REFERENCE TABLES, and TERMINOLOGY
Table of contents and Hyperlinks:
401K COURSES, TABLES & TERMINOLOGY
ADVANCED TOPICS
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This page is updated several times a year since 401k regulations change frequently.
401K BASICS
This course will provide you with a basic understanding of 401k plans. We will cover the following topics:
Logistics - How a typical 401k operates
Sample Vesting Schedule
Who is eligible to participate in a 401k?
401K Benefits - For the Employer, and for the Employee
401k Administration Expenses: How much does it cost and who pays the bills?
Understanding 401ks can provide a key (or a benchmark) to help you understand and remember the basics
of other retirement plans, like SEPs, Defined Benefit plans, etc.
For example: You could remember the basics of a 'SIMPLE' plan by comparing it to a 401k in this way:
'A SIMPLE plan is like a 401k for small businesses, except there is no complicated plan document, no 5500 filing
requirement, the annual limits are lower, and there are only two funding options for company contributions'.
The material covered (in the 401k Basics section) is designed for a beginner or novice;
but the tables,
terms and
acronyms will be
helpful to just about everyone interested in 401ks.
A (so called) 401k plan is an employer-sponsored retirement savings plan. "401k" refers to Internal Revenue Code
Section 401(k), which makes 401k plans a deductible company expense. A 401k is a "Qualified" benefit plan, meaning
strict rules must be followed so certain expenses can be DEDUCTIBLE for the employer and EXEMPT for the
employee. We'll talk further about Deductions and Exemptions when we discuss 401k benefits.
401k is one of the few options available for people who want to save a large amount of money for retirement.
Employees can withhold up to $15,500 from their wages in 2008 via 401k: This is much higher than an IRA or a
Roth IRA. Employers can match employee deductions, or make contributions to employees' accounts. In 2008,
an employee could have as much as $46,000 contributed to his account. The $46,000 limit applies to withholdings
and contributions combined: If an employee is 50 years old or more, this limit is increased by $5,000. See the
table below for more information
about 401k limits by year.
Logistics - How a typical 401k operates:
An individual cannot open a 401k retirement account: You can only join a 401k plan if it is made available by your
employer. Ask your employer if you are not sure if your company has a 401k.
Withholdings:
Each participating employee gets a 401k account in their name for 401k withholdings. Employees are given the option of
withholding a certain amount of money from their paycheck - either a flat dollar amount or a percentage of their pay.
The amount withheld is invested into their 401k account. This account belongs to the employee. The employee can take
this money with them if/when they leave the company. It is not a company asset. It is the employee's money.
Employees are also given a choice of investments for their withholdings. Investment alternatives differ from company
to company. Available investment alternatives have usually been reviewed and approved by a Professional Investment
Advisor. Many companies provide several groups of investments based on risk tolerance and the amount of time left
till retirement.
Employer contributions to 401k accounts:
Employers can elect to make contributions on behalf of their employees. Contributions could be in the form of matching
funds, a percentage of gross pay, or they could be a discretionary amount based on the profitability of the company.
Companies must adhere to a strict set of rules regarding employer contributions. These rules are outlined in a 401k
plan document. Plan documents are a set of guidelines that the 401k must follow. All plan documents must be approved
by the IRS.
Employer contributions are generally made into a separate account in the employee's name - separate from the
employee's withholding account. Though this account is in the employee's name, the money may not belong to
the employee right away. Employer contributions often become the property of the employee slowly over time. This
process is called "Vesting". A typical Vesting Schedule might look like this:
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TABLES
Statutory Limits for Traditional 401k Plans - By Year: |
| Year | HCE Salary Limit | Total Comp. Limit | Employee W/H Limit | Catch up Cont. Limit | Annual Benefit Limit | Top Heavy Comp. Limit:
Officer / 1-4.99% owner |
| 2014 | 115,000 | 260,000 | 17,500 | 5,500 | 52,000 | 170,000 / 170,000 |
| 2013 | 115,000 | 255,000 | 17,500 | 5,500 | 51,000 | 165,000 / 165,000 |
| 2012 | 115,000 | 250,000 | 17,000 | 5,500 | 50,000 | 165,000 / 165,000 |
| 2011 | 110,000 | 245,000 | 16,500 | 5,500 | 49,000 | 160,000 / 160,000 |
| 2010 | 110,000 | 245,000 | 16,500 | 5,500 | 49,000 | 160,000 / 160,000 |
| 2009 | 110,000 | 245,000 | 16,500 | 5,500 | 49,000 | 160,000 / 160,000 |
| 2008 | 105,000 | 230,000 | 15,500 | 5,000 | 46,000 | 150,000 / 150,000 |
| 2007 | 100,000 | 225,000 | 15,500 | 5,000 | 45,000 | 145,000 / 150,000 |
| 2006 | 100,000 | 220,000 | 15,000 | 5,000 | 44,000 | 140,000 / 150,000 |
| 2005 | 95,000 | 210,000 | 14,000 | 4,000 | 42,000 | 135,000 / 150,000 |
| 2004 | 90,000 | 205,000 | 13,000 | 3,000 | 41,000 | 130,000 / 150,000 |
| 2003 | 90,000 | 200,000 | 12,000 | 2,000 | 40,000 | 130,000 / 150,000 |
| 2002 | 90,000 | 200,000 | 11,000 | 1,000 | 40,000 | 130,000 / 150,000 |
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Statutory Limits for S.I.M.PL.E. Plans - By Year:
|
| Year | Total Comp. Limit | Employee W/H Limit | Catch up Cont. Limit |
| 2014 | 260,000 | 12,000 | 2,500 |
| 2013 | 255,000 | 12,000 | 2,500 |
| 2012 | 250,000 | 11,500 | 2,500 |
| 2011 | 245,000 | 11,500 | 2,500 |
| 2010 | 245,000 | 11,500 | 2,500 |
| 2009 | 245,000 | 11,500 | 2,500 |
| 2008 | 230,000 | 10,500 | 2,500 |
| 2007 | 225,000 | 10,500 | 2,500 |
| 2006 | 220,000 | 10,000 | 2,500 |
| 2005 | 210,000 | 10,000 | 2,000 |
| 2004 | 205,000 | 9,000 | 1,500 |
| 2003 | 200,000 | 8,000 | 1,000 |
| 2002 | 200,000 | 7,000 | 500 |
|
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TERMINOLOGY
Pension Administrators have a language all thier own. If you don't know the terms that are unique to the industry,
you could have trouble understanding them.
ACP
Average Contribution Percentage: The amount contributed to the 401k plan by the employer.
The average is calculated by using the Percentage contributed for each eligible employee.
ADP
Average Deferral Percentage: The amount contributed to the 401k plan by the employees.
The average is calculated by using the Percentage of each eligible employee.
Automatic Enrollment
If you want to increase participation in your 401k, you have an option to automatically enroll employees,
rather than waiting for them to take initiative. 401ktest.com does not recommend this, but the IRS is
taking aggressive steps to encourage companies to do this.
You must give the employee at least 30 days notice that they are going to be automatically enrolled. The
notice should let them know about the provisions of the plan, the investment alternatives, and you must
inform them that they have the option to say no.
You can also pick an investment for employees who do not choose one. You should follow the following
procedures, outlined by the IRS, when choosing an investment for your employees who won't choose for
themselves:
1. The investment must be a QDIA - qualified default investment alternative:
Company securities are not banned as a QDIA, but they are discouraged and they are restricted.
The investments must be managed by a Qualified Investment Manager. If the plan sponsor is managing the
assets, she/he should use a qualified consultant.
Investment alternatives should be one of the following types (in accordance with 404c):
- 'Lifecycle' funds or 'Targeted retirement date' funds: Funds that target a retirement date and
adjust their risk accordingly.
- 'Balanced Funds': A portfolio that is diversified to mitigate the risk of large losses
and provide Long-Term appreciation and capital preservation - A mix of Equity and Fixed income
products.
- 'Managed Account': There are no default investment specifications for actively managed
accounts, but managed accounts are required to consider the investors' age and/or expected
years till retirement as a factor in determining the overall risk of the investments made.
2. The participant must have the option to direct their own investments.
3. They must receive information about the default investment(s) 30 days prior to when the first
investment is made.
4. All materials provided to the plan sponsor (regarding the investment) must also be provided to the
participants holding the default investment(s).
