensation for all participants who are or will become eligible during the initial short plan year in Plan Compensation — Full Year. In addition, report compensation for all participants who are eligible on a date other than the first day of the plan year in Partial Year (A) and, if necessary, Partial Year (B) if your plan recognizes compensation from date of eligibility rather than the first day of the plan year. Plan Compensation — Full Year should include compensation from the first day of the short plan year. 415 Compensation will include compensation for the twelve-month period ending on the last day of the limitation year specified in the adoption agreement.
42
The annual compensation limit ($255,000 for plan years beginning in 2013) will be prorated based on the number of months in the initial short plan year. Your plan’s compensation limit may be a lesser amount. Please review your plan document and amendments. Q: Does 415 compensation include or exclude deferrals? A: 415 compensation that is used for annual additions limit testing includes deferrals. However, plan compensation which is defined as 415 compensation does not have to include deferrals unless the adoption agreement or plan document specifically states that deferrals are included.
Census completion questions Q: Do I need to report everyone employed by my business? A: Yes. All employees should be reported for two reasons. All employees should be listed on the census so AUL can enroll them in our recordkeeping system. You will then receive a report notifying you of their impending eligibility dates. Also, coverage testing and Form 5500 reporting require a total employee count. Q: What information needs to be completed for employees that are not yet eligible to participate? Answer: Complete name, date of birth, date of hire, Social Security number, gender, HCE, key employee, ELIG (A), ELIG (B) (not for ExACCT users), date of termination (if applicable), termination reason (if applicable) and plan hours. Q: How do I report a rehire? A: ExACCT users need to use the Date Rehired field and the Requested DOE fields for each contribution source. Plan sponsors who are non-ExACCT census filers should cross out the date of termination and the original DOH. Indicate the rehire date in the DOH column with an “R” preceding the rehire date. In addition, a new DOE should be indicated in ELIG (A)/ ELIG (B). See Christopher Jones in the “Sample census” section and “Additional information regarding rehires.”
Census instructions
Q: If a 100% owner’s grandson or granddaughter is employed by the company of the grandparent, is the grandson or granddaughter also considered an HCE? A: No, attribution of ownership rules for HCE determination purposes only take into consideration an owner’s spouse, parents, children and grandparents, not grandchildren. Additionally, siblings and in-laws of an owner do not count as family members for attribution rules.
Related match questions Q: What is related match? A: Related match is the match associated with ineligible deferrals. Q: What are ineligible deferrals? A: Excess deferrals (deferrals over the 402(g) deferral limit that must be distributed) or excess contributions (deferrals that must be distributed due to an ADP test failure). Q: What happens to related match? A: Related match must be forfeited. Example: Plan Y provides for a matching contribution equal to 50% of deferrals with no limit on the deferrals matched. The plan fails the ADP test and Participant A receives a refund of $1,000 in excess contributions. Participant B exceeded the deferral limit and $2,000 in excess deferrals are refunded to him. Participant A’s related match is $500 (50% x $1,000 in excess contributions) and Participant B’s related match is $1,000 (50% x $2,000 in excess deferrals), which are forfeited. Q: What happens if related match is not forfeited? A: If related match is not forfeited, the effective rate of match to the affected HCEs would increase, which would discriminate against NHCEs. Example: Plan Z matches 100% of deferrals with no limit on the deferrals matched. The information for Participant C, an HCE, is as follows: Compensation
$100,000
Deferrals
$8,000
$8,000 Match The ADP test fails and Plan Z refunds $3,000 in excess contributions to Participant C. The remaining deferral amount is $5,000. Related match to forfeit is $3,000. If related match is not forfeited, HCE is receiving a match rate of 160% ($8,000/$5,000) instead of 100%.
Q: How is related match calculated if an HCE stops making deferrals during the plan year? A: We will calculate related match using the Plan Compensation — Full Year amount (or Partial Year (A) if the HCE is a mid year entrant) that is provided on your census. If an HCE stopped making deferrals during the plan year, you may wish to provide additional data that includes compensation for the period of time that the HCE was actively deferring. Please contact your plan services consultant to provide us with the additional compensation figure to be used for the related match calculation. This will allow us to calculate related match more accurately.
