FAQ's

For 2009, a participant may contribute up to $16,500 in 401(k) deferrals. If the participant is over age 50, he or she may make an additional $5,500 "catch-up" contribution for a total of $22,000. The 2009 maximum combined limit for both employee and employer contributions for a participant is $49,000 ($54,500 if you are over age 50).

Proposed regulations indicate that 401(k) deferrals and participant loan payments must be deposited into the plan as soon as they can reasonably be segregated from the employer's general assets. In most cases, these amounts can be segregated a day or two after the employee's paycheck is issued. Although the regulations have not been passed, all indications are that they will be adopted in 2009.

If a plan has fewer than 100 participants at the beginning of the plan year, any amount deposited by the seventh business day after the date it was withheld or paid is considered timely.

Adding the option of Roth deferrals to a 401(k) plan allows employees to contribute post-tax deferrals to the plan. These deferrals grow tax free and are not taxed upon distribution from the plan, provided the contributions have been invested for at least five years and the participant has reached age 59½ at the time of distribution.

In general, Roth deferrals benefit younger workers who expect to be taxed in a higher bracket upon reaching retirement age. High income individuals who normally cannot contribute to a Roth IRA due to income restrictions may find the Roth 401(k) option useful in estate planning.

Once an employee has met all eligibility requirements for a plan, you should give the employee an enrollment packet. This packet should contain a deferral/investment election form, a beneficiary designation form, a complete copy of the Summary Plan Description, and fund performance information from the plan investment advisor, if applicable.

A forfeiture is the non-vested portion of a participant’s account after the participant has terminated employment. Depending on the plan specifications, these forfeitures can be added to an employer contribution or they can be used to reduce the employer contribution.

A fidelity bond insures the plan against losses due to fraud or dishonesty by persons who handle the plan funds. All qualified plans are required to have a fidelity bond of 10 percent of the plan assets, with a maximum of $500,000 of coverage. Most insurance companies will write fidelity bonds; they are typically referred to as an "ERISA Bond.” A bond can be added as an endorsement to the business policy. The endorsement must specify the plan's name.

You will be required to file a large form 5500 and undergo an audit once your retirement plan exceeds 100 participants. This number includes all eligible employees, not just those with balances in the plan.

Employers are given a transition period before the large filing is required. If the number of participants reported at the end of the prior plan year (line 7g of the Form 5500) plus those who became eligible on the first day of the current plan year is between 80 and 120, you may elect to complete the same small filing as the prior year.

If you exceed 120 participants at that time, you must switch over to a large filing and engage an accounting firm to prepare an audited financial statement of the plan.