Exploring Employee Benefit Plans

Part 1: Eligible Compensation

Part 2: De Minimis Balances of Terminated Employees

Part 3: Maintaining Documentation

Part 4: Timely Remittance

Part 5: Long-Term Part-Time Employees

Part 6: Secure Act 2.0 Changes

Of Note:

The 401(k) 2024 IRS contribution limits for employees is $22,500, with a $7,500 catch-up contribution if over the age of 50.

Secure Act 2.0 Changes

Mark your calendars! Secure Act 2.0 amendments must be made by the last day of the plan year beginning on/after January 1, 2025, or January 1, 2027, for governmental plans.

Required Minimum Distributions

Beginning Jan 1, 2023 – the age requirement increases to 73.

Beginning Jan 1, 2023 – the age requirement increases to 75.

Additionally, the penalty decreases from 50% to 25% for failing to take the required minimum distributions, effective for taxable years beginning after December 29, 2022.

Catch-up Contributions

For years beginning after December 31, 2023: Catch-up Contributions must be made on a Roth basis for employees with compensation greater than $145,000.

For years beginning after December 31, 2024: for employees ages 60-63 the limit for catch-up contributions increases to $10,000 or 150% of the regular catch-up amounts for 2024.

For more on how KT can help your organization’s Employee Benefit Plan

April 2, 2024

Exploring Employee Benefit Plans

Part 1: Eligible Compensation

Part 2: De Minimis Balances of Terminated Employees

Part 3: Maintaining Documentation

Part 4: Timely Remittance

Part 5: Long-Term Part-Time Employees

The long-term part-time employee is a SECURE Act and SECURE 2.0 Act change which goes into effect after December 31, 2024.

Long-term, part-time employees that complete two consecutive years of service with 500+ hours worked must be offered participation into a company’s 401k Plan. In addition, Plans that have had employees work three consecutive years of 500 – 1000 hours since 2021 should also be allowed to participate in the Plan. This could mean that the part-time employee is eligible in 2024.

This change will impact Plans who have eligibility provisions requiring employees to work a certain number of hours per year to become eligible to the retirement plan. Typically, Plans set a 1000-hour requirement to exclude part-time employees from the Plan. The new requirement will particularly be of interest to those who have many part-time employees, such as in the hospitality or construction industries.

If your Plan does have an hour’s requirement and employs part-time employees who work between 500 – 1000 hours, it’s important to reach out to your Third-Party Administrator (TPA) as soon as possible and determine how your Plan will track these hours. Once employees meet the service requirement, the Plan must permit the part-time employee to participate in the Plan no later than the following January 1st or July 1st (whichever is sooner), after the employee reaches the 500-hour requirement. Minimum age and class of employee requirements are still permitted when determining eligibility.

Another option Plans should consider is a potential amendment to the Plan. If your Plan currently excludes employees working under 1000 hours, the Plan could consider amending the Plan provisions to include such employees. The amendment would help alleviate the burden of tracking hours and the risk of the Plan improperly excluding eligible participants.

March 28, 2024

Exploring Employee Benefit Plans

Part 1: Eligible Compensation

Part 2: De Minimis Balances of Terminated Employees

Part 3: Maintaining Documentation

Part 4: Timely Remittance

Common Finding

Per the IRS and DOL, retirement plan withholdings should be remitted to the Third-Party Administrator (TPA) or Custodian/Trustee as soon as “administratively feasible.” Administratively feasible is considered to be approximately the same time it takes to remit payroll taxes. This timing varies from employer by employer; however, the typical timeline is somewhere between 0 – 5 business days from the payroll pay date.

Recommendation

Schedule the day you make remittances to be the same each pay period and set a calendar reminder for the day the remittance needs to be made. For example, Company X has a bi-weekly payroll and payday is every other Friday. The following Monday, the payroll clerk has a calendar reminder to remit retirement plan withholdings. Make sure that more than one employee is trained and able to make the retirement plan remittances. Just because your payroll employee is on vacation does not mean you get a pass on the administratively feasible time limit.

If you find that you did have late remittances, you should contact your TPA representative and consider going through the DOL’s Voluntary Fiduciary Correction Program. This involves making a corrective contribution to lost earnings to the participants. Late remittances are required to be disclosed on the annual financials (if large employer) and Form 5500. The amounts must be disclosed until the lost earnings to the participants are corrected.

