Chapter 2...
Understanding Your Company Plan
The Vital Statistics...
-- Eligibility Requirements
-- Contributions
-- Enrollment
-- Investments
Plan Responsibilities...
-- of the Plan Sponsor (Employer)
-- of the Trustees
-- of the Plan Administrator
-- of the Loan Administrator
Getting Started
-- Ordering account applications
Verifying Your Customized Software
Familiarizing Yourself with Your Customized Software...
-- The Company Information
-- The Employee Information
-- The Processing Functions
-- The Reports
-- The Utilities
Interfacing With Your Company Payroll Software
Now that you know how to use the Quick Guide and this Supplement, you're ready to get started with your company plan. You'll need to know a little about 401ks in general and your company plan in particular because company employees will undoubtedly ask you questions; better to familiarize yourself with the plan's components before you try to sell the plan to company employees.
If you're already familiar with 401k plans in general, this will only take a few minutes: you just look at the parameters that have been established for your plan and incorporate them into what you already know about how a 401k works.
If, however, you're unfamiliar with 401ks, you might want to reserve a couple of hours to go through the important basic concepts listed below, which are explained within your plan's Summary Plan Description, a hard copy of which is delivered to you when you sign up. Definitions of terms can be found in the Glossary.
If you need more in-depth explanations, ones that go into, for instance, the ramifications of various actions, our technical support staff can be reached at (818) 501-1597.
As a 401k plan sponsor, your company has discretion over certain variables in your company plan. In our run-it-yourself 401ks, the plan sponsor makes choices regarding…
• The plan's participant eligibility criteria
• The investments to be offered within the plan
• Whether or not to allow participants to borrow from their 401k accounts (401k loans)
• Whether or not the company will contribute to the plan participants’ accounts (matching contributions)
• The rate at which any such matching contributions will be made
• The rate at which any matching contributions will be vested to participants’ accounts.
The decisions your company made regarding the above have been hardwired into your plan administration software, and they appear, when relevant, on your plan's forms and documents. Changing any of these decisions constitutes a change to your plan in the eyes of the IRS and requires a formal revision. For this reason, your plan administration software will NOT allow you to change a matching contributions formula or vesting formula, loan provisions, or eligibility requirements. Please contact us if you want to change any of these parameters.
Also, if your company wants to change its plan investment offerings, please contact us. But remember, depending on the investment portfolio selected, such a change could prove costly to your plan's participants. Investment prospectuses spell out any fees that will be charged for early liquidation of investments.
Every person who works for your company is either eligible or ineligible to participate in your company plan based on the eligibility requirements you've chosen for that plan. Only eligible employees are relevant to 401k plans and therefore to your plan administration software.
Unless otherwise specifically arranged, your plan has the following eligibility requirements:
• Three months of full-time employment with the company
• Currently full-time employee; for purposes of 401k plans, any employee who works 1000 hours per calendar year is considered a full-time employee.
• Non-union employee
• Not a nonresident alien
Your company may have chosen to place additional restrictions on participation, such as requiring that participants be at least 21 years of age.
IMPORTANT!!!You need to maintain an employee record for every employee who currently meets your plan's eligibility requirements or who has met the requirements within the plan year, even if the person has left the company before the end of the plan year. This is very important to plan testing accuracy.
Fortunately, your plan administration software automatically calculates the eligibility of each employee for you as soon as you enter the employee's date of birth and date of hire. The software also prepares a “Current Eligibles” report listing the names of all eligible employees for you to view or print at any time.
You need to know who the newly eligible employees are so that you can contact them, explain the plan to them, and encourage them to join the plan. Identifying eligible non-401k participants is easy because your 401k software's "Employee Census Report" (see Chapter 9) lists, among other things, the participation status of all eligible employees. To print the "Employee Census Report," click on Reports in your plan administration software main menu window, “Welcome…”. Then click on Administrative Reports in the left-hand column, then on Employee Census in the right-hand column, then on Print. A pop-up window will appear, asking you to select your chosen options. Click on Eligibles and All Divisions, then on Print. The resulting screen displays the names of all eligible employees and their participation status, making it simple to identify eligible nonparticipants.
