The Internal Revenue Service (IRS) has announced the Cost-of-Living Adjustments (COLA) affecting dollar limitations for retirement plans and other retirement related items for the 2014 tax year. While some of the limitations will remain unchanged, some have increased for 2014 as follows:
Social Security Taxable Wage Base
Medicare Taxable Wage Base
Compensation (Plan Limit)
Defined Benefit Limit (415)
Defined Contribution Limit (415)
401(k) and 403(b) Contribution Limit
401(k) and 403(b) Catch Up Contribution Limit (over age 50)
SIMPLE Contribution Limit
SIMPLE Catch up Contribution Limit (over age 50)
Highly Compensated Employee Definition (prior year)
Maximum Deduction (% of Compensation) P/S and SEP Plans
IRA Contribution Limit (Traditional & Roth)
IRA Catch Up Contribution Limit (Over Age 50)
Year-End Compliance Reminders
Required Annual Notices
Many defined contribution plans with certain features are required to provide annual notices to plan participants. Generally, these annual notices are in addition to any initial notices the plan administrator may be required to provide on or before an employee’s eligibility date for the plan feature. Plan administrators should ensure that the following annual notices, if applicable, are provided to plan participants on a timely basis.
- 401(k) Safe Harbor Notice: All eligible participants in a safe harbor 401(k) plan must receive an annual notice that describes the safe harbor contribution allocation formula and certain other plan features. The notice must be given by December 1 for a calendar year plan, and not fewer than 30 days or more than 90 days before the first day of the plan year for a non-calendar year plan.
- 401(k) Automatic Enrollment Notice: If the plan provides that employees will be automatically enrolled, the plan administrator must give eligible employees an annual notice that describes the circumstances in which eligible employees are automatically enrolled and pay will be automatically contributed to the plan. The notice must be given by December 1 for a calendar year plan and not fewer than 30 days before the first day of the plan year for a non-calendar year plan. Depending on the plan’s auto-enrollment features, the notice may be referred to as a QACA (Qualified Automatic Contribution Arrangement), an EACA (Eligible Automatic Contribution Arrangement) or an ACA (Automatic Contribution Arrangement) notice.
- Qualified Default Investment Alternative (QDIA) Notice: A plan that permits participants to direct the investment of their account balances may provide that if the participant does not provide an affirmative investment direction election, the portion of the account balance for which an affirmative election was not given will be invested in a qualified default investment alternative. Plan administrators must give the annual notice by December 1 for a calendar year plan and at least 30 days prior to the beginning of the plan year for a non-calendar year plan.
It should be noted that a safe harbor 401(k) plan may incorporate two or more of the above notices into a single notice.
Many defined contribution plans require participants to complete a period of service before becoming fully vested in employer matching or non-elective (profit sharing) contributions. If a participant terminates prior to completing the service requirement for full vesting, the non-vested account may be forfeited and placed into a plan forfeiture suspense account. Some plan administrators allow the plan’s forfeiture suspense account to accumulate over several years. The Internal Revenue Code does not allow this practice.
The plan’s document or adoption agreement should contain provisions detailing how and when to utilize the plan’s forfeiture suspense account and may provide several options on the use of the forfeitures. A plan’s failure to utilize forfeitures in a timely manner denies plan participants additional benefits or reduced plan expenses. Generally, a plan administrator will have the following options related to the plan’s forfeiture suspense account under the terms of the plan document:
- Forfeitures may be used for eligible plan expenses (including administration, recordkeeping and audit fees)
- Forfeitures may be added to any employer matching or non-elective (profit sharing) contributions and allocated to eligible participants in the same manner
- Forfeitures may be used to reduce any employer matching or non-elective (profit sharing) contributions
The Employee Retirement Income Security Act of 1974 (ERISA) requires all persons who handle assets of employee benefit plans to be bonded through an ERISA fidelity bond. This requirement protects plans against losses sustained due to acts of fraud or dishonesty by those persons whose positions require them to come in direct contact with or exercise discretion over plan assets.
At the beginning of each plan year, the plan administrator or other fiduciary must assure that the bond continues to satisfy the ERISA requirements. The fiduciary should make appropriate adjustments or add additional protection to make sure the bond is in compliance for the new plan year. The bond must provide coverage for persons handling plan funds in an amount no less than 10% of the amount of funds handled in the previous year. The minimum bond amount cannot be less than $1,000 and does not need to be more than $500,000 per plan (or $1 million for plans that hold employer securities). The bond does not need to state a specific dollar amount, but instead can provide that at least 10% of funds handled, per plan are covered. The fiduciary could purchase an inflation guard provision that automatically increases the amount of coverage under the bond to equal the amount required under ERISA, if not already in place.