Adventures in Retirement Plan DesignCompliance and Administration

Considerations

Presented ByKelly Marie Hurd, ERPA, CPC

Senior Retirement Plan Consultant

T H E V I E W S E X P R E SS E D BY T H E S P E A K E R S A R E T H E I R O W N A N D D O N O T N E C E SS A R I LY R E P R E S E N T T H E V I E W S O F A N Y P E R S O N,

L I V I N G O R D E A D, R E A L O R F I C T I T I O U S, M A L E O R F E M A L E , R E L I G I O U S O R AT H E I S T … Y O U G E T T H E P O I N T.

N O P E O P L E O R A N I M A L S W E R E H A R M E D I N T H E M A K I N G O F T H I S P R E S E N TAT I O N.

T H E C O N T E N T O F T H I S P R E S E N TAT I O N I S G E N E R A L I N N AT U R E A N D I S F O R I N F O R M AT I O N A L P U R P O S E S O N LY. I T S H O U L D N O T B E U S E D A S A S U B S T I T U T E F O R S P E C I F I C TA X , L E G A L A N D / O R

F I N A N C I A L A DV I C E T H AT C O N S I D E R S A L L R E L E VA N T FA C T S A N D C I R C U M S TA N C E S.

Caveats & Disclaimers

Slide | 3

Design

Document

Investments

Record-keeping

Compliance/Gov’t

Reporting

Consulting

Legal/Accountin

g

Overview

www.dwcconsultants.com/services/plancomponents.php

Slide | 4

Retirement plan goalsPlan design options

◉ Safe harbor ◉ Automatic enrollment

Compliance considerations◉ Required testing◉ Related companies

Plan corrections

Agenda

Retirement Plan Goals

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What are you trying to accomplish with the plan?◉ Provide a maximum benefit to the owner(s) of the

company◉ Maximize the contributions to the company

executives◉ Implement a plan in order to secure a government

contract◉ Provide generous benefits to all employees to attract

and retain talent

Retirement Plan Goals

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Nondiscrimination testing to ensure Highly Compensated Employee (“HCE”) benefits not disproportionate to Non-HCE (“NHCE”) benefits

Must meet one of two tests to be HCE◉ 5% owner test

◉ Compensation test

Employees not meeting one of these tests are NHCE

HCEs & Nondiscrimination

www.dwcconsultants.com/knowledge_center/Key-HCE.php

Slide | 8

If the retirement plan is not for the benefit of all employees, define the target group◉ Who do you want to benefit from the retirement

plan?◉ Can you exclude certain classifications of employees

from benefiting under the plan?Determine your maximum and minimum

funding goalsRegulations are structured with testing that

requires plans to provide a minimum benefit to qualified employees

Benefiting Employees

WorkerClassification

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Permitted based on valid job classification◉ Title or job function◉ Location or division◉ Hourly or salaried

Not permitted if indirectly based on service◉ Temporary◉ Seasonal◉ Normally scheduled to work less than…

Defining Employee Exclusions

IRS Quality Assurance Bulletin, FY-2006, No. 3

Slide | 11

TempsSeasonal employeesPer diem employeesInternsStudentsEtc.

All of these are still employees!

Other Than Full Time

“An Rose Employee By Any Other Name”, PRECISION Magazine, 2014 edition, page 5.

Plan Design

Slide | 13

Should be customized to fit the employer’s goals

Factor to consider◉ Employee turnover

◉ Consistency of cash flow

◉ Flexibility

◉ Complexity

◉ Tax ramifications

Stay tuned…

Plan Design

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Retirement plans offer a plethora of design options◉ Safe harbor designs◉ Pro-rata vs. integrated allocations◉ New comparability

Plan Design

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Annual Compensation Per Capita Pro Rata Permitted

