Adventures in Retirement Plan Design
Compliance and Administration
Considerations
Presented By
Kelly Marie Hurd, ERPA, CPC
Senior Retirement Plan Consultant
Caveats & Disclaimers
THE
VIEWS EXPRESSED BY THE SPEAKERS ARE THEIR OWN AND DO NOT
NECESSARILY REPRESENT THE VIEWS OF ANY PERSON, LIVING OR DEAD, REAL OR
FICTITIOUS, MALE OR FEMALE, RELIGIOUS OR ATHEIST…YOU GET THE POINT.
NO
PEOPLE OR ANIMALS WERE HARMED IN THE MAKING OF THIS PRESENTATION.
THE
CONTENT OF THIS PRESENTATION IS GENERAL IN NATURE AND IS FOR
INFORMATIONAL PURPOSES ONLY. IT SHOULD NOT BE USED AS A SUBSTITUTE FOR
SPECIFIC TAX, LEGAL AND/OR FINANCIAL ADVICE THAT CONSIDERS ALL RELEVANT
FACTS AND CIRCUMSTANCES.
Overview
Legal/
Accounting
Design
Consulting
Document
Compliance
/Gov’t
Reporting
Investments
Recordkeeping
www.dwcconsultants.com/services/plancomponents.php
Slide | 3
Agenda
 Retirement plan goals
 Plan design options
◉ Safe harbor
◉ Automatic enrollment
 Compliance considerations
◉ Required testing
◉ Related companies
 Plan corrections
Slide | 4
Retirement Plan Goals
Retirement Plan Goals
 What are you trying to accomplish with the plan?
◉ Provide a maximum benefit to the owner(s) of the company
◉ Maximize the contributions to the company executives
◉ Implement a plan in order to secure a government contract
◉ Provide generous benefits to all employees to attract and
retain talent
Slide | 6
HCEs & Nondiscrimination

Nondiscrimination testing to ensure Highly
Compensated Employee (“HCE”) benefits not
disproportionate to Non-HCE (“NHCE”) benefits

Must meet one of two tests to be HCE
◉ 5% owner test
◉ Compensation test

Employees not meeting one of these tests are
NHCE
www.dwcconsultants.com/knowledge_center/Key-HCE.php
Slide | 7
Benefiting Employees
 If the retirement plan is not for the benefit of all
employees, define the target group
◉ Who do you want to benefit from the retirement plan?
◉ Can you exclude certain classifications of employees from
benefiting under the plan?
 Determine your maximum and minimum funding
goals
 Regulations are structured with testing that requires
plans to provide a minimum benefit to qualified
employees
Slide | 8
Worker
Classification
Defining Employee Exclusions
 Permitted based on valid job classification
◉ Title or job function
◉ Location or division
◉ Hourly or salaried
 Not permitted if indirectly based on service
◉ Temporary
◉ Seasonal
◉ Normally scheduled to work less than…
IRS Quality Assurance Bulletin, FY-2006, No. 3
Slide | 10
Other Than Full Time
 Temps
 Seasonal employees
 Per diem employees
 Interns
 Students
 Etc.
All of these are still employees!
“An Rose Employee By Any Other Name”, PRECISION Magazine, 2014 edition, page 5.
Slide | 11
Plan Design
Plan Design

