A qualified plan must satisfy the Internal Revenue Code in both form and operation. That means that the provisions in the plan document must satisfy the requirements of the Code and that those plan provisions must be followed. The IRS administers a determination letter program that enables plan sponsors to get advance assurance as to the form of their retirement plan document. Employers should establish practices and procedures to ensure the plan is operated in accordance with the plan document so participants and beneficiaries receive their proper retirement benefits. Be aware that the law and regulations in the retirement plans area frequently change. Make sure your plan document and determination letter, if applicable, are up to date.
What follows is a list of some of the more important retirement plan requirements to help employers in implementing practices, procedures and internal controls to monitor plan operations. Your plan may have other operational requirements that need to be monitored. Note that problems often arise from changes in personnel, procedures, payroll systems, or new service providers such as accountants, attorneys, actuaries or third-party plan administrators. Employers that have experienced any of these changes should give special scrutiny to operational requirements affected by the change.
If you find you haven’t operated your plan according to the law or the plan language, use our fix-it guides for 401(k) plans, 403(b) plans, SARSEP plans, SEP-IRA plans, and SIMPLE IRA plans to correct mistakes.
Section 410(a)(1) of the Internal Revenue Code (Code) sets forth the minimum age and service requirements for a qualified retirement plan. In general, a plan cannot require, as a condition of participation, that an employee complete a period of service with the employer extending beyond the later of:
Section 410(a)(4) sets forth the rules for plan entry dates (the dates when an eligible employee must begin participation). Under Code section 410(a)(4), a plan is not qualified unless it provides that an employee who is otherwise eligible to participate under the terms of the plan commences participation no later than the earlier of:
Your plan document describes who is covered under your plan, i.e., who benefits under your plan, and what contributions or benefits will be provided to those covered employees. Your employees’ rights to contributions and benefits are derived from the plan document. You must operate your plan strictly in accordance with the terms of your plan document; that is, you must cover the employees that your plan document describes as being covered and when the plan document says they should be covered, and you must provide them the contributions or benefits set out in the plan document. Even if the terms of your plan do not reflect your intent, you must follow the terms of your plan. Of course, the terms of your plan may be amended by a plan amendment. But see item 3, below, with respect to the prohibition against cutting back benefits that your employees have already accrued (or to which they are already entitled) under the plan.
Section 411(d)(6) prohibits the reduction of any participant’s accrued benefit by an amendment of the plan. In a defined contribution plan (a 401(k), profit-sharing, money purchase plan, etc.), this means that no employee’s account can be reduced because of a plan amendment. A plan amendment that has the effect of eliminating or reducing an early retirement benefit or a retirement-type subsidy, or eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment will be treated as reducing accrued benefits.
Under a CODA, participants may elect to have their employer contribute a specific amount to the plan in lieu of receiving it in cash as wages. In order to satisfy the requirements of section 401(k), the plan must satisfy the Actual Deferral Percentage (ADP) test. The ADP test requires that the deferral of income into the CODA by highly compensated employees be proportional to that for nonhighly compensated employees. Generally, amounts that the participant elects to defer may only be distributed upon specific events including death, disability, termination of employment, hardship and attainment of age 59 ½. The plan document must state that the Actual Deferral Percentage (ADP) test of Code section 401(k)(3) will be satisfied and must actually satisfy the test in operation. Additionally, the law has changed to allow an employer not to perform an ADP test if it makes a safe harbor contribution to the plan on behalf of employees. In addition to the safe harbor contribution, certain notice requirements are also applicable.
If a retirement plan permits employee and/or matching contributions, the plan must satisfy the requirements of Code section 401(m). The plan document must state that the actual contribution percentage (ACP) test of Code section 401(m)(2) will be satisfied and must actually satisfy the test in operation. The ACP test requires that the employee and matching contributions provided for highly compensated employees be proportional to those for nonhighly compensated employees. Code section 401(m) does not apply to a defined benefit plan unless employee contributions to the plan are allocated to a separate account.
Similar to the ADP safe harbor contribution, a safe harbor exists for the ACP test if the ADP safe harbor contribution is made and timely notice is provided to participants. Additionally, the level of matching contributions is limited in order for the ACP safe harbor to apply.
Elective deferrals are amounts that employees elect to contribute to a retirement plan out of their compensation. A plan that provides for elective deferrals, for example a 401(k) plan, must provide that for each participant the amount of elective deferrals under the plan and all other plans, contracts, or arrangements of an employer maintaining the plan may not exceed the amount of the limitation in effect under Code section 402(g)(1) (Code section 401(a)(30)). In addition to the plan terms providing that elective deferrals must satisfy the requirements of Code section 402(g), elective deferrals must satisfy these requirements in operation. This limit is $23,000 in 2024; $22,500 in 2023; $20,500 in 2022; $19,500 in 2021 and 2020 and $19,000 in 2019, subject to cost-of-living adjustments in later years.
The law allows participants who are age 50 and over to make additional elective deferrals to the plan over the statutory limit. For taxable years beginning in 2023 and 2024, the additional elective deferrals is $7,500 (beginning in 2021 and 2020, the additional elective deferrals is $6,500; $6,000 in 2015, 2016, 2017 and 2018 and 2019 (subject to cost-of-living adjustments in later years).
