The Frugal Fiduciary Small Business 401(k) Blog
Get the latest industry news, deadlines and tips you need to know to help tackle your fiduciary responsibility needs.
As a business owner, you must operate your 401(k) plan according to the terms of a written plan document. Most plans use an IRS preapproved document for this purpose. All preapproved documents must be fully rewritten (or restated) every six years to reflect recent law changes. The last 6-year restatement cycle was called “PPA” after the Pension Protection Act. A new cycle - called "Cycle 3" - opened last year. Between August 1, 2020 and July 31, 2022, all pre-approved 401(k) plans must be restated from a PPA to a Cycle 3 plan document. That means now.
As a business owner, you want to understand the basic fiduciary hierarchy applicable to all 401(k) plans and the responsibilities of each role within it. This understanding can make the oversight of your 401(k) plan – basically ensuring that your fiduciary responsibilities are met – much more straightforward.
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Switching jobs and unsure what to do with your 401(k) account? If you’d like to keep growing your retirement savings on a tax-deferred basis, you can leave your account in your former employer’s plan or roll it into your new employer’s 401(k) plan or an Individual Retirement Account (IRA). Rolling your account can seem like the obvious choice, but in some cases, leaving it could grow your retirement savings faster.
Owners of a partnership or sole proprietorship (or an LLC taxed as either) are considered “self-employed individuals” for 401(k) plan purposes. 401(k) plans must allocate and test the annual contributions made to self-employed individuals using a special definition of plan compensation called earned income. When applicable, earned income is calculated by the plan’s Third-Party Administrator (TPA) based on information prepared by the employer’s Certified Public Accountant (CPA). The CPA, in turn, will use the TPA's calculation to finalize the employer’s year-end tax returns.
When two or more companies with common ownership meet the IRS’ controlled group definition, they are considered a single employer for 401(k) plan purposes. 401(k) plans must often benefit the employees of all controlled group members to pass the IRC section 410(b) “coverage” test annually. Put differently - overlooking a member can often mean a failed coverage test. Steep IRS penalties - including plan disqualification - are possible when a failure goes uncorrected for years. A basic understanding of the controlled group rules can help employers avoid this trouble.
There are few industries where the phrase “you get what you pay for” is less applicable than the 401(k) industry. Equally competent 401(k) providers can charge dramatically different fees for comparable administration services and investments. This variability is a big problem for employers – who have a fiduciary responsibility to protect the interests of plan participants by paying only “reasonable” 401(k) fees. Employers that fail to meet their responsibility can be personally liable for restoring participant losses due to excessive fees.