If your company is making matching contributions, you must know what the contribution formula is so that you can calculate and process the proper amount into each participant's record. You must also know the vesting period. The vesting formula is hardwired into your plan administration software, and the program automatically keeps track of each participant's vesting percentage. The software also produces an “Employee Vesting Summary” report, which lists, in addition to each participant's current vesting percentage, the amount of employer contributions to date and the amount vested.
Part and parcel of maintaining an employee record for each eligible employee, the IRS requires you to periodically notify eligible, nonparticipating employees (whether newly eligible or long-time eligible) about joining the plan. Times during which eligible employees can join the 401k plan are called open enrollment periods.
Many companies let an employee join the 401k plan the day he or she becomes eligible. Some companies, however, find so-called continuous open enrollment too cumbersome and limit open enrollment periods to the end of every quarter, the end of every other quarter, or sometimes the end of the plan year.
Other companies use what is called automatic (or passive or negative) 401k enrollment, in which every employee is automatically enrolled in the 401k plan as soon as he or she meets the plan's age and length of service participation requirements (see “Automatic Enrollment” in Chapter 3).
The enrollment period(s) for your company are listed in your SPD.
These are the investments your company has selected for the company plan. Plan participants can direct 401k contributions and any returns earned on such contributions into one or more of the plan's investments. However, unless specified otherwise in your plan, participants cannot allocate less than $50 a month to each separate investment they select.
Your company has chosen to run its own 401k plan for its employees using your plan administration software. As employer-sponsor, the company has certain responsibilities; as Plan Administrator, you have other responsibilities. The following paragraphs list these responsibilities.
Responsibilities of the Employer-Sponsor
The plan sponsor (the employer) is responsible for…
• Adopting the plan bank checking account that will be used as a transaction point, creating a permanent “paper trail” of all contributions received, purchases, distributions, rollovers, loan repayments, etc.
• Selecting the trustee of the plan and complying with Department of Labor (DOL) bonding requirements if individual trustees are selected
• Designating a Plan Administrator
• Designating a Loan Administrator, if your company offers loans and the Plan Administrator is not also the Loan Administrator
• Arranging for an annual certified audit of plan assets for purposes of reporting to the government if the plan contains 100 or more participants at the beginning of the plan year
Responsibilities of the Trustee(s)
The trustees for your plan are responsible for…
• They are the legally designated persons responsible for investing the assets of the plan trust by giving instructions for the purchase, sale, exchange, or transfer of shares.
• They also execute any necessary forms in connection with said shares or in connection with the design of the plan.
Responsibilities of the Plan Administrator
The Plan Administrator is the authorized representative of the employer and is responsible for the day-to-day management and administration of the plan in accordance with the Adoption Agreement and applicable federal laws and regulations. But don't worry: most of these rules and regulations — and their annual changes and updates — are incorporated into your customized plan administration software. Plus, your plan administration software provides a framework and structure designed to guide you through the routine tasks automatically.