Catch-up questions Q: What are catch-up contributions? A: Catch-up contributions are an opportunity for eligible participants who are 50 years of age and older to make additional deferrals to their 401(k), 403(b) and governmental 457(b) plans. Q: Who is eligible to make a catch-up contribution? A: Participants who are, or will become age 50 during the calendar year are eligible to make catch-up contributions. However, at least one of four limits must be exceeded before amounts can be considered catch-up. The applicable limits are (a) the maximum dollar deferral limit; (b) the annual additions limit, which is the lesser of 100% of compensation or the annual additions dollar limit ($51,000 for 2013); (c) the plan’s deferral limit (for example, a plan may have a maximum deferral percentage limit of 15% of compensation); or (d) the ADP limit for an HCE in a particular plan year. Additionally, the plan document must state that catch-up contributions are allowed. Q: Can an individual make catch-up contributions to more than one plan? A: Yes. Catch-up contributions may be made to any plan that permits them. However, since the limit on catch-up contributions is an individual limit, the individual should track the amount of catch-up contributions made to separate plans so he or she does not exceed the catch-up limit for a given calendar year. An exception to this single catch-up limit rule exists for individuals who participate in either a 401(k) or 403(b) and a governmental 457(b) plan. A separate standard deferral limit and catch-up limit applies to deferrals made to a 43
457(b) plan. Thus, catch-up contributions to all 401(k) and 403(b) plans an individual participates in must be added together to determine if the catch-up limit is exceeded. Catch-up contributions to all governmental 457(b) plans an individual participates in must be added together to determine if the separate 457(b) catch-up limit is exceeded. Q: What is the catch-up limit? A: The catch-up limit is based on the employee’s taxable year (most often the calendar year). In 2013, the limit for 401(k), 403(b) and governmental 457(b) plans is the lesser of $5,500 or the participant’s 415 compensation reduced by all other elective deferrals to 401(k), 403(b) and 457(b) plans. The 2013 limit for SIMPLE 401(k) plans is the lesser of $2,500 or the participant’s 415 compensation reduced by all other elective deferrals. Q: Is the catch-up limit a plan limit or individual limit? A: The limit on catch-up contributions is an individual limit much like the deferral limit ($17,500 for 2013). Q: Can catch-up contributions be matched? A: For administrative ease, we strongly encourage all plan sponsors to match catch-up contributions. Additionally, catch-up contributions for 401(k) and 403(b) safe harbor plans must be taken into account when calculating any matching contribution. If your plan is not a safe harbor 401(k) or 403(b) plan and you choose not to match catch-up contributions, we recommend you contact your plan services consultant to discuss the administrative issues that may result. Please refer to your plan document to determine if catch-up contributions must be matched. If your plan is an adoption of the AUL 2008 document or the AUL 403(b) prototype plan, the catch-up provisions are included in the adoption agreement.
44
Adoption agreement section to review to determine if catch-up Adoption agreement allowed
Adoption agreement section to review to determine if catch-up is matched
AUL 2008 document 27.C.h. — 401(k) adoption agreement
27.C.h.1.-2.
