With the start of the new year, it’s important to make sure your 401k administrator is up to speed with the new contribution limits and the requirements for participant communications, as well as being prepared to help employees complete their beneficiary forms and have a sound understanding of what to do with the account balance when a participant terminates employment.
Know the Limits for 2015:
There is good news for employees who are able to maximize their contributions to the company 401k plan. The annual limit for the 401(k) and Roth Deferral is now $18,000. Participants who are 50 and over (even if their 50th birthday is December 31st), can make use of a higher “catch-up contribution” limit which allows them to contribute an additional $6,000. The annual limit on compensation that can be used when determining how much can be contributed to an account is $265,000.
Defined Contribution Plan Communications:
Plans must provide participants with required communications. These communications include but are not limited to:
1. Fee disclosures
2. Summary annual report
3. Summary plan description
4. Qualified default investment alternative notice
5. Safe harbor notice
It is important to know which notices are required, the acceptable delivery options, and the deadline for providing them to participants. Notices should be reviewed to determine that the content is accurate. Each notice must be written in a way that plan participants will understand.
A current beneficiary designation form should be maintained for each participant in a pension plan. Plan administrators should remind participants periodically to review beneficiary designations. This will provide participants an opportunity to update beneficiary forms to reflect life changes such as birth, marriage, or divorce. If paper copies of beneficiary forms are maintained, they should be reviewed to determine that they are signed and dated by the participant. In addition, if a participant has multiple beneficiaries the percentage allocated to each should add up to 100%. For non-spouse beneficiaries, request address and social security numbers to make them easier to locate.
Participant Account Balances:
Participants that terminate employment with a vested account balance in excess of $5,000 are permitted to keep their money in the plan until they request a distribution of the balance. Terminated participants with account balances below $5,000 can be forced to take their balances out of the plan as long as they are given the appropriate notice prior to the distribution. The plan document should be reviewed to determine how these distributions under $5,000 should be processed. The advantages to processing distributions for former participants with balances under $5,000 are:
1. Reduction in the time and effort needed to locate missing participants in the future.
2. Terminated employees with an account balance are included in the plan’s number of participants used to determine if the plan needs an annual audit.
Removing these balances from the plan could possibly eliminate the cost of an annual audit.