Disparity

New Comparabilit

y

Owner #1 $255,000 $20,750 $51,000 $51,000 $51,000

Owner #2 $255,000 $20,750 $51,000 $51,000 $51,000

Manager #1

$ 80,000 $20,750 $16,000 $13,440 $ 5,200

Manager #2

$ 50,000 $20,750 $10,000 $8,400 $ 3,250

Manager #3

$ 45,000 $20,750 $9,000 $7,560 $ 2,925

Staff #1 $ 40,000 $20,750 $8,000 $6,720 $ 2,600

Staff #2 $ 30,000 $20,750 $6,000 $5,040 $ 1,950

Staff #3 $ 30,000 $20,750 $6,000 $5,040 $ 1,950

Staff #4 $ 23,000 $20,750 $4,600 $3,864 $ 1,495

Staff #5 $ 22,000 $20,750 $4,400 $3,696 $ 1,430

$830,000 $207,500 $166,000 $155,760 $122,800

61% 20.0% 61% 65% 83%

Comparison of Methods

www.dwcconsultants.com/knowledge_center/ProfitSharing.php

Slide | 16

Plan design that provides for automatic passage of ADP test

Minimum employer contribution required Participant notice required 30 – 90 days

prior to start of each plan year Two “traditional” options Two automatic enrollment options

Safe Harbor 401(k) Plans

“The Not-So-Safe-Harbor 401(k) Plan”, PRECISION Magainze, 2013 edition, page 12

Slide | 17

Matching contribution◉ 100% of the first 3% of deferrals, plus

◉ 50% of the next 2% of deferrals

Base contribution◉ 3% of compensation

Immediate vesting required

Safe Harbor 401(k) Plans - Traditional

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Deferrals◉ Minimum 3% during initial period

◉ Auto increase by 1% per year up to 6%

◉ Maximum is 10%

Matching contribution◉ 100% of the first 1% of deferrals, plus

◉ 50% of the next 5% of deferrals

Base contribution◉ 3% of compensation

Maximum vesting = 2 year cliff

Safe Harbor 401(k) Plans – Auto Enrollment

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Annual Compensatio

n

401(k) Deferrals

SH Base (3%)

New Comp (10.14%/1.38

%)

Total ER

Alloc.

Total Allocation

Owner #1 $255,000 $23,000 $7,650 $25,850 $33,500 $56,500

Owner #2 $255,000 $17,500 $7,650 $25,850 $33,500 $51,000

Manager #1

$ 80,000 $ 4,000 $2,400 $ 1,104 $ 3,504 $ 7,504

Manager #2

$ 50,000 $ 1,000 $1,500 $ 690 $ 2,190 $ 3,190

Manager #3

$ 45,000 $ 0 $1,350 $ 621 $ 1,971 $ 1,971

Staff #1 $ 40,000 $ 0 $1,200 $ 552 $ 1,752 $ 1,752

Staff #2 $ 30,000 $ 0 $ 900 $ 414 $ 1,314 $ 1,314

Staff #3 $ 30,000 $ 0 $ 900 $ 414 $ 1,314 $ 1,314

Staff #4 $ 23,000 $ 0 $ 690 $ 317 $ 1,007 $ 1,007

Staff #5 $ 22,000 $ 1,000 $ 660 $ 304 $ 964 $ 1,964

$830,000 $46,500 $24,900 $56,116 $81,016 $127,516

61% 87% 61% 92% 83% 84%

Safe Harbor & New Comparability

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Let’s review a typical California safe harbor plan.

I Love Rock N Roll, Inc.

Plan consistently fails ADP test

◉ HCE ADP = 10%◉ NHCE ADP = 4%

Is Safe Harbor 401(k) the best option?

Slide | 21

Failed ADP test◉ HCE ADP = 10%◉ NHCE ADP = 4%

Correction◉ Increase NHCEs to an average of 8%, or◉ Decrease HCEs to an average of 6%, or◉ Combination of the two, or◉ Safe harbor plan

I Love Rock N Roll, Inc.

