Defined Benefit Plan Administration Duties

Plan Sponsor Responsibilities in the Administration of a Defined Benefit Plan

• Plan Installation
  • Provide complete and accurate data about your company (including other related companies) and your employees. This will allow your consultant to design the best plan for your circumstances while minimizing the likelihood of any unpleasant surprises down the road.
  • Adopt the plan by the end of your tax year. We will prepare the plan document and other necessary paperwork for you. The document must be signed by the employer and trustee no later than the end of the tax year.
  • Provide employees with notification of the plan provisions. A Summary Plan Description (SPD) will be included with the plan document we prepare for you. A copy of this must be provided to each eligible employee by the end of the initial tax year. New employees must receive a copy upon satisfying the plan’s eligibility requirements.
  • Set up a trust account. Most banks and brokerage firms can set up a qualified retirement plan trust for you. The process is generally similar to setting up any other investment account except that you will need to provide a copy of the signed plan document in order to prove that you have a qualified plan. We do not handle investments so you are free to choose any custodian you would like. You will need set up an account prior to making your first retirement plan contribution, which could be after the end of your tax year.
  • Have your CPA or tax advisor obtain an EIN if your business doesn’t already have one.

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• Employer Contributions to the Plan
  • Make required contributions. We will tell you if you are required to make a contribution and what the minimum amount is.
  • Deposit the contribution by the deadline. Employer contributions must be made by the due date of your tax return but no later than 8 ½ months after the end of your plan year (September 15th for calendar year plans).
  • Contribute cash only. Any in-kind contribution to a defined benefit plan is strictly prohibited.
  • Steer clear of other prohibited transactions too. In general, a prohibited transaction occurs when a disqualified person engages in certain financial dealings with the plan. A “disqualified person” can include owners, officers, highly compensated employees, relatives of these groups, and others. A prohibited transaction can occur if a disqualified person sells assets to the plan, co-owns assets with the plan, uses assets of the plan or borrows money from the plan.
  • Be prudent about how you invest plan assets. There are few investments that are expressly prohibited, but some are better suited to your retirement plan than others. Real estate, limited partnerships, and privately held stock are just a few examples of investments that are “allowable” but have potential to be problematic.

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• Government Reporting

  IAI will prepare all the government reporting filings that are required for your plan. However, you will need to sign and submit them.

  • File IRS Form 5500. Nearly all qualified plans are required to submit an IRS Form 5500 annually. The filing is due 7 months after the end of your plan year (9½ months with extension). Generally, you must submit the filing electronically. If your plan only covers owners, you are allowed to file a 5500-EZ, which can be submitted on paper.
  • File PBGC Comprehensive Premium Filing and pay the premium. Some DB plans are required to be insured by the Pension Benefit Guaranty Corporation (PBGC). Those plans must submit an annual filing and pay a premium by 9 ½ months after the beginning of each plan year.
  • File IRS Form 1096 and 1099-R to report distributions from the plan. Retirement plan distributions to participants must be reported to the IRS whether or not the distribution is taxable.

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• Recordkeeping
  • Provide accurate employee data each year. You will need to provide your consultant with employee information that includes: name, date of birth, date of hire (or re-hire) and date of termination. Each year we will need compensation as defined by the plan and hours worked for each employee. We may also need job title, relationship to owner and percentage of ownership for select employees.
  • Account for all plan assets. You will need to provide monthly statements for your plan trust account that show all activity for the year. Be sure to notify your consultant if you transferred funds to a new account during the year. Make it easy by authorizing the fund custodian(s) to send us duplicate statements automatically.

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• Ongoing Employee Communication
  • Provide each employee with a Summary Plan Description (SPD). A copy of the SPD must be provided to each eligible employee when the plan is first established. New employees must receive a copy upon satisfying the plan’s eligibility requirements. If the plan provisions are amended, you may need to provide the employees with a Summary of Material Modifications (SMM), which we will prepare for you.
  • Have each employee complete a Designation of Beneficiary form. Keep the forms with your plan records. Make sure these are periodically updated if there are any changes. The Designation of Beneficiary Form should include a Pre-Retirement Survivor Annuity Explanation.
  • Provide each employee with their individual benefit statement. We will prepare these for you annually, but they are only required to be provided every 3 years (or upon request, if sooner).
  • Provide Annual Funding Notice or Summary Annual Report. Plans covered by the PBGC must distribute an Annual Funding Notice to all participants and other plans may need to likewise distribute the Summary Annual Report. We will provide these notices to you with your 5500 filing.

