401(k) Update
	Samet & Company PC 1330 Boylston Street Chestnut Hill, MA 02467	617.731.1222 617.734.8052 fax	www.samet-cpa.com
December 19, 2005
Review of Plan Many employers do not look at their retirement plans unless their third-party administrator (TPA) recommends changes to the plan. However, to stay abreast of ever-changing laws it is recommended that every three to five years key HR, benefits and/or finance staff meet with outside retirement professionals to conduct a comprehensive third-party review. A review of the company's retirement plan may identify opportunities for providing employees with up-to-date benefits or identify compliance problems with retirement plan laws. Based on the review, the employer may be able to a) avoid penalties for noncompliance and/or the potential loss of tax-favored treatment by discovering and correcting problems before the IRS finds them, such as missing a required amendment deadline; b) minimize costs and maximize savings by changing contribution formulas so the allocation of plan dollars has a positive impact on the company's bottom line; or c) reward employees by making changes to the vesting schedules which save the company money and reward long-term employees. There are two types of retirement plan reviews. A plan design review and a compliance review. A plan design review considers the company's particular goals and needs, employee statistics, as well as legislative changes that may affect the plan by making it more cost-effective to the company or better for employees. A compliance review reviews plan documents, amendments, annual administrative testing and governmental reporting to ensure regulatory requirements are being met. This is sometimes done after an event such as a change in third-party administrator.
In reviewing your plan, new legislative changes that should be considered include rollover of mandatory cash-out distributions and Roth contribution 401(k) plans. Automatic Cash Out Procedures The final regs regarding the automatic rollover of certain mandatory distributions from retirement plans that contain a cash out feature give an employer three choices regarding mandatory cash outs made on or after March 28, 2005. The plan must be amended to either 1) implement the safe harbor automatic rollover rules by automatically transferring these distributions to an IRA; 2) eliminate mandatory cash-outs; or 3) lower the mandatory distribution dollar amount threshold to $1,000 or less. Plans must be amended by the end of the first plan year ending on or after March 28, 2005. For calendar year plans, the deadline is December 31, 2005. If cash-outs are eliminated, employers may have to maintain accounts with small balances for long periods of time and incur the associated administrative costs of these accounts.
Roth 401(k) Effective January 1, 2006, 401(k) plans may offer plan participants the opportunity to make Roth 401(k) contributions. Roth 401(k) contributions are salary reduction contributions that are made on an after-tax basis and avoid future taxes on any income generated by the account. For more information see "The Roth 401(k) Will Be Here Soon" written by Jay A. Kessler, CPA at www. samet-cpa.com/roth401k.
401(k)/401(m) Final Regulations Effective for plan years beginning on or after January 1, 2006. Although plan amendments are not yet required, plans must operate in accordance with these new rules. a) Nondiscrimination testing rules. The regs clarify that plan sponsors generally may not use a targeted "bottom up" method for making qualified nonelective contributions and qualified matching contributions used to correct ADP/ACP testing failures. b) Hardship withdrawal rules. Plans may permit additional reasons for hardship withdrawals including burial and funeral expenses for a parent, spouse, child or dependent and repair of damage to a participant's primary residence that would qualify for a casualty deduction.
Maximum benefit and contribution limits for 2006 Elective deferrals $ 15,000 Highly compensated threshold 100,000 Annual compensation limit 220,000 Catch-up contributions 5,000
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