FAQ: Plan Sponsors

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Hardship Distributions                                          


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IRS code allows for hardship distributions from 401(k) plans, but the plan document must expressly provide for such distributions.   Hardship distributions are subject to limitations and guidelines.   What are these guidelines?
  • Plan participants must be actively employed by the plan sponsor, even if they are under 59 Â½.
  • The distributions must be made based on immediate and heavy financial need of the participant, and is determined based on the individual circumstances of each case. A plan's guidelines may include a safe harbor set of guidelines to clarify what circumstances qualify for a hardship distribution. For example, an actual eviction or foreclosure proceeding, or expenses for medical care.
  • The distribution cannot exceed the amount necessary to satisfy the need that cannot be met reasonably by other resources. A plan must define what is necessary. For example, a plan may specify that before qualifying for a hardship withdrawal, all available distributions and nontaxable loans must be already taken.
  • The funds available for hardship withdrawal are generally restricted to the participant's elective contributions from the point of inception into the Plan. There are some exceptions to this general rule that allow hardship withdrawals from Employer contributions.
  • Depending upon plan guidelines, the employee may be prevented from making any elective contributions for six months. 


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Participant Terminations


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Most 401(k) plans allow hardship distributions only upon satisfaction of the safe harbor rules. If you are regularly receiving requests for hardship distributions that cannot be granted under the safe harbor rules, it may be appropriate to consider the use of other standards that may be more helpful to your employees.


What are my responsibilities when a participant terminates employment with assets in the plan?

In recent years, a trend in participant education has changed from enrollment and contributions to giving more advice to job changers and retirees. Now, plan sponsors can and should explain the tax implications of taking a cash distribution in the form of a lump sum, as well as alternative options.

Financial professionals with GF Pension Corp. are available to work with your participants when they are close to, or already have, terminated service.


Can I force participants out of my plan?

The IRS provides the guidance plan sponsors need to comply with to process automatic rollovers out of their plans. Section 401(a)(31)(B) of the Economic Growth and Tax Relief Reconciliation Act of 2001, requires tax-favored retirement plans that make mandatory rollover to terminated participants with account balances of less than $5,000, to transfer the assets to an Individual Retirement Account (IRA) selected by the plan sponsor. If the terminated participant account is less than $1,000, generally the account may be paid out directly to the participant as a lump sum distribution.

Under the Department of Labor Safe Harbor, a plan sponsor is deemed to meet its fiduciary responsibility in the selection of an IRA and an investment fund if:

  • The amount of the rollover is no more than $5,000 plus any amounts that the participant had rolled into the plan from another plan
  • The rollover is to an IRA that meets IRC standards and requirements, maintained by a regulated financial institution that meets the IRC criteria for IRA sponsors, and a plan fiduciary enters into a written agreement with the IRA sponsor for the benefit of the affected participants
  • The funds in the default IRA are invested in a money market fund, interest-bearing savings account, certificate of deposit, or similar stable value investment vehicle
  • Fees and expenses charged to the default IRA do not exceed the fees and expenses charged by comparable IRA sponsors
  • Participants are given an explanation of the plan's new rollover provisions prior to being made automatic

What about lost participants?
The DOL provides four mandatory search methods that are used by all fiduciaries to attempt to locate a participant prior to the participant being classified as lost.
1.       Mail the distribution packet via certified mail.
2.       Check related plan records for any other address for the participant
3.       Check with the participant's beneficiary to attempt to locate the participant
4.       Make use of either the IRA or Social Security Administration's letter forwarding services to send the participant the required distribution forms. (The IRS [www.irs.gov] and SSA [www.ssa.gov] have published guidelines.)
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The IRS requires that an audit be prepared annually by an Independent Qualified Public Accountant (IQPA) for all plans with more than 100 participants at the beginning of the plan year.


The IQPA examines all aspects of the plan to determine if they conform to Generally Accepted Accounting Principles (GAAP). He/she then prepares separate financial statements to form an opinion and notes to these financial statements. This “accountant's opinion” is then attached to the Form 5500 when it is filed with the EBSA.


Which employees are included in determining if the plan has over 100 participants at the beginning of the Plan Year?

The employees who are included in the “100 participant” count are those employees who have met the Plan's eligibility requirements and are eligible to participate in the Plan as of the beginning of the plan year being reported. This includes employees who have elected not to contribute salary deferrals to the Plan, but are eligible to contribute salary deferrals to the plan.


Do you include terminated participants who still have account balances in the plan in determining the participant count?

Yes. You need to include all terminated participants who still have a vested account balance in the Plan.


What happens if our plan never had over 100 eligible participants, but now has 105 eligible participants as of the beginning of the plan year?

If the participant count was under 100 in prior years, then goes over 100 participants at the beginning of the plan year, an audit is required. However, you could also elect the 80/120 rule. This rule would allow you to be exempt from an audit until your participant count reaches 120. You would be subject to an annual audit unless your participant count drops to 80 or fewer.


Can I use my own corporate accountant to prepare the accountant's opinion?

Probably – ERISA requires the audit to be completed by an Independent Qualified Public Accountant. To be qualified, the accountant must be licensed as a CPA in the state where the employer is located. To be considered “Independent”, the accountant cannot be an employee, owner, partner, stockholder, or director of the company. The accountant also cannot provide investment advice or received compensation of any nature from the plan. The accountant cannot engage in any joint business venture with the plan or the plan sponsor. The accountant, or the accounting firm, would not be precluded from providing other services to the employer, but the DOL states that it will “give appropriate consideration to all relevant circumstances”. This is clearly an area where caution should be exercised.


What type of information do you need to provide to the auditor? 

  • Form 5500 filing, with all schedules attached.
  • If available, the audit package provided by your fund house (i.e., John Hancock, Mass Mutual, etc.). Usually includes SAS 70 report.
  • Plan Document, Amendments, Summary Plan Description, Summary Annual Report
  • Statement of Plan Assets, Contributions, Loans, Benefit Payouts, Testing Reports, etc. This information is contained in the annual report provided by GF Pension each year.


What happens if the IQPA finds the plan's financial statements to not be in accordance with GAAP?

On the Schedule H attached to the Form 5500, the IQPA will check off the appropriate box, depending on his/her conclusions on the status of the financial statements. 


  • An Unqualified Opinion is issued when the IQPA concludes that the plan's financial statements present fairly the financial status of the plan as of the end of the period audited. 
  • A Qualified Opinion is issued when the IQPA concludes that the plan's financial statements present fairly the financial status of the plan as of the end of the period audit, except for the effects of one or more matters described in the opinion
  • A Disclaimer of Opinion is issued when the IQPA does not express an opinion on the financial statements because he or she has not performed an audit sufficient in scope to enable him or her to form an opinion on the financial statements. 
  • An Adverse Opinion is issued when the IQPA concludes that the plan's financial statements do not present fairly the financial status of the plan as of the end of the audit period.


What happens if the accountant's opinion is not attached to the Form 5500 filing?

If the required accountant's opinion is not attached to the Form 5500, the filing is subject to rejection as incomplete and penalties may be assessed.


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Benefit and Contribution Limits


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Fiduciary Liability Insurance / ERISA Fidelity Bond / Timing of Contributions   


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