5. Participants must be able to roll their investments into other opportunities without penalty.
This doesn't mean that they should be put in a better position than other participants, but that
they cannot be put into a more restrictive position than others.
6. Plans must offer a "broad range" of investment alternatives - in accordance with 404c.
If your plan is restricted to only a few mutual funds, and if you initiate automatic enrollment,
you may not be able to meet the burden of providing a 'broad range' of investment alternatives.
Catch-up Contribution
If you are 50 or over, the simple contribution limit is increased by this amount.
Catch-up contributions are NOT SUBJECT TO HCE TESTING if they become the reason for a test failure.
Cross-Testing
Sometimes also called Tiering or New Comparability. This is a technique that allows contributions to be
made based on employee classifications and the future value of the contribution at retirement age.
Cross-testing may be an option for Prototype 401k plan in 2008.
Cross-testing is complicated, but it can provide a great value to privately held companies who
are careful about how they spend their benefit dollars.
Current Year Test
Compliance test allowed for testing HCE contribution limits. Current year payroll information is used to
set HCEs contribution or deferral limits.
Prior Year Test
Compliance test allowed for testing HCE contribution limits. Prior year payroll information is used to
define current year limits.
GUST
GUST is an acronym derived from the abbreviations used to describe several pieces of legislation. These
abbreviations are defined below:
- The Uruguay Round Agreements Act ("GATT")
- The Uniformed Services Employment and Reemployment Rights Act ("USERRA")
- The Small Business Jobs Protection Act ("SBJPA")
- The Taxpayer Relief Act ("TRA")
A few key points of the above (laws which were passed between 1994 and 1997) include:
A change in definition of Highly Compensated Employee; Repeal of Family Aggregation rules
used in compliance testing; Definition of compensation now includes elective deferrals
for annual addition limits; Change in how matching contributions are handled for self-employed
individuals; Change in required minimum distribution rules for employed participants;
Creation of new 401(k) discrimination testing options; Repeal of Five year averaging; And much more…
GUST II
aka Full GUST: The Internal Revenue Service opened the determination letter program
to allow sponsors of individually designed plans to obtain determination letters that
take into account all the changes in the qualification requirements made by GUST, including
those changes made by SBJPA that are first effective in plan years beginning after 12/31/98.
These determination letters are referred to as GUST II or Full GUST letters.
HCE Compensation Limit
The maximum amount of salary that can be considered when testing for Compliance with the 401k plan. If
a Highly Compensated Employee's (HCE's) total salary were considered when calculating their withholding
percentage, then plans would not fail testing as often as they do.
PDT
Permissive Disaggregation Test: If you fail an initial anti-discrimination test, a PDT is a possible testing
option. If you have a plan that allows (part-time employees under 21 who have worked with you less than a year)
to join the plan, you can test this group separately. Since this group usually doesn't join a 401k plan,
and since there are probably no HCEs in this group, the PDT can help a plan pass that might otherwise have failed.
There are other sophisticated testing options (like age banding, social security integration, and cross-testing),
which illustrates why it is important to have a good Third Party Administrator. Sometimes, you really do
get what you pay for.
Permitted Disparity
See Social Security Integration below.
Social Security Integration
Also known as Permitted Disparity - 401(l) - Employees who make more than the Social Security wage base can be given
a larger 401k contribution according to this provision. If the disparity level is uniform, and it begins at a pay
rate above the (Social Security taxable wage base), the disparity can be as much as 5.7% higher than the rate given
to those below the wage base.
I'm not making this stuff up! See IRS code 401(l) for more details about SSI
logistics and limits
Simple Contribution Limit
Ignoring all other variables, this is the maximum amount an employee can contribute to a 401k plan.
SIMPLE Retirement Plan
SIMPLE is an acronym that stands for Savings Incentive Match
PLan for Employees. The limits are about 30% lower than a 401k, the rules
are less complicated, and there is no annual 5500 filing requirement. Employers are required to make
a 3% match or a 2% Non-Elective Contribution. All deferrals and contributions are 100% vested.
Pretty simple, huh?
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ACRONYMS
Professionals in the Pension Industry have an acronym for almost everything, and more are being created
every day.