Slide | 22

Annual Compensatio

n

401(k) Deferrals ADP SH NEC

(3%)SH Match

(Basic)Targeted

QNEC

Mick $100,000 $10,000 10.00% $3,000 $4,000 $ 0

Steven 90,000 10,000 11.11% 2,700 3,600 0

Ringo 80,000 0 0.00% 2,400 0 0

Iggy 70,000 5,000 7.14% 2,100 2,800 0

Beck 50,000 1,500 3.00% 1,500 1,500 0

Jimi 50,000 5,000 10.00% 1,500 2,000 3,125 (6.25%)

Lana 40,000 0 0.00% 1,200 0 2,500 (6.25%)

Meghan 40,000 400 1.00% 1,200 400 2,500 (6.25%)

Bono 40,000 0 0.00% 1,200 0 2,500 (6.25%)

Beyonce 20,000 350 1.75% 600 350 1,300 (6.25%)

Kanye 15,000 0 0.00% 450 0 1,875 (12.5%)

$595,000 $32,250 $17,850 $14,650 $13,800

Non-HCE Group

Slide | 23

Failed ADP test◉ HCE ADP = 10%◉ NHCE ADP = 4%

Options◉ Pro rata QNEC = $595,000 x 4% = $23,800◉ Safe Harbor NEC = $17,850◉ Safe Harbor Match = $14,650◉ Targeted QNEC = $13,800

I Love Rock N Roll, Inc.

eba.benefitnews.com/news/the-unconventional-401k-2736440-1.html (requires free registration)

Slide | 24

ABC Company – Considering Auto Enrollment◉ 8 HCEs

100% participation Average deferral of 6.53%

◉ 395 NHCEs 57% participation Average deferral of 2.52%

◉ Auto enrollment 4% of pay 0% opt-out rate

Automatic EnrollmentTesting

Slide | 25

XYZ Company – Already Has Auto Enrollment◉ 51 HCEs

94.1% participation Average deferral of 6.59%

◉ 128 NHCEs 94.5% participation Average deferral of 3.61%

◉ Auto enrollment 48 new NHCEs enrolled at 3% of pay 0% opt-out rate NHCE average deferral of 3.55%

Automatic EnrollmentTesting

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30-year old participant, earning $50,000/year with annual COLAs of 3%◉ Replacement ratio = 69%

Retirement age = 65Average annual investment return of 8%Default deferral of 3% of pay

◉ Runs out of money by age 70Escalating default deferral from 3% to 6% of

pay◉ Runs out of money by age 78

Automatic EnrollmentComfortable Retirement

www.plansponsor.com/print.aspx?id=6442513744

ComplianceConsiderations

Slide | 28

Nondiscrimination testing◉ Minimum coverage◉ Top heavy◉ ADP/ACP (we covered by loving Rock and Roll)◉ Compensation ratio◉ Other

Key employees vs. HCEs/NHCEs

Compliance Considerations

www.dwcconsultants.com/knowledge_center/NDT-Overview.php

Slide | 29

Applicable limits◉ Plan and participant level limits◉ Plan year and calendar year

Related companies◉ Controlled groups◉ Affiliated service groups

Compliance Considerations

Slide | 30

Applicable Limits

www.dwcconsultants.com/knowledge_center/contributionlimitations.php

Limit Code Section 2015 2014 2013

Compensation 401(a)(17) $265,000 $260,000 $255,000

Elective Deferrals [401(k)] 402(g)(1) $18,000 $17,500 $17,500

Catch-Up Contributions [401(k)] 414(v)(2)(B)(i)

$6,000 $5,500 $5,500

Elective Deferrals [SIMPLE] 408(p)(2)(E) $12,500 $12,000 $12,000

Catch-Up Contributions [SIMPLE]

414(v)(2)(B)(ii)

$3,000 $2,500 $2,500

Annual Additions – DC Plan 415(c)(1)(A) $53,000 $52,000 $51,000

Annual Additions – DB Plan 415(b)(1)(A) $210,000 $210,000 $205,000

HCE – Compensation Test 414(q)(1)(B) $120,000 $115,000 $115,000

Key Employee – Officer Comp 416(i)(1)(A)(i) $170,000 $170,000 $165,000

Key Employee – 1% Owner Comp

416(i)(1)(A)(iii)