The limitations on benefits and contributions for retirement plans are set forth in Code section 415. The annual benefit limitation for a defined benefit plan is $225,000 for 2019, $230,000 for 2020 and 2021, $245,000 for 2022; $265,000 for 2023 and $275,000 in 2024 (subject to cost-of-living adjustments for later years) for each employee. The limitation on annual contributions to a defined contribution plan is $56,000 for 2019, $57,000 for 2020, $58,000 in 2021, $61,000 in 2022; $66,000 in 2023 and $69,000 in 2024 (subject to cost-of-living adjustments for later years) for each employee.
The maximum annual compensation of each employee that can be taken into account under a plan for any year must not exceed $280,000 for 2019 ($285,000 for 2020 $290,000 for 2021; $305,000 for 2022; $330,000 for 2023 and $345,000 for 2024) and subject to cost-of-living adjustments in later years.
A plan must satisfy certain vesting and minimum benefit requirements if the plan is top-heavy. In general, a plan is top-heavy if 60 percent of the aggregate accrued benefits or account balances under the plan are for the benefit of certain "key employees." Generally, a key employee is:
a 5 percent owner of the employer, a 1 percent owner of the employer with over $150,000 in compensation from the employer, orCode section 411 provides the minimum vesting requirements. This requires that each employee vest or own, at a minimum, a stated percentage of their interest in the plan each year. Your plan’s vesting schedule will be set out in your plan document. Many plans provide for 100% vesting for all employees immediately upon their commencement of participation. All employees must be 100% vested by the time that they attain Normal Retirement Age under the plan and when the plan is terminated. Amounts that are not vested may be “forfeited” by the employees when they separate from service with the employer. Your plan will describe how these forfeitures will be used: either to increase benefits or to fund future benefits for other plan participants. In a defined benefit plan, forfeitures must not be applied to increase the benefits any employee would otherwise receive under the plan. (Code section 401(a)(8)).
An employee’s assets may not remain in the retirement plan indefinitely. Section 401(a)(9) sets out the latest date by which distributions must begin and the minimum amount of the distribution. A plan must provide that the interest of each employee will begin to be distributed to the employee not later than the required beginning date which means, in general, April 1 of the calendar year following the later of:
At a minimum, the distributions must be evenly spread over the life of the employee or over the lives of the employee and a designated beneficiary (or over a period not extending beyond the life expectancy of the employee and a designated beneficiary).
Section 411(a)(11) prevents a plan from forcing a distribution on a plan participant prior to the time the participant attains normal retirement age or age 62. In general, if the present value of any nonforfeitable accrued benefit exceeds $5,000, a plan must provide that such benefit may not be distributed without the consent of the participant.
The joint and survivor requirements are designed to protect the employee’s spouse. In general, they require that distributions from the plan be made in the form of a joint and survivor annuity unless the spouse waives the right to a qualified joint and survivor annuity. The term “joint and survivor annuity” means an annuity for the life of the participant with a survivor annuity for the life of the spouse which is not less than 50 percent of (and is not greater than 100 percent of) the amount of the annuity which is payable during the joint lives of the participant and the spouse.
The joint and survivor requirements do not apply to certain profit-sharing plans that do not provide distributions in the form of an annuity and that provide that the employee’s spouse receives the employee’s account upon death of the employee. (Code sections 401(a)(11) and 417).
Your plan must provide that if the distributee of any eligible rollover distribution
such distribution shall be made in the form of a direct trustee-to-trustee transfer to the eligible retirement plan. Your plan must comply with this provision in operation. (Code section 401(a)(31)).
Additionally, the law has changed to require that for employer-initiated mandatory distributions of more than $1,000, the distribution must be paid as a direct rollover to an IRA if the participant does not make an affirmative election to do otherwise.
The plan must provide that benefits provided under the plan may not be assigned or alienated. In practice, the plan must not allow the assignment or alienation of any employee’s interest in the plan, other than for certain participant loans if they are provided for under the plan terms, and for certain qualified domestic relations orders. (Code section 401(a)(13)).
The contributions or benefits provided under a plan must not discriminate in favor of highly compensated employees. Section 401(a)(4) contains the test for nondiscrimination that a qualified plan must satisfy. The purpose of this test is to assure that the benefits provided to highly compensated employees are proportional to those provided to nonhighly compensated employees.
In general, 410(b) sets out rules on who the plan must cover. In order to satisfy this Code section, a plan must meet one of the following tests:
For purposes of IRC Section 410(b), employees who are included in a unit of employees covered by a collective bargaining agreement and employees who are nonresident aliens receiving no U.S. source earned income from the employer can be excluded from consideration.
Note that changes in employee demographics may affect the way that the plan satisfies the coverage tests. In addition, if the employer has been involved in a merger, acquisition or divestiture of a business unit, the plan should be reviewed to assure that it passes one of the section 410(b) coverage tests.
On each day of the plan year, a defined benefit plan must benefit the lesser of:
If your plan is a defined benefit plan, an enrolled actuary will have to compute the funding required for the plan and sign Schedule SB of Form 5500 setting out the plan's funding status. If your plan is a money purchase pension plan, the contributions required by the plan document must be made in order to satisfy the minimum funding requirements of section 412.
A trust is a medium under which the retirement plan assets are accumulated. The employer or employees, or both, contribute to the trust, which forms part of the retirement plan. The assets are held in the trust until distributed to the employees or their beneficiaries according to the plan’s provisions. The trust must be maintained for the exclusive benefit of the employees and their beneficiaries. Section 401(a) of the Code sets out the requirements that a trust must satisfy in order to “qualify” for favorable tax treatment. When a trust is “qualified” under section 401(a), it obtains its exemption from income tax under Code section 501(a).
Make sure that your plan complies with the applicable reporting and disclosure requirements, including: