The past year has brought a number of changes to the law governing qualified retirement plans and employee benefits. This article highlights the most significant changes that went into effect in 2011.
New SIMPLE Cafeteria Plan.
Starting in 2011, the new health care law allows a small employer (under 100 employees) to avoid existing cafeteria plan rules which now limit benefits for “highly compensated individuals” to 25% of all benefits flowing thru the plan. The 25% limit is removed in a SIMPLE Cafeteria Plan that provides employer contributions of either 2% of pay or matching contributions up to 6% of pay. This will help the small business owner who may have been limited by the 25% rule in past years. For that owner, the cost of 2% employer contribution can be well worth the opportunity to use the plan to pay, and save income and FICA taxes on, large uninsured medical and dependent care expenses. Please contact us if you are interested in establishing a SIMPLE Cafeteria Plan or if you wish to amend your existing cafeteria plan to qualify as a SIMPLE plan.
Medical Expense Changes.
Starting in 2011, medical plans and cafeteria plans may reimburse only for medicines and drugs that are prescribed, and also for insulin. This reverses a recent IRS ruling that had expanded covered expenses to include cold remedies and other over-the-counter medications.
Electronic Payment of Tax Withholdings on Pension Distributions.
Starting in 2011, all deposits of federal withholding taxes on pension distributions must be made electronically. The IRS is phasing out Form 8109 coupons for deposits at federal banks. Retirement plans (separate from employer-sponsors) will have to register under the Electronic Federal Tax Payment System (EFTPS) and link a bank account in the name of the plan. An exception continues for deposits totaling less than $2,500 in any year, to be paid instead with IRS Form 945 when required to be filed by the plan each January 31.
Roth 401(k) Conversions Inside a Retirement Plan.
A new tax law now allows a participant who is otherwise eligible for a distribution of his/her 401(k) account (i.e., he/she is 59½ or has terminated employment) to convert the distributable amount into a Roth 401(k) account inside the plan. This way, the participant does not have to actually take a distribution and roll it to an IRA to make the Roth conversion. The plan must be amended to allow this option. If you are interested in adding this feature to your plan, please contact us.
Limits for 2011 generally unchanged.
Since inflation is nearly zero, the various contribution and other limits will generally remain unchanged in 2011. This includes the 401(k) deferral limit of $16,500 ($22,000 for those age 50+) and the overall defined contribution plan limit of $49,000 ($54,500 for those age 50+).
Cash Balance (Defined Benefit) Plans Gain Favor.
The IRS issued regulations to further implement Congressional legislation in 2006 approving cash balance pension plans, which is a new type of defined benefit plan. These plans are uniquely suited for professionals and small business owners wanting much larger retirement plan contributions than are allowed under 401(k) plans. We have set up a number of these plans recently for clients who are contributing $150,000 per year, and more, on a tax deductible basis. If you have an interest in exploring this exciting new plan design for your profession or business, please contact us.
New Fee Disclosure Rules.
The Department of Labor issued two sets of disclosure regulations related to investment fees and administrative expenses.
The first set of regulations requires that investment advisors disclose and explain to employers and plan trustees (plan sponsors) all fees charged to the plan, directly or indirectly, separately identifying advisory fees, record keeping fees and brokerage services and to whom they are paid. The purpose is to ensure that plan sponsors have this information when selecting from among investment alternatives, and so that plan sponsors can better comply with the ERISA requirement that a plan pay no more than “reasonable” fees for these services. The regulation goes into effect in July 2011. If you are a plan sponsor, be sure to insist on this information from your investment advisors and investment managers.
The second set of regulations applies to plans that allow participants to self-direct their own investment accounts. Participants in those plans must receive disclosure of investment fees and also of record keeping, legal and administrative expenses paid by or charged to their accounts. Also, all participants must be regularly advised of the sales charges and expense ratios with respect to each investment option offered, so that they can make informed investment decisions. This disclosure responsibility will fall on the plan sponsor, although the sponsor may rely on the investment advisor to provide this information to the participants. This rule goes into effect for plan years beginning on or after November 1, 2011. This rule will increase the complexity of operating some plans. Those plan sponsors may wish to reconsider the “self-direction” option and switch to a “pooled investment” model, which is much simpler administratively, and cheaper, to operate.