$150,000 $150,000 $150,000

Social Security Wage Base N/A $118,500 $117,000 $113,700

RelatedCompanies

Slide | 32

Plan document◉ Only “lead” employer◉ Adoption by other employers

Crediting service for eligibility and vesting◉ Required for related employers◉ Optional for unrelated employers

Nondiscrimination testing◉ Aggregation generally required for related employers◉ Separate testing for unrelated employers

Application of limits◉ Annual additions limit

Implications

Slide | 33

One person or entity is deemed to own what another person or entity owns

Three different definitions◉ IRC §267(c)

Prohibited transactions◉ IRC §318

Highly compensated employees and key employees Disqualified persons in S-Corp ESOPs Affiliated service groups

◉ IRC §1563 Controlled groups

Attribution

www.dwcconsultants.com/knowledge_center/OwnerAttribution.php

Slide | 34

Parent/subsidiaryBrother/sisterCombined

Types of Controlled Groups

“Related Companies: Who Is In Control?”, PRECISION Magazine, 2013 edition, page 3

Slide | 35

One business owns at least 80% of one or more other businesses◉ For purposes of combined annual additions limit,

threshold is greater than 50%Single parent may own multiple subsidiariesGroup may include several tiers

◉ Parent owns subsidiary◉ Subsidiary owns other subsidiaries

Parent/Subsidiary Group

Slide | 36

Example◉ Company A owns the following:

100% of company B 80% of company C 50% of company D

◉ Parent/subsidiary group consists of A, B and C but not D

Example◉ Same as above and C owns 40% of D◉ A (50%) + C (40%) = 90%, so D is now part of the

controlled group

Parent/Subsidiary Group

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Five or fewer owners satisfy both of the following:◉ Common ownership of at least 80%, and◉ Identical ownership of more than 50%

Brother/Sister Group

Slide | 38

Example

Owner 3-Hour Tour

Island Resort

Identical

Gilligan 40% 30% 30%

Ginger 20% 40% 20%

Mary Anne 35% 15% 15%

Thurston 5% 0% 0%

Professor 0% 15% 0%

Common 95% 85% 65%

Brother/sister group includes 3-Hour Tour and Island Resort◉ 85% common ownership◉ 65% identical ownership

Slide | 39

A-orgB-orgManagement

Types of Affiliated Service Groups

www.dwcconsultants.com/knowledge_center/AffiliatedSvcGroup.php

Slide | 40

Consists of an A-Organization and a First Service Organization (“FSO”)◉ A-Organization

Has ownership interest in FSO, and Regularly performs services for FSO, or Regularly associated with FSO in performing services

to a third party◉ FSO

Any type of entity If corporation, must be professional services

corporation Determined based on operation, not form

A-Org

Slide | 41

Both A-Org and FSO must be service organizations◉ Capital is not a material income producing factor◉ Banks are never service organizations◉ These are always service organizations

Health Law Engineering and architecture Accounting and consulting Actuarial science and insurance Performing arts

A-Org

Slide | 42

Law firm◉ Firm is a partnership◉ Each attorney has his/her own PC◉ PCs, rather than individual attorneys, are partners

in law firm◉ A-Org affiliated service group

PCs are A-Orgs Law firm is FSO

Example

Slide | 43

Medical practice◉ Doctor owns PC◉ Doctor has ownership in imaging center◉ Doctor refers patients from PC to imaging center for

x-rays◉ A-Org affiliated service group

PC is A-Org Imaging center is FSO

Example

Slide | 44

Consists of a B-Organization and an FSO◉ FSO

Same definition as in A-Org group◉ B-Organization

Derives a significant portion of its business from FSO, and

Provides services to FSO historically performed by employees, and

Owned at least 10% by HCEs of FSO◉ Significance

Less than 5% is never significant 10% or more is always significant Everything else is facts and circumstances