AUL 403(b) prototype plan
23.(a)-(b)
21.(a)-(b)
If you sponsor an individually designed plan, an adoption of a prototype document that is not indicated above or an adoption of a volume submitter document, please review the terms of your plan document and plan amendments before allowing participants to make catch-up contributions to your plan. Q: How does a plan sponsor report catch-up contributions to AUL? A: Plan sponsors that use ExACCT may report catch-up contributions with their plan deposits as they occur. In addition, catch-up contributions should be reported on the annual census by using the Catch-Up field in ExACCT (for 403(b) plans this field is labeled “Catch-Up 50” in ExACCT). Plan sponsors who are non-ExACCT census filers must include on the census spreadsheet the catch-up amount for each eligible employee with catch-up contributions. Q: Are all excess amounts automatically recognized as catch-up contributions? A: AUL will consider all catch-up amounts reported in determining whether a participant has made catch-up contributions for the calendar year. We will review excess annual additions, excess deferrals and excess contributions resulting from year-end compliance tests and deferral limit testing. If total excess amounts are less than or equal to the catch-up limit in effect for the plan year ($5,500 for 2013) reduced by the catch-up contributions already made, then the excess amounts will be treated as catch-up contributions. Q: Can catch-up contributions be made throughout the year or only at the end of the year? A: Catch-up contributions may be made as soon as one of the four limits (as previously described) is exceeded; however, the determination of whether elective deferrals are recognized as catch-up contributions is usually made at the end of a plan year. Q: Must a plan allow for catch-up contributions? A: No. While not mandatory, it is recommended because it benefits participants who want to contribute as much as possible for their retirement. In addition, all eligible plans sponsored by a single employer (except plans subject to a collective bargaining agreement) must offer catch-up or none of the plans may offer catch-up. This is referred to as the “universal availability” requirement.
Census instructions
Q: How will catch-up contributions resulting from ADP failure be determined? A: The refund amount for HCEs who are age 50 or older will be reduced by $5,500, less the amount reported as catch-up contributions on the annual census. Not applicable to 403(b) plans. Q: How are catch-up contributions reported on an employee’s Form W-2? A: Catch-up contributions are reported with deferrals in Box 12 on the Form W-2. No separate reporting is required. Q: For 403(b) plans only: Is there another catch-up contribution available for 403(b) plan participants? A: In addition to the catch-up contributions described above, the 403(b) plan of a qualified organization may allow elective deferrals to be increased for certain participants. Generally, an employee who has completed 15 years of service with a qualified organization may be eligible for this additional 403(b) catch-up. Qualified organizations include: church, a convention of churches or association of churches, education organizations, health and welfare service agencies, home health service agencies, hospitals. The plan document must contain provisions allowing this special catch-up contribution. ExACCT will contain a field marked “Catch-up” to report these contributions. Participants eligible for both the 15-year catch-up and catch-up must make the 15-year catch-up before making age 50 related catch-up contributions. See 403(b) 15-Year Catch-Up Calculation Worksheet on eRetirement — Plan Sponsor under the 403(b) Information page.
Roth deferral questions Q: What are Roth deferrals? A: Roth deferrals are contributions to a 401(k) or 403(b) plan that are includible in gross income. Qualified distributions of earnings on Roth deferrals are tax free.
Q: Who is eligible to make Roth deferrals? A: If the plan allows for Roth deferrals, anyone eligible to make pre-tax deferrals is eligible to make Roth deferrals. Q: Must Roth deferrals be matched? A: Yes. If the plan makes a matching contribution on pre-tax deferrals, it must apply the same formula to Roth deferrals. Q: What is the limit on Roth deferrals? A: Roth deferrals and pre-tax deferrals share a combined deferral and catch-up limit. There is not a separate limit for each; therefore, the limit on pre-tax and Roth deferrals is $17,500 with a $5,500 catch-up limit (for those eligible to make the catch-up). Q: Are Roth deferrals subject to testing? A: Yes. Roth deferrals that are not catch-up contributions are part of the ADP test, are subject to the deferral limit and annual additions limit test. Roth deferrals are included in the top heavy determination. Q: If the ADP test fails, which type of deferrals are returned? A: If the ADP test fails and a participant has both pre-tax and Roth deferrals, pre-tax deferrals will be returned first to the extent necessary to correct the failure. Q: Can catch-up contributions be made as Roth deferrals? A: Yes, if the plan permits Roth deferral contributions. Q: How are Roth deferrals reported on an employee’s Form W-2? A: Box 12 of the Form W-2 should have a code of “AA” for Roth deferrals to a 401(k) plan and a code of “BB” for Roth deferrals to a 403(b) plan. The compensation reported in Box 1 should include Roth deferrals.
Q: Must a plan allow Roth deferrals? A: No. Roth deferral provisions are not mandatory.
45