The Plan Administrator is responsible for…
• Determining employee eligibility for participation (actually done by the plan administration software based on the birth and hire dates you enter for each employee)
• Promoting participation in the plan to company employees
• Responding to inquiries about the plan
• Accepting and processing new enrollments and changes to existing enrollments, including interfacing with the company's Payroll organization
• Determining matching contributions (if any) for each participant
• Receiving regularly scheduled payroll information from Payroll, including participant identification and itemized contribution amounts
• Recording contribution deposits from each participant and remitting contribution deposits to the investment account company
• Receiving asset information from the investment account company at regularly scheduled intervals and reconciling fund activity at year's end
• Determining if a rollover contribution is an eligible rollover from a qualified plan and processing eligible rollovers into the plan
• Advising participants of rollover options prior to distribution of their account balances
• Processing rollovers out of the plan
• Handling distributions of plan assets resulting from participant employment termination, including terminations because of retirement, death, or disability
• Recording loan information and repayments (if the Plan Administrator is also the Loan Administrator, see "Responsibilities of the Loan Administrator," below)
• Handling other allowable distributions of participant balances, including hardship withdrawals and voluntary and mandatory distributions
• Notifying the investment account company to make allowable disbursements to participants
• Identifying highly compensated and key employees for compliance testing and running compliance tests during the year and at year's end
• Preparing and filing with the government the necessary forms and reports
• Preparing and distributing to employees the necessary forms and reports
• Assuming responsibility for any other plan-related duties not mentioned above
Responsibilities of the Loan Administrator
The Loan Administrator is responsible for…
• Distributing loan applications upon request by participants
• Reviewing loan applications for completeness and accuracy
• Approving loan applications
• Setting the loan repayment schedule and interest rate
• Determining when a loan is in default
Because administrating some of the elements of a 401k plan can be time-consuming and therefore costly to the company, there are certain allowable charges that you can pass on to the participant. The major charges include the following:
• A reasonable charge for reproducing requested documents (other than each participant's first copy of the Summary Plan Description and any other documents required to be distributed to all participants)
• Nominal annual loan fee of approximately $25 - $30 to process a loan application and/or maintain a loan for the year.
At this point, we assume that you have already familiarized yourself with the contents of the CD-ROM, you've run the demonstration often enough that you feel comfortable with the software, you've transferred the contents of the CD-ROM onto your hard disk, and you've inserted your plan-specific information into your plan administration software through use of the license diskette. (For regular operations, you must work from your plan administration software on your hard disk. You cannot save any information on the CD-ROM.)
You should first make a backup copy of all your plan administration software files and folders. To do this, click on Utilities in your plan administration software's main menu, then click on Backup Data File and follow the onscreen instructions.
You'll also want to make sure you have mastered the contents of the Summary Plan Description. The Summary Plan Description contains most of the educational information you will need to get going.
TIP…The Prototype Plan Document that is included in “Reports” (under “Forms -- Plan Documentation") is an official document you're required to keep on file. It is the IRS approved master 401k plan for our run-it-yourself systems and does not indicate which of the available plan options your company has selected for its particular plan. It is also written to IRS standards, which means its language is cumbersome and full of references to laws and legal documents. The Summary Plan Description, on the other hand, is designed to give the layperson an understanding of the plan and its offerings without being too cluttered with legalese. It is designed with the employee-participant in mind and a copy should be given to each current and prospective employee. Employees have the right to view a copy of the Plan Document, too, at any time. Except for each employee's initial SPD copy, your company can charge a reasonable photocopying and administrative fee for document distribution (for actual costs incurred); documents should be delivered to an employee within 30 days of being requested.
You may also want to print out a copy of each of the forms and documents you'll be using in running the company plan. All the forms are in the Reports section of your plan administration software; just click on Reports in the main menu window, then, in the resulting “Reports” window, click on All Reports in the left-hand column, scroll down the right-hand column until you reach the report you want to print out, click on its name, then click on Print. (See below for how to choose between viewing a report on screen or printing out a hard copy.)
Before you hand any form or document over to an employee, you should first read through it carefully yourself and make sure you understand its content. There is a lot of useful information on these forms that you should know. Besides, you probably will have to explain them to the employee(s); it's much easier to sound knowledgeable when you really are knowledgeable!
Many investment companies require their own account applications be used in order for an account to be opened. In setting up your plan you should immediately order a supply of blank account applications.
When an account needs to be opened, your 401k plan administration software will prepare a generic account application; simply transfer the applicable information onto the investment company's official account application and forward the application to the investment company with the month's processing information (see Chapter 4 for details on processing).