B-Org

Slide | 45

Central Billing Office (“CBO”)◉ Five ENT practices are equal owners of CBO◉ Each ENT practice has two equal owners◉ CBO derives 20% of its business from each practice

Example

Slide | 46

Example

Simpson’s ENTBart (50%)

Milhouse (50%)[FSO]

Jetson’s ENTAstro (50%)Jane (50%)

[FSO]

HB ENTHanna (50%)

Barbera (50%)[FSO]

Scooby’s ENTDaphne (50%)Velma (50%)

[FSO]

Flintstone’s ENTFred (50%)

Barney (50%)[FSO]

Central BillingOffice

[B-Org]

Slide | 47

Consists of a management organization (“MO”) and recipient organization (“RO”)

MO’s principal business is to provide management functions for RO

No common ownership required

Management Groups

CorrectingPlan Errors

Slide | 49

1. Failure to timely adopt amendments required by tax law changes.◉ Full plan restatement due by April 30, 2016, maybe

earlier for safe harbor 401(k) plans. www.dwcconsultants.com/knowledge_center/

RestatePPA.php

2. Failure to follow the plan’s definition of compensation when determining benefits.

3. Failure to include eligible employees or exclude ineligible ones.

IRS Top 10 List

Slide | 50

4. Failure to follow rules related to participant loans.

5. Failure to follow rules related to in-service withdrawals.

6. Failure to satisfy rules related to required minimum distributions at age 70 ½.

7. Failure to satisfy rules related to eligibility to sponsor certain types of plans.

8. Failure to pass the ADP and/or ACP test.

IRS Top 10 List

Slide | 51

8. Failure to pass the ADP and/or ACP test.9. Failure to provide the top-heavy minimum

benefit to non-key employees.10. Failure to cap benefits at the annual

additions limit.

IRS Top 10 List

www.irs.gov/Retirement-Plans/EP-Examination-Process-Guide---Section-2---Compliance-Monitoring-Procedures---Top-Ten-Issues---Voluntary-Correction

Slide | 52

Admitting You Have A Problem IsThe First Step!

Confess your sins?Go forward and sin no more? I’m an atheist?

To Correct Or Not To Correct?

Slide | 53

Impact on participants and beneficiaries Impact on plan administrationLikelihood of discoveryStatute of limitationsPersonal liability of plan fiduciaries

To Correct Or Not To Correct?

Slide | 54

Correction Programs

“Accidents Will Happen”, PRECISION Magazine, 2014 edition, page 14

DOL (DFVC & VFC)◉ Specific errors◉ Specific methods◉ No self-correction

IRS (EPCRS)◉ Almost any error◉ Pre-approved

methods or “roll your own”

◉ Self-correction permitted sometimes

Page | 55

Questions

Kelly Marie Hurd, ERPA, CPC

Senior Retirement Plan Consultant

651.204.2600 ext. 117 www.linkedin.com/in/kellymariehurd

Kelly.Hurd@DWCConsultants.com www.DWCconsultants.com

APPENDIX

Slide | 57

Established in 1999National ERISA consulting firmLocations in multiple statesOver 700 clients nationwideConsulting & compliance services for defined

contribution and defined benefit plans are our only service lines

No E&O claims since company inception

About DWC ERISA Consultants, LLC

Slide | 58

Our Team…◉ Consultants average more than 10 years of experience◉ Partners average over 20 years of experience◉ Registered with the IRS as return preparers, subject to

strict ethical standards◉ Hold active industry leadership roles

IRS Advisory Committee on Tax Exempt & Government Entities

ASPPA Board of Directors and Executive Committee ASPPA Government Affairs Committee Co-editor-in-chief of The Journal of Pension Benefits Professor of Benefits/Compensation – Carlson School of

Management Author of the Defined Contribution Handbook

Expertise & Leadership

Slide | 59

Every member of the DWC team is encouraged to think beyond the conventional wisdom and

put themselves in their clients' shoes.