Should be customized to fit the employer’s goals

Factor to consider

◉
Employee turnover
◉
Consistency of cash flow
◉
Flexibility
◉
Complexity
◉
Tax ramifications
Stay tuned…
Slide | 13
Plan Design
 Retirement plans offer a plethora of design options
◉ Safe harbor designs
◉ Pro-rata vs. integrated allocations
◉ New comparability
Slide | 14
Comparison of Methods
Annual
Compensation
Per Capita
Pro Rata
Permitted
Disparity
New
Comparability
Owner #1
$255,000
$20,750
$51,000
$51,000
$51,000
Owner #2
$255,000
$20,750
$51,000
$51,000
$51,000
Manager #1
$ 80,000
$20,750
$16,000
$13,440
$ 5,200
Manager #2
$ 50,000
$20,750
$10,000
$8,400
$ 3,250
Manager #3
$ 45,000
$20,750
$9,000
$7,560
$ 2,925
Staff #1
$ 40,000
$20,750
$8,000
$6,720
$ 2,600
Staff #2
$ 30,000
$20,750
$6,000
$5,040
$ 1,950
Staff #3
$ 30,000
$20,750
$6,000
$5,040
$ 1,950
Staff #4
$ 23,000
$20,750
$4,600
$3,864
$ 1,495
Staff #5
$ 22,000
$20,750
$4,400
$3,696
$ 1,430
$830,000
$207,500
$166,000
$155,760
$122,800
61%
20.0%
61%
65%
83%
www.dwcconsultants.com/knowledge_center/ProfitSharing.php
Slide | 15
Safe Harbor 401(k) Plans

Plan design that provides for automatic passage
of ADP test

Minimum employer contribution required

Participant notice required 30 – 90 days prior to
start of each plan year

Two “traditional” options

Two automatic enrollment options
“The Not-So-Safe-Harbor 401(k) Plan”, PRECISION Magainze, 2013 edition, page 12
Slide | 16
Safe Harbor 401(k) Plans - Traditional

Matching contribution
◉ 100% of the first 3% of deferrals, plus
◉ 50% of the next 2% of deferrals

Base contribution
◉ 3% of compensation

Immediate vesting required
Slide | 17
Safe Harbor 401(k) Plans – Auto Enrollment

Deferrals
◉ Minimum 3% during initial period
◉ Auto increase by 1% per year up to 6%
◉ Maximum is 10%

Matching contribution
◉ 100% of the first 1% of deferrals, plus
◉ 50% of the next 5% of deferrals

Base contribution
◉ 3% of compensation

Maximum vesting = 2 year cliff
Slide | 18
Safe Harbor & New Comparability
Annual
Compensation
401(k)
Deferrals
SH Base
(3%)
New Comp
(10.14%/1.38%)
Total ER
Alloc.
Total
Allocation
Owner #1
$255,000
$23,000
$7,650
$25,850
$33,500
$56,500
Owner #2
$255,000
$17,500
$7,650
$25,850
$33,500
$51,000
Manager #1
$ 80,000
$ 4,000
$2,400
$ 1,104
$ 3,504
$ 7,504
Manager #2
$ 50,000
$ 1,000
$1,500
$
690
$ 2,190
$ 3,190
Manager #3
$ 45,000
$
0
$1,350
$
621
$ 1,971
$ 1,971
Staff #1
$ 40,000
$
0
$1,200
$
552
$ 1,752
$ 1,752
Staff #2
$ 30,000
$
0
$ 900
$
414
$ 1,314
$ 1,314
Staff #3
$ 30,000
$
0
$ 900
$
414
$ 1,314
$ 1,314
Staff #4
$ 23,000
$
0
$ 690
$
317
$ 1,007
$ 1,007
Staff #5
$ 22,000
$ 1,000
$ 660
$
304
$
964
$ 1,964
$830,000
$46,500
$24,900
$56,116
$81,016
$127,516
61%
87%
61%
92%
83%
84%
Slide | 19
I Love Rock N Roll, Inc.
Let’s review a typical California safe harbor plan.
Plan consistently fails ADP test
◉
◉
Is Safe Harbor 401(k) the best option?
HCE ADP = 10%
NHCE ADP = 4%
Slide | 20
I Love Rock N Roll, Inc.
 Failed ADP test
◉ HCE ADP = 10%
◉ NHCE ADP = 4%
 Correction
◉ Increase NHCEs to an average of 8%, or
◉ Decrease HCEs to an average of 6%, or
◉ Combination of the two, or
◉ Safe harbor plan
Slide | 21
Non-HCE Group
Annual
Compensation
Mick
401(k)
Deferrals
ADP
SH NEC
(3%)
SH Match
(Basic)
Targeted QNEC
$100,000
$10,000
10.00%
$3,000
$4,000
$
0
Steven
90,000
10,000
11.11%
2,700
3,600
0
Ringo
80,000
0
0.00%
2,400
0
0
Iggy
70,000
5,000
7.14%
2,100
2,800
0
Beck
50,000
1,500
3.00%
1,500
1,500
0
Jimi
50,000
5,000
10.00%
1,500
2,000
3,125 (6.25%)
Lana
40,000
0
0.00%
1,200
0
2,500 (6.25%)
Meghan
40,000
400
1.00%
1,200
400
2,500 (6.25%)
Bono
40,000
0
0.00%
1,200
0
2,500 (6.25%)
Beyonce
20,000
350
1.75%
600
350
1,300 (6.25%)
Kanye
15,000
0
0.00%
450
0
1,875 (12.5%)
$595,000
$32,250
$17,850
$14,650
$13,800
Slide | 22
I Love Rock N Roll, Inc.
 Failed ADP test
◉ HCE ADP = 10%
◉ NHCE ADP = 4%
 Options
◉ Pro rata QNEC = $595,000 x 4% = $23,800
◉ Safe Harbor NEC = $17,850
◉ Safe Harbor Match = $14,650
◉ Targeted QNEC = $13,800
eba.benefitnews.com/news/the-unconventional-401k-2736440-1.html (requires free registration)
Slide | 23
Automatic Enrollment
Testing
 ABC Company – Considering Auto Enrollment
◉ 8 HCEs


