Frequently Asked Questions - Benetech

1 Frequently Asked Questions Edward Jones Self-Directed Safe Harbor 401(k) FAQs Below are five common mistakes to avoid in setting-up a 401(k) 3. If the plan document's service requirement for eligibility is and some Frequently Asked Questions less than 12 months/1,000 hours, make sure there are no part- time employees that may enter the plan. Five Common Mistakes to Avoid Using less than 12 months of service generally would let part-time employees into the plan, no matter how few hours they work. 1. Be sure the targeted employees for example, the owner, or 4. Enroll only employees who have met the plan document's owner's spouse meet the plan document's eligibility and entry eligibility and entry date requirements.

2 Date requirements. To determine which employees are currently eligible to participate If the plan requires 12 months of service to be eligible, be sure that in the plan, check the plan document for (i) eligibility requirements the employees who are expected to participate have a date of hire (including service, hours, etc.), (ii) plan entry dates, and (iii). that allows them to enter the plan on a plan entry date prior to (or excluded types of employees (if any, , the plan document may immediately following) the initial enrollment meeting. exclude union employees). Examples: If the plan document waives eligibility requirements on a A new company established during the current year adopts a particular date, then all employees employed on that date would be new 401(k) Plan that requires 12 months of service for plan currently eligible to participate in the plan (note: all employees eligibility.)

3 In this case, none of the employees (including the hired after this date would be subject to the plan document's normal owner) would be eligible for the plan in the first plan year. For eligibility and entry date requirements). the employees to enter the plan in the first year, the plan would need to use the waive eligibility requirements provision 5. If Roth deferrals are to be made, be sure that the 401(k). (note: waiving eligibility makes everyone employed on that document allows Roth deferrals. date a participant in the plan, regardless of hours worked, age, etc.). Roth deferrals are available on this program, but this provision must have been elected in the plan document.

4 A company has been in place for a number of years and starts a new 401(k) Plan that requires 12 months of service. The owner's spouse is hired during the first plan year so the Frequently Asked Questions spouse can participate in the plan. Unfortunately, the spouse is not eligible unless the waive eligibility requirements . provision uses a date that is after the spouse's date of hire Must a sole proprietorship have a Federal Employer Tax (note: waiving eligibility makes everyone employed on that Identification Number (EIN)? date a participant in the plan, regardless of hours worked, age, Yes. Department of Labor rules require that a company must have etc.)

5 An EIN to sponsor a qualified plan (see DOL Revenue Ruling 2000-20). A Social Security Number may not be used for a sole 2. If a new 401(k) Plan is using a one-time waiver of all proprietorship. eligibility requirements to allow the owner of a new business (or other employees) to participate immediately, be sure the The client (or the client's accountant) can easily obtain an EIN on plan sponsor understands this option lets everyone into the the IRS web site in 5-10 minutes ( ). For more plan. information on this process you may contact the IRS directly at 800-829-4933. If the proper document provision is selected, a new 401(k) can waive eligibility requirements on a particular date (note: an Are Roth deferrals available?)

6 Existing 401(k) cannot elect this waiver). Employees hired after this date would be subject to the plan's normal service Yes, in principal. However, always check the plan document to requirements. make sure the document allows Roth deferrals. If not, the plan document must be amended prior to depositing Roth deferrals. However, it is important to remember that this provision waives all service requirements on that date. Therefore, anyone employed When must the annual Safe Harbor notices be distributed to on that date would be a participant in the plan immediately, even if participants? they work less than 1,000 hours or are younger than the plan's age requirement.

7 A Safe Harbor notice must be distributed when a new Safe Harbor 401(k) is established, and annually thereafter at least 30 days (but not more than 90 days) prior to the beginning of the next plan year. 2/09. participant, allowing enough time for the participant to provide the Are matching contributions deposited each pay period, or once company with enrollment forms for the entry date (see plan a year? document for timing of enrollment form submission). It is The plan document dictates when the match should be deposited. recommended that the company collect enrollment forms from If the plan document uses a per pay period definition of each newly eligible employee even those who chose not to defer compensation for determining match contributions, then the match to document that the opportunity to defer was offered to the should be deposited each pay period based on the participant's participant.

8 Compensation for that period. What happens if an employee who was eligible to enter the plan If the plan document uses an plan year definition of compensation earlier in the year was not given the opportunity to defer salary for matching contributions, then the match should be deposited under the plan? once a year, after the close of the plan year. Benetech will calculate this amount based on the year-end census information Not giving an employee who is eligible to enter the plan an provided by the plan sponsor. If an annual match is deposited each opportunity to defer salary is a plan qualification problem that must pay period, it is likely that the actual match deposited for each be corrected.

9 The standard IRS-approved method for correcting participant will need to be adjusted based on annual compensation this problem is for the company to make a contribution for the information. Additional fees would apply for the additional work affected employee based on published IRS-issued instructions. Not associated with these adjustments. correcting this problem could result in penalty fees or other sanctions. When should profit sharing contributions be deposited? What happens if an ineligible employee is allowed to defer The allocation of profit sharing contributions (and other company salary under the plan?)

10 Contributions other than certain match contributions) is based on an annual definition of compensation. Therefore, the profit sharing This is a plan qualification problem that must be corrected. The (or other) contribution should be deposited only once a year, after company should contact Benetech to discuss correction methods the close of the plan year. Benetech will calculate this amount available. based on the year-end census information provided by the plan sponsor. Are rollovers into the 401(k) Plan from other retirement plans and traditional (pre-tax) IRAs allowed? If profit sharing (or other) contributions are deposited in participant accounts during the course of the plan year, it is likely that this Yes.