March 22, 2024

Exploring Employee Benefit Plans

Part 1 – Eligible Compensation

Part 2 – De Minimis Balances of Terminated Employees

Part 3: Maintaining Documentation

Common Finding

There are several documents that Plan Sponsors must retain. Examples include, but are not limited to, enrollment forms, declination forms, change in election forms, management’s approval of pay rates, new hire and birth date documentation such as I-9’s, termination paperwork, and support for hardship distributions. Plan Sponsors must maintain this documentation until the participant no longer has funds in the Plan. This means the Plan Sponsor must maintain the documentation for terminated employees who still have balances within the retirement plan.

If a plan does not offer the ability to update their deferral percentages online, paper forms should be maintained for all employees for any elections or changes they make. Declination forms should be obtained for all eligible participants, even if they elected not to contribute to the Plan. This declination form helps prove that all participants have been properly offered enrollment into the Plan.

Recommendation

Management should obtain and maintain documentation in personnel files as a record of any changes and support retirement plan transactions and processes. Documentation is vital to ensuring the Plan is operating in accordance with participant elections and that Plan documents are in compliance.

Make sure you are following up with employees that have not returned the Plan’s enrollment form. Just because they did not return the form does not necessarily constitute a declination. If participants are allowed to make changes online, it is good practice to keep loan and election change correspondence received from the Third-Party Administrator in the employees’ personnel files.

March 14, 2024

Exploring Employee Benefit Plans

Read Part 1

Part 2: De Minimis Balances of Terminated Employees

Common Finding

De Minimis distributions should occur when balances are below a certain threshold, as defined by the Plan document. Most plans have a requirement for balances less than a determined value of $1,000 or $5,000. The maximum can be increased to $7,000 during 2024 with the change in the Secure 2.0 Act.

Terminated employees with balances below these thresholds should be distributed in cash or rolled over into an individual IRA account outside of the Plan.

Recommendation

Management should implement a process to review balances of terminated employees on a regular basis, such as quarterly or bi-annually, and distribute balances that meet the Plan’s requirement. This process can be delegated to your Third-Party Administrator (TPA).

One common issue when De Minimis distributions are not occurring is due to the participant not having an updated address with the TPA. It is the responsibility of the Plan Sponsor to ensure all current and past employees have updated addresses with the TPA.

How KT Can Help with Your Employee Benefit Plan

March 7, 2024

Exploring Employee Benefit Plans

Part 1: Eligible Compensation

Common Finding

Plans have the ability to define the Plan’s eligible or ineligible compensation. It is vital that those involved in payroll are well aware of these delineations. The Company’s payroll calculations for employee retirement withholdings and employer match or profit-sharing benefit need to agree with the Plan’s definition of compensation. For example, Company A added a new compensation code for $1 shift differential for working weekends. When setting up this earning type in the payroll software, management should verify that the new pay code is or is not utilized in retirement calculations. Additionally, when processing payroll after this change is made, it is a great idea to verify it is working properly by reperforming the calculation.

Most Plan’s choose W-2 earnings or 415 wages. These choices include nearly all taxable earnings. However, some Plans have chosen to exclude certain types of earnings such as bonuses, commissions, or fringe benefits (such as employer paid health insurance, allowances, or certain types of reimbursements), just to name a few.

Recommendation

When a new compensation type is created or new payroll software is used, it is important to verify whether it is eligible compensation as defined by the Plan to ensure deferrals are calculated correctly. It may benefit your Company to verify compensation types are correctly classified as eligible or ineligible compensation as defined by the Plan in your payroll software on a regular basis, or as needed when the Plan is amended, or changes are made to your payroll software.

If you are unsure what qualifies as eligible compensation, refer to the Plan’s adoption agreement or contact your Third-Party Administrator (TPA).

February 29, 2024

KT is Here to Solve Your Retirement Plan Audit Needs

Employee benefit plan audits such as 401(k), 403(b), and ESOPs can be a daunting and stressful process, especially for those who have not been audited previously. KT is here to help alleviate that stress through our knowledgeable and experienced staff. Whether you have a benefit plan that has recently met the requirements for an audit or have been getting audited for multiple years, we can help you understand common benefit plan deficiencies, how to best resolve them, and how to reduce the chance of future deficiencies.

So why KT?