100% participation
Average deferral of 6.53%
◉ 395 NHCEs


57% participation
Average deferral of 2.52%
◉ Auto enrollment


4% of pay
0% opt-out rate
Slide | 24
Automatic Enrollment
Testing
 XYZ Company – Already Has Auto Enrollment
◉ 51 HCEs


94.1% participation
Average deferral of 6.59%
◉ 128 NHCEs


94.5% participation
Average deferral of 3.61%
◉ Auto enrollment



48 new NHCEs enrolled at 3% of pay
0% opt-out rate
NHCE average deferral of 3.55%
Slide | 25
Automatic Enrollment
Comfortable Retirement
 30-year old participant, earning $50,000/year with
annual COLAs of 3%
◉ Replacement ratio = 69%
 Retirement age = 65
 Average annual investment return of 8%
 Default deferral of 3% of pay
◉ Runs out of money by age 70
 Escalating default deferral from 3% to 6% of pay
◉ Runs out of money by age 78
www.plansponsor.com/print.aspx?id=6442513744
Slide | 26
Compliance
Considerations
Compliance Considerations
 Nondiscrimination testing
◉ Minimum coverage
◉ Top heavy
◉ ADP/ACP (we covered by loving Rock and Roll)
◉ Compensation ratio
◉ Other
 Key employees vs. HCEs/NHCEs
www.dwcconsultants.com/knowledge_center/NDT-Overview.php
Slide | 28
Compliance Considerations
 Applicable limits
◉ Plan and participant level limits
◉ Plan year and calendar year
 Related companies
◉ Controlled groups
◉ Affiliated service groups
Slide | 29
Applicable Limits
Limit
Code
Section
2015
2014
2013
Compensation
401(a)(17)
$265,000
$260,000
$255,000
Elective Deferrals [401(k)]
402(g)(1)
$18,000
$17,500
$17,500
414(v)(2)(B)(i)
$6,000
$5,500
$5,500
408(p)(2)(E)
$12,500
$12,000
$12,000
414(v)(2)(B)(ii)
$3,000
$2,500
$2,500
Annual Additions – DC Plan
415(c)(1)(A)
$53,000
$52,000
$51,000
Annual Additions – DB Plan
415(b)(1)(A)
$210,000
$210,000
$205,000
HCE – Compensation Test
414(q)(1)(B)
$120,000
$115,000
$115,000
Key Employee – Officer Comp
416(i)(1)(A)(i)
$170,000
$170,000
$165,000
Key Employee – 1% Owner Comp
416(i)(1)(A)(iii)
$150,000
$150,000
$150,000
N/A
$118,500
$117,000
$113,700
Catch-Up Contributions [401(k)]
Elective Deferrals [SIMPLE]
Catch-Up Contributions [SIMPLE]
Social Security Wage Base
www.dwcconsultants.com/knowledge_center/contributionlimitations.php
Slide | 30
Related
Companies
Implications
 Plan document
◉ Only “lead” employer
◉ Adoption by other employers
 Crediting service for eligibility and vesting
◉ Required for related employers
◉ Optional for unrelated employers
 Nondiscrimination testing
◉ Aggregation generally required for related employers
◉ Separate testing for unrelated employers
 Application of limits
◉ Annual additions limit
Slide | 32
Attribution
 One person or entity is deemed to own what another
person or entity owns
 Three different definitions
◉ IRC §267(c)