Since the IRS and Department of Labor are involved, following regulations is of critical

importance, but the strategy for doing so must be considered in the context of the day-to-day

business environment and each client’s objectives.

Custom Solutions

Slide | 60

Mandatory professional credentialing program◉ All consultants must complete the exams toward the

Enrolled Retirement Plan Agent (“ERPA”) credential within 3 years of hire. Allows consultants to represent clients before the IRS

In-house training on technical developments and process improvements

Required CPE and participation in industry conferences and events◉ Each employee has an annual budget for expenses

related to CPE.

Professional Development

Slide | 61

Compliance Advantage

Rigorous internal review standards◉ All deliverables are reviewed by a senior team member◉ Comprehensive internal controls, including electronic audit trail, to

ensure quality and accuracy Industry-leading service-delivery

◉ Generally respond to all communications within 1 business day◉ Delivery commitments based on receipt of requested information rather

than government deadlines◉ Fast turnaround times as compared to industry standards

Plan sponsor reports◉ Easy to read◉ Include action items, executive summary, and detailed sections

Compliance portal◉ Plan sponsor reports and government forms stored by type and/or year◉ Year-end plan sponsor data submission is secure and easy to complete◉ Dynamic tracking and routing of all tasks and client deliverables

Slide | 62

DWC’s service model is straight-forward. We assign a consultant, team leader and partner to each plan. DWC adheres to a strict peer-review policy, so all work is reviewed prior to delivery to our clients. Our structure provides high-touch, accurate service to our clients while maintaining cost-effective pricing.

At DWC, we dig deeper to understand each client’s unique financial and operational needs. With decades of experience, critical thinking and exceptional service, DWC combines strategic solutions with flawless execution.

Relationship-Based Service

Slide | 63

DWC does not accept revenue sharing from any third parties.

Our fee model is and has always been to charge a reasonable fee for the services we actually provide for each plan. We do not offer “all-inclusive” pricing, because such pricing models typically result in many plans subsidizing extra services that only a few plans actually require. This is a significant reason why industry surveys continually show our fees to be below the 50th percentile for the premium service-level that we provide.

We fully disclose our fees in an easy-to-understand format, and we always have, even long before “fee disclosure” became a requirement or even an industry buzzword.

Cost-Effective Pricing

Slide | 64

Client Reports: First Impression

Sales: Plan Design Projection Report◉ Customized cost-benefit analysis of several design

options◉ Delivered within 2 business days of receipt of census

Hired: Welcome Package◉ DWC team introduction◉ Roles and responsibilities (both initial and ongoing)◉ Service standards◉ Delivered within 5 business days

Slide | 65

Client Reports: Plan Document

Collaborative process◉ DWC: prepares Summary of Plan Provisions (SoPP)

comparing current provisions to proposed new document, including recommendations

◉ Client/DWC/Advisor: conference call to review SoPP, discuss and update as needed

◉ DWC: finalizes and delivers signature-ready plan document package Plan document and adopting resolution Summary Plan Description and plan FAQ QDRO policy and loan policy (as applicable) Plan Administrator’s guide and sample forms

◉ DWC: follows up to ensure timely execution of documents

Slide | 66

Client Reports: Year End Prep Report

Delivered 6 to 8 weeks prior to year-end◉ Includes required annual notices◉ Requests information needed to complete testing,

contribution calculation and government reporting, as applicable Census (several options for secure, encrypted

submission) Annual questionnaire (completed online)

◉ Client checklist as a reminder of their key tasks◉ Reminder of key compliance deadlines and our

service commitmentClient phone call to review report and process

Slide | 67

Client Reports: Annual ERISA Compliance Review

The AECR is delivered annually and includes action items, executive summary and the following items:

In the event of an IRS or DOL audit, our AECR makes the process much less stressful.

Plan eligibility review Coverage test ADP/ACP test Top heavy determination Contribution limit review Compensation ratio test

Company contribution calculation Required minimum distributions Participant loan review Proactive plan design review Related company review Form 5500 and 8955-SSA