  • Firm Experience:
    • During 2023, KT conducted approximately 50 employee benefit plan audits, including 401(k), 403(b), and ESOP plan audits. The Department of Labor (DOL) released an audit quality study in 2023 which showed that, on average, 30% of audit firms had one or more major deficiencies with respect to Generally Accepted Audit Standards (GAAS). The study showed the more plan audits a firm conducted, the lower the deficiency rate. Audit firms who conducted less than 24 Plan audits had, on average, a 15% higher deficiency rate compared to firms who conducted between 25 – 99 plan audits.KT has continued to receive clean opinions on our external peer reviews. KT has not had any significant findings related to employee benefit plan audits as a result of these examinations.
    • KT is part of the AICPA Employee Benefit Plan Audit Quality Center, and we regularly attend the AICPA annual employee benefit plan national conference.
  • We have knowledgeable staff with specific training who receive continued professional education:
    • KT has dedicated employees who specialize in employee benefit plan audits and attend regular continuing professional education training.
    • Our employees stay up to date on evolving regulations and help to ensure your plan can be safeguarded from potential noncompliance. In doing so, we can avoid potential penalties and lost earnings, which may occur if errors are not corrected in a timely manner.
  • KT has substantial experience in benefit plan audits and can offer meaningful improvements to your internal processes:
    • Avoid the ‘well that’s always how we’ve done it’ and having incorrect routine transactions in place. In initial year audits, we commonly find regular plan practices which were improperly setup which result in noncompliance and potential fines, and penalties for the Plan Sponsor.
      • Some examples of common problems found during audits include provisions over participants’ eligibility, improper definition of compensation, timing of remittances, and not taking into consideration updated IRS limits. The correction of these errors resulted in additional plan funding of hundreds to thousands of dollars.
    • Inform you of any changes in DOL and IRS guidance and regulations including how this may affect your internal processes and benefit plan audit.
    • Many plan sponsors do not think about internal controls when it comes to their employee benefit plan. However, proper controls can help ensure that the plan continues to stay compliant with the plan document, IRS, and DOL regulations, and protect the plan participant’s interests. Even plans that have been around for years have opportunities for improvement and could benefit from evaluating their internal control processes and procedures.
  • Competitive pricing and flexible scheduling
    • Pricing varies depending on Plan provisions and sizes.
    • We can collaborate with you to find the optimal time to conduct our audit.

Note on 2024 Revised Audit Requirements:

The DOL and IRS require these audits to be conducted annually for those plans that have over 100 participants with account balances. (Note: this is a change in 2024. Previously the requirement was over 100 eligible participants, plus those non-eligible participants with a remaining account balance.)

KT will help ensure you have a quality, meaningful audit experience. We are here to make sure your Plan and Plan participants are in good hands.

January 22, 2024

3508EZ PPP Forgiveness Application – Reading Between the Lines

On June 16, 2020, the SBA released the new simplified 3508EZ Forgiveness Application. The EZ application is a short three pages as compared to the five-page full application. To qualify for the EZ application the employer must attest:

The Borrower did not reduce annual salaries, or hourly wages, of any employee by more than 25 percent during the Covered Period, when compared to the period between January 1, 2020 and March 31, 2020 (not including employees who earned more than $100,000 during 2019).

AND

The Borrower did not reduce the number of employees or the average paid hours of the employees between January 1, 2020 and the end of the Covered Period. The Borrower can ignore reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020.  Also, the Borrower may ignore reductions in an employee’s hours if the Borrower offered to restore employment and the employee refused.

On the surface, the EZ application looks very straight forward. It simply asks for payroll and non-payroll costs. Caution, while this seems easy enough, there are areas the Borrower needs to be aware of.  

Owner Compensation Recap (based on 24-week election):

C Corporation (C Corp) Owners – Compensation is limited to 2.5 months based on 2019 cash compensation; total wages are capped at $20,833.  Also, state and local taxes, employer contributions for health insurance, and employer contributions for retirement plans (capped at 2.5 months of 2019 amounts) are considered allowable costs.

S Corporation (S Corp) Owners – S-Corp owners are treated the same as C-Corp owners; however, employer contributions for owner health insurance are not allowable costs.

Self-Employed Schedule C (Sole Proprietor) or Schedule F (Agricultural Sole Proprietor) filers – Compensation is limited to 2.5 months of the 2019 net profit as reported on IRS Form 1040, Schedule C line 31 or Schedule F line 34. State and local tax payments, employer paid health insurance and retirement contributions are not eligible costs. Also, the business is required to submit the 2019 IRS Form 1040, Schedule C or F, if it was not submitted with the initial application.