Your 401k administration software provides you with a generic account application that contains the information you will need, but you will need to order your investment company's specific account applications and have them on hand
Verifying Your Customized Software
Your plan administration software is customized to match your 401k plan. In addition to basic company information (company name, address, telephone and fax numbers, and tax identification number), we've told the program whether or not to accept matching contribution entries and what vesting formula to apply to any such contributions based on the designations your company has made for its plan.
You should check the accuracy of this information IMMEDIATELY. Do not wait until it's time to use your software to process 401k contributions. As was mentioned previously, this information is hardwired into your plan administration software; to change anything you must contact us.
So let's introduce you to the software system that contains all these data.
Familiarizing Yourself with Your Customized Software
After a few seconds on the “splash” screen, your plan administration software opens on the main Welcome menu. We'll go through all the items on this main menu in order, but first, let's go to “Printer” and “Screen at the bottom of the menu.
Screen is the default choice. When it is selected, all information, including all reports, appears on your screen. The ability to “print” to the screen allows you to view the output quickly and without wasting paper, as some reports are many pages long.
At many points, you also have the choice of printing out a copy of the grid, report, or whatever is contained within the window. When this choice is available, a Print or Proof button will be an option within the menu at the bottom of the window.
When you select Print at the “Welcome…” screen level, your plan administration software automatically sends final information straight to the printer, rather than showing you an on-screen version first. You usually won't want to do this. You may, however, want to print a report after viewing it on the screen. Reports displayed on the screen can be sent to your printer by pressing “Ctrl-P.”
The first button on the “Welcome. . .” window, “Company Information,” contains the specific data about your company's plan that we referred to earlier in this chapter. Click on Company Information, then on License Information. Check the basic information, then look to the Employer Matching designation. If your company will be making matching contributions to plan participants’ accounts, Employer Matching should be labeled Matching Enabled.
If Employer Matching is enabled, you need to check on the vesting schedule(s) the program will apply to any matching contribution entries made into the program; exit License Information and click on Vesting (Employer Match) to make sure the vesting information for regular matching contributions matches what your company requested. Vesting (Qualified Non-Elective) shows vesting for qualified non-elective contributions (QNECs); such vesting is always 100% vested (see the Glossary for the definition of QNECs). Vesting (Disc. Employer PS) shows the vesting for discretionary employer contributions (profit sharing), the schedule for which your company has set.
With regard to vesting for regular matching contributions, your plan administration software adheres to basic IRS guidelines and limitations, and allows vesting to be calculated either on a calendar year or on an anniversary date of an employee. The percentage of vesting for each participant is transferred to other reports, including the participant's monthly statement and the employee's profile report.
If your company will not make matching contributions to the plan, “Employer Matching” should read “Matching Disabled” and, because you cannot vest something that doesn't exist, no vesting formula will be entered in the program if you click on Vesting.
NOTE…An employee automatically becomes fully vested when he or she turns 65, even if the full vesting period is not fulfilled. An employee is also fully vested upon death, and all employees are fully vested if the company terminates the plan.
After checking the vesting information, check the eligibility criteria by clicking on Eligibility.
The next button in the “Company Information” window is “Dealer Information.” This window summarizes information about your broker of record, if applicable (applicability depends on the type of investments being offered within your plan). The information appears when relevant on generic investment account applications prepared by the software.
The following window, the “Announcement” window, is a place where you can write in any announcement to all persons receiving a monthly account statement. There is a default announcement, but you can change it at will, and insert anything that promotes the 401k or alerts participants to upcoming 401k-related matters.
Another item you can access through the “Company Information” window is the Divisions feature. This is also a screen you can make changes on.
Your plan administration software lets you assign your plan's participants to divisions of your choice and will sort information within its myriad of 401k-related reports by those divisions. You can use the feature for analysis of the plan and its popularity division by division, for example, or to contact individuals by division. It is especially useful if you have employees with geographically dispersed business locations, receiving payroll data from different sites. (The division to which you assign participants is a sorting feature only and in no way affects their participation in the plan or how their money is handled.) The division appears on employee statements.