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• Operational Duties
  • Ask your insurance agent about an ERISA bond, and keep the amount of coverage up-to-date. A bond must be obtained for Plan “fiduciaries”. A Plan fiduciary is any person or entity who handles the Plan’s assets, including, but not limited to, the Plan Administrator, Trustee and Employer. The minimum bond required is generally the greater of $1,000 or 10% of the assets of the Plan. Remember fidelity bonds insure the plan against loss, not the fiduciaries. Fiduciary insurance may also be obtained, but is not required.
  • If your plan has more than 100 participants, get a plan audit. Plans with over 100 participants and select other plans may require an annual independent auditor’s opinion to be included with the Form 5500 filing. Note that an audit of the plan is distinct from an audit of the business and may require a separate engagement.
  • Sign plan document updates and keep originals on file. Every six years or so, any amendments made to the plan must be incorporated into the main body of the document. We will keep you apprised of these deadlines and prepare the “restated” document for you.

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• Distribution of Benefits
  • Provide a distribution election form and notices to participants when they leave employment. Participants have options with regard to when and how to receive their plan benefit after termination of employment, retirement or death. Notify us when these events occur and we will calculate benefits and provide distribution election forms.
  • Make sure you have spousal consent. Plans with an annuity option generally need to obtain the consent of the participant’s spouse for certain distribution elections. We will include a form to obtain spousal consent with the distribution election forms.
  • Remember small benefits may need to be paid sooner. Plans often provide for the immediate distribution of small benefits upon termination of employment, and this threshold is most frequently set at $5,000. If a participant terminates with a small benefit, you must provide distribution forms, which we will prepare for you upon request.
  • Make required distributions after 72 (70 ½ if born prior to 7/1/1953). Participants over the age of 72 (70 ½ if born prior to 7/1/1953) may require annual taxable distributions from the plan. The plan might permit employees to defer these distributions until after they leave employment, but 5% owners are required to begin receiving distributions no later than the April 1 following the year in which they turn 72 (70 ½ if born prior to 7/1/1953). If there are employees over the age of 72 (70 ½ if born prior to 7/1/1953) in the plan, you should notify us immediately when they terminate employment. We will calculate the required payment amount and provide you with distribution election forms for the participant to elect how they would like to receive the distribution.
  • Submit tax withholding. Distributions to participants that are not rolled over are generally subject to federal and state tax withholding, although annuity recipients have the ability to opt out of withholding. Withholding should be submitted to the federal and state governments at the time of distribution. We can recommend a processing service to make this easy.
  • Check for special payment provisions if there is a death. The plan may provide for an immediate distribution to the beneficiary upon the death of the participant. Notify us when there is a death and we will calculate the death benefit and prepare the necessary distribution election forms.
  • Have procedures for responding to Qualified Domestic Relations Orders (QDROs). The plan may receive a court order instructing it to divert all or a portion of a participant’s benefit to an alternate payee. Most often these orders relate to divorce or child support. We will provide QDRO procedures for you to follow in the event the plan receives such an order. The order must meet strict legal requirements to permit assignment of a benefit to anyone other than the participant and therefore should be reviewed by legal counsel.

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• Compliance Testing
  • Identify Highly Compensated and Key Employees. Be sure to tell us if there have been (or better yet, if you are contemplating) any changes in ownership – either by person or by share. Relatives of owners who are employed by the sponsor may also affect compliance results.
  • Watch for changes in employee population too. The law requires the plan to cover a minimum number of employees and to benefit a sufficient percentage of non-highly compensated employees to satisfy nondiscrimination. These plan coverage rules are complex. Due to employee turnover, changes in employment classifications or work schedules, or acquisitions of related companies, even a well-designed plan may fail to satisfy the coverage rules. Furthermore, a participant’s failure to benefit for a plan year because of his termination of employment with the employer during that plan year may affect the application of the coverage rules. If any of these circumstances exist, you should consult our firm regarding the impact on the plan’s ability to satisfy the coverage requirements.

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• Participant Loans (if Applicable)
  • Make sure the plan permits participant loans. A retirement plan can allow for participant loans, if the plan document provides for this. If the plan does not have a participant loan provision, be sure to ask us to amend it before distributing any loans. When we prepare the amendment, we will also provide administrative guidelines for managing the loan program. Participant loans are limited to the lesser of 50% of the participant’s vested benefit or $50,000.
  • Get a loan application and promissory note in writing. We will supply you with the appropriate documents to use. Spousal consent may be necessary as well.
  • Make loan payments on time. The loan generally must be repaid within 5 years in level installments that are paid at least as frequently as quarterly using a reasonable rate of interest. When the participant makes a payment, either by check or through payroll withholding, those funds must be deposited to the plan’s account within a few days.

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