Partnerships – Compensation is limited to 2.5 months based on 2019 net earnings from self-employment, which is calculated using the 2019 IRS Form 1065, Schedule K-1 box 14a (reduced by box 12, section 179 expense deduction, unreimbursed partnership expenses deducted on their IRS Form 1040 Schedule SE, and depletion on oil and gas properties) multiplied by 0.9235. Compensation must be paid during the coverage period. Separate payments for health insurance, retirement, or state and local taxes are not eligible for additional loan forgiveness. 2019 IRS Form 1065 K-1s are required at the time of the forgiveness application if not submitted during the initial application.

LLC Owners – LLC owners must follow the instructions that apply to how their business was organized for tax filing purposes for tax year 2019, or if a new business, the expected tax filing situation for 2020. 

Non-owner Compensation– For all non-owner employees, cash compensation is limited to either $15,385 if the 8-week coverage period is elected, or $46,154 if the 24-week coverage period is elected. There are no limits on state and local taxes, employer paid retirement plan contributions or health insurance contributions that were paid during the covered period.

Full-time Equivalent (FTE) Employee Head Counts– To qualify for the EZ application the Borrower must not have reduced the number of employees or the average paid hours of employees during the covered period as compared to the comparative period. Because of this requirement, the FTE reduction calculation becomes very important.  It is interesting that there is no specific area to include the calculated FTE employee counts on the EZ); however, there is still a requirement to calculate whether FTE employees had been reduced.  Also, the application line requesting number of employees at time of loan application/forgiveness application should be total employees, not FTE employees.

To calculate the reduction in FTE’s you may need to perform multiple calculations for the various comparative periods. The possible comparative periods include January 1, 2020 through February 28, 2020, and February 15, 2019 through June 30, 2019.   Or if you are a seasonal employer, the SBA allows the use of whichever comparative period during 2019 yields the greatest forgiveness for the Borrower. In addition, there are two different methods you can use to calculate your company’s FTE figures. One method is calculating part time employees based on their average hours worked compared to a 40-hour employee. The second method is to calculate each part-time employee equal to a ½ employee. For these reasons, the business could be required to run several FTE calculations to ensure maximum forgiveness.

Borrowers should make sure to read the instructions to either the 3508EZ or full 3508 applications before completing. Also, continue to pay attention to upcoming legislation and KT updates as we learn more regarding the final rules and regulations for the forgiveness application.

For questions or assistance with the forgiveness application, please reach out to Austin Eichacker at [email protected].

September 25, 2020

PPP Forgiveness Update

Automatic and Simplified Forgiveness Process Coming?

Currently, there are bi-partisan proposals in Congress which may allow ‘automatic’ forgiveness for small PPP borrowers ($150,000 or less) by signing a simple good-faith attestation.  There appears to be a high probability this legislation will pass.  In addition, borrowers between $150,000 and $2,000,000 will no longer be required to submit supporting documents with their application.  You would still need to retain the supporting documents for three years should you be audited. There are no proposed changes for borrowers of $2 million or more. Unfortunately, we are unlikely to know the outcome to these proposals until mid to late September because Congress is currently on recess. Congress will likely need to decide before the end of September as the 2021 fiscal budget is due September 30th.  

In addition, probably as a direct result of the unknown outcome of the above congressional proposals, the SBA has not issued their final rules and guidance to the PPP forgiveness application. Most experts agree there is still a need for additional FAQ, rules, and guidance.

When is the Forgiveness Application Due?

The SBA opened the PPP submittal portal on August 10th.  This does not mean you need to rush to get the application completed. Borrowers have up to 10 months following the last day of the covered period (up to 24 weeks after the date you received the PPP funds) to apply for forgiveness. After 10 months the loan is no longer deferred and the borrower must begin paying principal and interest. There is no rush to submit the application.

Potential questions you may have:

I have contracted with KT to perform the PPP forgiveness application and have submitted all the requested documents.   Now what?

First and foremost, thank you for allowing us to assist with this process and getting us the documentation needed to complete and/or accompany the application. At this time, we are concentrating on forgiveness applications of amounts greater than $150,000. We are still accepting and receiving documents for all PPP forgiveness applications. This way, if the proposals by Congress do not pass, we are ready to complete the applications. However, because we don’t wish to waste your money, we are not currently completing applications for loans less than $150,001 unless specifically requested.

