Welcome to Part 3 of our series on retirement planning for your employees. Part 1 discussed the different types of retirement plans you can offer to your employees. Part 2 discussed the different types of eligibility requirements you can have in place for your plan and when your employees can begin to participate. This month we will briefly explore loans, hardships, timeliness of employee contribution transmittals, and what your responsibilities are if you have to terminate a plan.
As an employer, you are permitted to, but not required, to offer loans to participants in your defined contribution plans. The loans must charge a reasonable rate of interest and be adequately secured. The plan must include a procedure for applying for the loans and the plan’s policy for granting them. Loan amounts are limited to the lesser of 50 percent of the employee’s account balance or $50,000 and must be repaid.
Defined contribution plans are permitted to – but not required to – provide hardship distributions. Be sure to provide employees with adequate information to determine if it does permit them and what circumstances are included as hardships. A few examples of acceptable hardship distributions are for prevention of one’s primary residence, payment for higher educational expenses, or payment of medical expenses.
If you offer a cash balance plan, employees probably will have the option of transferring at least a portion of their account balance to an individual retirement account or to a new employer’s plan, depending on one’s plan documents. If an employee leaves before retirement age and is in a defined contribution plan (such as a 401(k) plan), in most cases he or she will be able to transfer the account balance out of your plan and into one for their new employer.
As the employer, you must follow certain rules to make sure that your plan deposits the contributions that come out of your employees’ paychecks in a timely manner. You must deposit participant contributions as soon as it is reasonably possible to separate them from the company’s assets, but no later than the 15th business day of the month following the payday. For small plans (those with fewer than 100 participants), salary reduction contributions deposited with the plan no later than the 7th business day following withholding by you will be considered contributed in compliance with the law. In our experience most plans should deposit employee contributions as soon as feasibly possible and consistently. If during the year you consistently demonstrate your company can deposit employee contributions within five business days then you should hold your company to that turnaround time throughout the year. Anything later than that should really be considered late. In the Annual Report (Form 5500), the plan administrator is required to include information on whether deposits of contributions were made on a timely basis.
When a plan is terminated, the current employees must become 100 percent vested in their accrued benefits. This means that you as an employer must provide all the benefits that your employees have earned at the time of the plan termination, even benefits in which they were not vested and would have lost if they left their job at their own will. If there is a partial plan termination, (for example, if you close a particular plant or division that results in the end of employment of 20 percent or more of plan participants) then the affected employees must be immediately 100 percent vested.