ACP
Average Contribution Percentage
ADP
Average Deferral Percentage
CEBS
Certified Employee Benefit Specialist
CMT
Chartered Market Technician
CPA
Certified Public Accountant
CVA
Certified Valuation Analyst
DB
Defined Benefit
DC
Defined Contribution
EBAR
Equivalent Benefit Accrual Rate
EGTRRA
Economic Growth and Tax Relief Reconciliation Act of 2001
ERISA
Employee Retirement Income Security Act
FICA
Federal Insurance Contributions Act
FIT
Federal Income Tax
HCE
Highly Compensated Employee
KSOP
Combined ESOP and 401(k) Plan
NHCE
Non-Highly Compensated Employee
IA
Investment Analyst
NEC
Non-Elective Contribution
QACA
Qualified Automatic Contribution Arrangement
QDIA
Qualified Default Investment Alternative
QJSA
Qualified Joint and Survivor Annuity
PDT
Permissive Disaggregation Test
QNEC
Qualified Non-Elective Contribution
QPA
Qualified Pension Analyst
SBJPA
Small Business Job Protection Act (of 1996)
SHNEC
Safe Harbor Non-Elective Contribution
SEP
Simplified Employee Pension
SIMPLE
Savings Incentive Match PLan for Employees
SPD
Summary Plan Description
TPA
Third Party Administrator
TSA
Tax Sheltered Annuity
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ADVANCED 401K TOPICS:
TESTS OFTEN INVOLVED WITH 401K PLANS
ADP / ACP Testing - The Two Primary 'Anti-discrimination' tests for Non-Safe Harbor Plans
All 401k plans are required to undergo a series of annual tests. The type of tests required for your plan
will depend partly on the benefits provided, as well as the features and options outlined in your plan document.
Some tests involve making sure simple limits are not exceeded. Other tests are designed to ensure that
(Officers, Directors, Key Employees, etc.) don't receive a majority of the benefits available in the plan.
These tests are referred to as Anti-discrimination tests.
Officers, Directors, and Key employees are referred to as HCEs. Congress defines an HCE as anyone
who makes more than $105,000 in 2008 - Please refer to the
Statutory Limits Table for more details about
annual HCE limits.
Anti-discrimination tests attempt to make 401k plans more equitable by placing restrictions on how much an HCE
can participate in the plan. These restrictions are generally based on how much non-HCEs are
participating in the plan, or on the level of 401k benefits provided to non-HCEs.
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Other Tests Required for Many 401k Plans
This course will provide a summary explanation of the following tests:
- Coverage test
- Gateway Minimum test
More detailed procedures (for the coverage and gateway minimum tests) are provided in separate courses.
And it will provide instructions on how to perform the:
- Top Heavy test
- Maximum Deferral Limit test
- Annual Limitations Test
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The Coverage Test (IRC §410(b))
The Coverage Test is another anti-discrimination test. This one is designed to ensure that a 401k plan is offered to most
of your employees, not just HCEs. This test applies to many qualified benefit plans - not just retirement plans. The
coverage test can become an issue if your company segregates employees into groups, then limits benefits to some
of those groups.
The coverage test may also become an issue if you have a temporary work-force that could be considered statutory employees.
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QUIZZES:
Earn Continuing Education Credit!
All our course material is available Free of Charge to Subscribers fo 401ktest.com!
You can can also get CPE Credit for these courses by visiting CPEcredit.com.
They sell our courses online, and they currently have the following courses available:
- 401k - A Basic Guide - 3 hours of CPE in most states
- ADP / ACP testing - 2 hours
- Other Tests Required for many 401k plans - 2 hours
This course includes detailed instructions on how to perform the:
- Top Heavy test
- Maximum Deferral Limit test
- Annual Limitations Test
We also released the following course for our friends in the non-profit community:
- 403b - A Basic Guide - 3 hours of CPE
We chose CPEcredit.com as our courseware publisher because
their site is very easy to navigate,
their courseware architecture is superior to many others, and
they were willing to offer our content at a low price.
We are very aware that this material is offered for $1,000s elseware; but we are committed to providing affordable 401k services to the small business community.
Future topics for consideration include:
Cafeteria Plan Basics
Cross-testing and EBAR techniques
We are soliciting subject matter experts for these topics. Please contact us at
info@401ktest.com if you would like to be considered. Please include a resume
and/or a sample of your work. We're looking for writers who can present complicated topics in an understandable way.
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