Prohibited transactions
◉ IRC §318



Highly compensated employees and key employees
Disqualified persons in S-Corp ESOPs
Affiliated service groups
◉ IRC §1563

Controlled groups
www.dwcconsultants.com/knowledge_center/OwnerAttribution.php
Slide | 33
Types of Controlled Groups
 Parent/subsidiary
 Brother/sister
 Combined
“Related Companies: Who Is In Control?”, PRECISION Magazine, 2013 edition, page 3
Slide | 34
Parent/Subsidiary Group
 One business owns at least 80% of one or more
other businesses
◉ For purposes of combined annual additions limit, threshold
is greater than 50%
 Single parent may own multiple subsidiaries
 Group may include several tiers
◉ Parent owns subsidiary
◉ Subsidiary owns other subsidiaries
Slide | 35
Parent/Subsidiary Group
 Example
◉ Company A owns the following:



100% of company B
80% of company C
50% of company D
◉ Parent/subsidiary group consists of A, B and C but not D
 Example
◉ Same as above and C owns 40% of D
◉ A (50%) + C (40%) = 90%, so D is now part of the controlled
group
Slide | 36
Brother/Sister Group
 Five or fewer owners satisfy both of the following:
◉ Common ownership of at least 80%, and
◉ Identical ownership of more than 50%
Slide | 37
Example
3-Hour
Tour
Island
Resort
Identical
Gilligan
40%
30%
30%
Ginger
20%
40%
20%
Mary Anne
35%
15%
15%
Thurston
5%
0%
0%
Professor
0%
15%
0%
Common
95%
85%
65%
Owner
 Brother/sister group includes 3-Hour Tour and
Island Resort
◉
85% common ownership
◉ 65% identical ownership
Slide | 38
Types of Affiliated Service Groups
 A-org
 B-org
 Management
www.dwcconsultants.com/knowledge_center/AffiliatedSvcGroup.php
Slide | 39
A-Org
 Consists of an A-Organization and a First Service
Organization (“FSO”)
◉ A-Organization



Has ownership interest in FSO, and
Regularly performs services for FSO, or
Regularly associated with FSO in performing services to a third
party
◉ FSO


Any type of entity
If corporation, must be professional services corporation
 Determined based on operation, not form
Slide | 40
A-Org
 Both A-Org and FSO must be service organizations
◉ Capital is not a material income producing factor
◉ Banks are never service organizations
◉ These are always service organizations






Health
Law
Engineering and architecture
Accounting and consulting
Actuarial science and insurance
Performing arts
Slide | 41
Example
 Law firm
◉ Firm is a partnership
◉ Each attorney has his/her own PC
◉ PCs, rather than individual attorneys, are partners in law
firm
◉ A-Org affiliated service group


PCs are A-Orgs
Law firm is FSO
Slide | 42
Example
 Medical practice
◉ Doctor owns PC
◉ Doctor has ownership in imaging center
◉ Doctor refers patients from PC to imaging center for x-rays
◉ A-Org affiliated service group


PC is A-Org
Imaging center is FSO
Slide | 43
B-Org
 Consists of a B-Organization and an FSO
◉ FSO

Same definition as in A-Org group
◉ B-Organization



Derives a significant portion of its business from FSO, and
Provides services to FSO historically performed by employees,
and
Owned at least 10% by HCEs of FSO
◉ Significance