Click on Divisions. A list of existing divisions, if any, appears in the left-hand box. To add a division, click New (lower left of window), then type the information in the cells in the right half of the window. You can simply name a division or assign it any degree of specification, such as an identifying code and/or a person to contact for that division.
After you've typed in as much information as you want recorded for the division, click Exit to return to the “Company Information” window or click New to add another division. Add as many divisions as you like; your plan administration software places no restrictions on their number.
The last button on “Company Information” is “Investments”. Click on it to verify the list of investments your company has chosen. Each has a unique cusip and ticker number assigned so it can be tracked in the newspapers and elsewhere.
“Closed” investments are those that are closed to new (and sometimes existing) investors by the investment account company. There are various reasons for closing an investment: the portfolio may have been merged with another similar portfolio within the investment company, or the portfolio has become so popular that the company cannot invest more cash without degrading the fund's overall performance. The latter situation may be temporary or permanent. Your plan administration software will not accept new investments into a closed fund, but it will of course continue to track previous investments made to the portfolio.
“Suppressed” investments are different from closed investments. They are investments that are suppressed by you, the Plan Administrator, or your company because you have reasons for not wanting them available to the participants. You or your employer may feel that the employees are being offered too many choices, and want to suppress a few, or you believe that your employees might run into trouble with certain portfolios (such as the “junk bond” portfolios that took a big hit in the 1980s).
IMPORTANT!!!If you see any problems, contact us IMMEDIATELY. The program will not allow you to make any adjustments yourself to any of this fundamental information because, theoretically, you could make a change that would constitute a “change” to your plan in the eyes of the IRS and that could therefore jeopardize your plan's IRS-qualified status.
The second button of the “Welcome…” window is “Employee Information.” Your plan administration software uses the information you enter about each of your employees eligible to participate in the company plan to correctly process subsequent 401k contributions.
IMPORTANT!!!You must have an entry for every employee eligible to participate in the plan, regardless of whether or not the employee chooses to participate. The IRS has certain requirements about balanced participation among lower and higher-paid employees. If you don't have entries for every eligible employee, your plan administration software's top-heavy and other IRS-mandated testing functions will not be accurate.
“Employee Information” stores the following information about each employee for whom you create a record:
• name (last, middle initial, and first)
• division, if any
• social security number
• title, if any (VIP)
• current address and phone number
• date of birth
• date of hire
• date of joining the 401k plan
• date employment with the company terminated
• amount of contribution to a prior plan (during the current year only)
• year of contribution to prior plan (the current year, if such contributions have been made))
• desired current monthly contribution (dollar amount or percentage of salary)
• any notes or reminders about the employee that you wish for your own use. Throughout the Quick Guide and this Help Guide we'll suggest information that might be put here. The information in the “Notes” field is not transferred anywhere or printed on any report.
The following information also needs to be entered as appropriate for each employee (click on the associated box and a check mark will appear):
• if the employee is a U.S. citizen (US Citizen)
• if the employee is an officer of the company (Officer)
• if the employee is part time (Part Time -- less than 1,000 hours per year)
• if the employee is a plan participant (Participant)
• if the employee is a 1% or 5% owner of the company (1% Owner/5% Owner)
• if the employee is a union member
• if an enrollment application has not been received (No App)
• if the employee is a nonresident alien (N.R. Alien)
The Suppress Auto Enrollment is checked if the employer has opted not to have this feature in the plan (for more on automatic enrollment, see Chapter 3).
The last items in the right-hand column of the “Employee Information” window are whether the employee is eligible or not eligible to participate in the plan (calculated by your plan administration software) and whether or not the employee has terminated employment (if not, it's blank).