We would like KT, or have contracted with KT, to complete the PPP application; however, we received a loan for less than $150k. Should we hold off on sending documents to KT?

While there is potential to receive automatic forgiveness with Congress’s proposal, this has not been finalized. We would prefer you to both reach out and upload the documents requested. This way we would then be ready to complete the application if necessary.

The bank has contacted our business regarding completing the new 3508EZ application. Is there anything special I should know before filling it out?

The new EZ application is a simplified version as compared to the full 3508 forgiveness application. If you are self-employed or have no employees, you will be required to submit this form. However, the complex rules, regulations, and calculations needed to complete the application are still applicable. Examples of calculations still required for the EZ application are:

  • FTE calculations during the coverage period and a comparative period.  You also need to consider potential FTE reduction exceptions for terminated employee positions for which you were unable to rehire a similarly qualified employee. Compensation limits depending on whether the 8 or 24 week period is elected
  • Owner limits and restrictions depending on how your company is legally structured
  • Payroll requirements of at least 60%

If you have any questions or are interested in KT assisting with the PPP forgiveness application please contact Austin Eichacker at [email protected].

August 26, 2020

401(k)/403(b) Audit Requirements/Quality Study Results

The Employee Retirement Income Security Act of 1974 (ERISA) sets requirements for plan sponsors of 401(k) and 403(b) plans to help protect the interests of the participants and beneficiaries of these plans.  Among many items established by ERISA, certain plans are required to have annual audits performed on the plan’s financial statements by an independent certified public accountant. IRS penalties for late filing of a properly prepared 5500 tax return are $25 per day, up to a maximum of $15,000.  In addition, Department of Labor penalties can run up to $1,100 per day, with no maximum. To avoid these penalties, you need to know if your plan requires an audit.

To begin, plan administrators should know the “80-120 participant rule”. Plans are allowed to file Form 5500’s to the IRS as small plans, and do not require an audit, as long as their plan does not exceed 120 eligible participants on the first day of the plan year. While it is unheard of, an administrator could elect to have an audit with as few as 80 participants. Once the plan has exceeded 120 eligible participants at the beginning of a plan year, the plan is considered to be a large plan and must have annual audits completed in succeeding years. If the plan would ever fall below 100 eligible participants at the beginning of a following plan year, the plan could then again file as a small plan and no audit would be required. The terminology of the 80-120 participant rule is extremely important. A business can easily have 120 or more eligible participants but have less than 120 current employees.

So what is an eligible participant? Eligibility includes current employees who are eligible for the plan (including those who are not participating!) as well as former employees who have a balance in their account. Plan eligibility requirements vary plan to plan. Eligibility often depends on age and time of service requirements. However, for some plans, eligibility includes every employee if no prerequisites were elected as part of the adoption agreement. All plan administrators should be knowledgeable of their plan’s definition of eligibility and should constantly monitor the number of “eligible participants” to ensure they do not require annual audits.

For those plans that do require annual audits, audited financial statements are required to be submitted with the Form 5500, Annual Return of Employee Benefit Plans, on the last day of the seventh month after the plan year end. There is an optional extension of 2 ½ months.

As mentioned earlier, ERISA was established to protect the interests of the plan’s participants. This is why the US Government requires the audit—even though it is often viewed as an expense burden. However, a recent study by the Employee Benefits Security Administration, along with the Department of Labor, found that nearly 4 out of 10 audits contained major deficiencies by the CPA firms conducting the audits.  The study also found there is a direct correlation between the number of audits a firm performs annually and the deficiency rate. The report found CPA firms which perform only 1-2 employee benefit plan audits annually had a 76% deficiency rate compared to only a 12% deficiency rate among the firms which specialize in employee benefit plan audits.

As plan administrators of your 401(k) and 403(b) plans, it is your responsibility to protect the financial interests of the plan’s participants. Be sure to select auditors who are qualified and understand the importance of quality audit work. At Ketel Thorstenson, LLP we partake in annual employee benefit plan trainings, are members of the Employee Benefit Quality Center, and have the experience of auditing more than 40 employee benefit plans annually.

If you are interested in knowing more about 401(k) or 403(b) plan audits, or have any questions about Ketel Thorstenson’s employee benefit plan practice, please contact my direct line at 605-716-3259.

December 4, 2019