Less than 5% is never significant
10% or more is always significant
Everything else is facts and circumstances
Slide | 44
Example
 Central Billing Office (“CBO”)
◉ Five ENT practices are equal owners of CBO
◉ Each ENT practice has two equal owners
◉ CBO derives 20% of its business from each practice
Slide | 45
Example
Flintstone’s ENT
Fred (50%)
Barney (50%)
[FSO]
Simpson’s ENT
Bart (50%)
Milhouse (50%)
[FSO]
Jetson’s ENT
Astro (50%)
Jane (50%)
[FSO]
Central Billing
Office
[B-Org]
Scooby’s ENT
Daphne (50%)
Velma (50%)
[FSO]
HB ENT
Hanna (50%)
Barbera (50%)
[FSO]
Slide | 46
Management Groups
 Consists of a management organization (“MO”) and
recipient organization (“RO”)
 MO’s principal business is to provide management
functions for RO
 No common ownership required
Slide | 47
Correcting
Plan Errors
IRS Top 10 List
1.
Failure to timely adopt amendments required by
tax law changes.
◉ Full plan restatement due by April 30, 2016, maybe earlier
for safe harbor 401(k) plans.

www.dwcconsultants.com/knowledge_center/RestatePPA.php
2. Failure to follow the plan’s definition of
compensation when determining benefits.
3. Failure to include eligible employees or exclude
ineligible ones.
Slide | 49
IRS Top 10 List
4. Failure to follow rules related to participant loans.
5. Failure to follow rules related to in-service
withdrawals.
6. Failure to satisfy rules related to required
minimum distributions at age 70 ½.
7. Failure to satisfy rules related to eligibility to
sponsor certain types of plans.
8. Failure to pass the ADP and/or ACP test.
Slide | 50
IRS Top 10 List
8. Failure to pass the ADP and/or ACP test.
9. Failure to provide the top-heavy minimum benefit
to non-key employees.
10. Failure to cap benefits at the annual additions
limit.
www.irs.gov/Retirement-Plans/EP-Examination-Process-Guide---Section-2---Compliance-Monitoring-Procedures---Top-Ten-Issues--Voluntary-Correction
Slide | 51
To Correct Or Not To Correct?
Admitting You Have A Problem Is
The First Step!
 Confess your sins?
 Go forward and sin no more?
 I’m an atheist?
Slide | 52
To Correct Or Not To Correct?
 Impact on participants and beneficiaries
 Impact on plan administration
 Likelihood of discovery
 Statute of limitations
 Personal liability of plan fiduciaries
Slide | 53
Correction Programs

DOL (DFVC & VFC)
◉ Specific errors
◉ Specific methods
◉ No self-correction
“Accidents Will Happen”, PRECISION Magazine, 2014 edition, page 14

IRS (EPCRS)
◉ Almost any error
◉ Pre-approved methods or
“roll your own”
◉ Self-correction permitted
sometimes
Slide | 54
Questions
Page
| 55
Kelly Marie Hurd, ERPA, CPC
Senior Retirement Plan Consultant
651.204.2600 ext. 117
www.linkedin.com/in/kellymariehurd
Kelly.Hurd@DWCConsultants.com
www.DWCconsultants.com
A PPENDIX
About DWC ERISA Consultants, LLC
 Established in 1999
 National ERISA consulting firm
 Locations in multiple states
 Over 700 clients nationwide
 Consulting & compliance services for defined
contribution and defined benefit plans are our only
service lines
 No E&O claims since company inception
Slide | 57
Expertise & Leadership
 Our Team…
◉ Consultants average more than 10 years of experience
◉ Partners average over 20 years of experience
◉ Registered with the IRS as return preparers, subject to strict
ethical standards
◉ Hold active industry leadership roles






IRS Advisory Committee on Tax Exempt & Government Entities
ASPPA Board of Directors and Executive Committee
ASPPA Government Affairs Committee
Co-editor-in-chief of The Journal of Pension Benefits
Professor of Benefits/Compensation – Carlson School of
Management
Author of the Defined Contribution Handbook
Slide | 58
Custom Solutions
Every member of the DWC team is encouraged to
think beyond the conventional wisdom and put
themselves in their clients' shoes.
Since the IRS and Department of Labor are involved,
following regulations is of critical importance, but the
strategy for doing so must be considered in the context
of the day-to-day business environment and each
client’s objectives.
Slide | 59
Professional Development
 Mandatory professional credentialing program
◉ All consultants must complete the exams toward the
Enrolled Retirement Plan Agent (“ERPA”) credential within
3 years of hire.

