Fall 2010 issue of Horizons

General Topics – continued

5) Impermissible in-service distributions to participants Most profit sharing and 401(k) plans contain provisions that enable participants who are still employed by their employer to obtain certain plan distributions, such as hardships, age 59 1 / 2 or other available distributions. However, if a participant receives a distribution for a reason that is not allowed by the plan document or he/ she wasn’t eligible to receive one, then it is an impermissible distribution.

7) An ineligible employer adopted a retirement plan Some employers cannot adopt certain types of retirement plans. For example, a tax-exempt entity may not be able to adopt a 403(b) plan but may have established one anyway. 8) Failure to pass the actual deferral and/ or actual contribution percentage test Plan sponsors of 401(k) plans that do not offer a safe harbor contribution or qualified automatic contribution arrangement must pass the actual deferral percentage (ADP) and/or actual contribution percentage (ACP) test each year. The ADP tests eligible employee deferral and Roth 401(k) contributions and the ACP tests eligible matching and after-tax contributions. The tests are designed to ensure that the plan is getting a fair level of participation amongst the eligible rank and file employees. If the plan fails one or both of the tests, then the plan administrator must take the corrective action within twelve months after the plan year being tested to avoid problems. 9) Failure to make the proper contribution to non-key employees when the plan is top heavy A defined contribution plan such as a 401(k) and/ or profit sharing plan is top heavy if more than 60% of all the participants’ account balances are for the benefit of the key employees (generally these are the owners and officers of the employer). If the plan is top heavy, then the employer is generally required to make a minimum contribution to all the non-key employees. 10) Failure to limit the annual contributions for a participant’s account The maximum amount of employee and employer contributions, and forfeitures that can be allocated to a participant’s account for the 2010

6) Failure to make required minimum distributions Terminated employees age 70 1 / 2

or older and 5%

or more owners age 70 1 / 2 or older are required to receive a minimum amount from a retirement plan each year (other than in 2009 under certain circumstances). Failure to receive the minimum amount can result in a 50% excise tax on the amount of the required distribution that wasn’t made to the participant.

Raise Your Expectations

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