Information about an employee can be processed as follows: Click on New to add, or Delete to delete, employees from the list, Alloc. to designate their investment choices and deferral percentages, Loans to enter their 401k loans into the system, Activity to view participants’ specific account history and/or make adjustments to their accounts (rollovers, distributions, etc.), and/or Profile to print profiles of the information about them, including their contribution history. The details of these processes are covered in relevant later chapters of this Help Guide.
IMPORTANT!!!Deleting an employee is (or should be) a rarity. It deletes all records for that employee, which is usually not desirable.
Clicking on Processing (the third button of the “Welcome . . .” window) offers six options:
• Process Monthly Contributions
• Reprocess Monthly Contributions
• Edit Posting Period
• Update Monthly Salaries
• Update Year-to-Date Salaries
• Batch Processing
“Process Monthly Contributions” is used to process new monthly contributions; “Reprocess Monthly Salaries” to review or reprocess contributions for a prior month; “Edit Posting Period” to change the month transactions were posted to investment accounts; “Update Monthly Salaries” to update employees’ earnings for a specific prior month; and “Update Year-to-Date Salaries” to make adjustments to salaries at the end of the year to ensure that the salary data are correct for end-of-year compliance testing. These activities are described in detail in Chapters 4 and 8.
Batch Processing is used to work on a group of the same type of adjustments, such as trust-to-trust transfers into the plan (typically when one employer absorbs a group of employees and their 401k savings from another company). It lets you make entries for multiple employees, then process them all together (whereas if you go through the “Employee Information” window you have to do each employee separately, processing each before moving on to the next).
“Reports,” the fourth button of “Welcome…” window, is used to access the myriad of reports that your plan administration software compiles from posting and cross-referencing all the entries you put in each month. Chapter 9 describes these reports.
Your plan administration software system also contains a number of forms and documents that are not reports per se, but that are critical to administrating your 401k plan and are included under “Reports”; some of these are customized to your company's plan and others need no customization.
Major forms you will be using include the following:
• The Enrollment Pac is used for initial enrollment and investment selection, or for changes in any of the enrollment designations: change of personal information (name, address, etc.) change in marital status, change of beneficiary or change in investment selection (whether it is a change in investments or just a change in the percentages of deferrals going to the same set of investments),
• The Loan Pac is used when a participant wants to take out a loan against his or her plan balance.
• The Hardship Withdrawal Pac is used when a participant wants to apply for a hardship withdrawal of funds in his or her account.
• The Distribution Pac is used when the participant leaves the 401k plan, whether at retirement, termination of employment, or for another reason.
The forms associated with each chapter are listed at the top of each chapter's page. How they are used is described in the chapter.
“Utilities” has six options:
• Click on Repair & Compact to clean up your program; it should be done weekly if the volume of activity is large, monthly if the volume is low.
• When you click on Backup Data File you will first be asked if you want to repair and compact the database; it's a good idea to say yes. Then you will be asked to type in the location to which you wish to back up the data.
• Selecting “Zip Data File to Diskette(s) compresses your plan administration software data file to floppy diskettes.
• Selecting “Unzip Data File from Diskette(s)” uncompresses your plan administration software data file from floppy diskettes.
• “Change Passcode:” Select this option to change your system password. If you set a password, any one wishing to use your plan administration software system will be required to enter the password upon first launching the software. Click on Change Passcode. Your plan administration software comes without a default password. To enter yours if you want it, type whatever alphanumeric password you want in the middle cell, retyping it in the bottom cell as confirmation. Click OK to set the new code into the program and return to the “Utilities” window.
Interfacing With Your Company Payroll Software
Initially, and each month thereafter, you will need certain data from your payroll organization. (Chapters 3 and 4 list the needed data.) You can enter these data into your plan administration software either manually or automatically. An interface that links your company's automated payroll system with your plan administration software so that you can automatically enter the required data is not a standard feature of our system; however, our technical engineering staff will build such an interface into your system should your company desire it. Please contact us for details or a price quote.