Allows consultants to represent clients before the IRS
 In-house training on technical developments and
process improvements
 Required CPE and participation in industry
conferences and events
◉ Each employee has an annual budget for expenses related to
CPE.
Slide | 60
Compliance Advantage
 Rigorous internal review standards
◉
All deliverables are reviewed by a senior team member
◉
Comprehensive internal controls, including electronic audit trail, to ensure
quality and accuracy
 Industry-leading service-delivery
◉
Generally respond to all communications within 1 business day
◉
Delivery commitments based on receipt of requested information rather than
government deadlines
◉
Fast turnaround times as compared to industry standards
 Plan sponsor reports
◉
Easy to read
◉
Include action items, executive summary, and detailed sections
 Compliance portal
◉
Plan sponsor reports and government forms stored by type and/or year
◉
Year-end plan sponsor data submission is secure and easy to complete
◉
Dynamic tracking and routing of all tasks and client deliverables
Slide | 61
Relationship-Based Service
DWC’s service model is straight-forward. We assign a
consultant, team leader and partner to each plan. DWC
adheres to a strict peer-review policy, so all work is reviewed
prior to delivery to our clients. Our structure provides hightouch, accurate service to our clients while maintaining costeffective pricing.
At DWC, we dig deeper to understand each client’s unique
financial and operational needs. With decades of experience,
critical thinking and exceptional service, DWC combines
strategic solutions with flawless execution.
Slide | 62
Cost-Effective Pricing
DWC does not accept revenue sharing from any third parties.
Our fee model is and has always been to charge a reasonable fee for
the services we actually provide for each plan. We do not offer “allinclusive” pricing, because such pricing models typically result in
many plans subsidizing extra services that only a few plans actually
require. This is a significant reason why industry surveys
continually show our fees to be below the 50th percentile for the
premium service-level that we provide.
We fully disclose our fees in an easy-to-understand format, and we
always have, even long before “fee disclosure” became a
requirement or even an industry buzzword.
Slide | 63
Client Reports: First Impression
 Sales: Plan Design Projection Report
◉ Customized cost-benefit analysis of several design options
◉ Delivered within 2 business days of receipt of census
 Hired: Welcome Package
◉ DWC team introduction
◉ Roles and responsibilities (both initial and ongoing)
◉ Service standards
◉ Delivered within 5 business days
Slide | 64
Client Reports: Plan Document
 Collaborative process
◉ DWC: prepares Summary of Plan Provisions (SoPP)
comparing current provisions to proposed new document,
including recommendations
◉ Client/DWC/Advisor: conference call to review SoPP,
discuss and update as needed
◉ DWC: finalizes and delivers signature-ready plan document
package
Plan document and adopting resolution
 Summary Plan Description and plan FAQ
 QDRO policy and loan policy (as applicable)
 Plan Administrator’s guide and sample forms

◉
DWC: follows up to ensure timely execution of documents
Slide | 65
Client Reports: Year End Prep Report
 Delivered 6 to 8 weeks prior to year-end
◉ Includes required annual notices
◉ Requests information needed to complete testing,
contribution calculation and government reporting, as
applicable
Census (several options for secure, encrypted submission)
 Annual questionnaire (completed online)

◉
Client checklist as a reminder of their key tasks
◉ Reminder of key compliance deadlines and our service
commitment
 Client phone call to review report and process
Slide | 66
Client Reports: Annual ERISA Compliance Review
The AECR is delivered annually and includes action
items, executive summary and the following items:






Plan eligibility review
Coverage test
ADP/ACP test
Top heavy determination
Contribution limit review
Compensation ratio test
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Company contribution calculation
Required minimum distributions
Participant loan review
Proactive plan design review
Related company review
Form 5500 and 8955-SSA
In the event of an IRS or DOL audit, our AECR makes the
process much less stressful.
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