Vermont Bar Journal, Vol. 40, No. 2 Fall 2014, Vol. 40, No. 3 | Page 24

by John H.W. Cole, Esq.

Retirement Plans:
What to Select When You’re Selecting
The IRS requires every profit sharing
and 401(k) plan to be updated once every six years to reflect changes in the Internal Revenue Code and tax regulations. IRS
approval of existing plan documents expired March 31, 2014. All profit sharing and
401(k) plans need to be brought up to date,
and filed with the IRS where applicable, to
be considered qualified. The update period
expires March 31, 2016.
For tax purposes plan restatements are
retroactively effective to April 1, 2014.
However, there is no guarantee that a state
or federal court would be similarly inclined
in a collection or bankruptcy proceeding. In
such proceedings a plan must be considered qualified for plan interests to be protected from creditors. Accordingly I recommend that all profit sharing and 401(k) plans
be brought into compliance as soon as possible.
In addition, the U.S. Supreme Court, in
U.S. v. Windsor,1 invalidated Section 3 of
the Defense of Marriage Act, which prohibited the recognition of same sex marriages, invalidating as well the definition of
marriage set forth in most plan documents.
Subsequently, the IRS adopted its own definition of marriage, which was even broader as to same sex marriages. This amendment must be signed by the due date of the
sponsor’s 2014 tax return.
This article is designed to assist plan
sponsors in selecting plan provisions. The
discussion applies to both profit sharing
and 401(k) plans, excepted as otherwise
noted.
Eligibility Requirements
A profit sharing plan can have an eligibility requirement of two years, one year,
or less than a year. If it has an eligibility requirement of more than a year then the
plan must provide for full and immediate
vesting of profit sharing allocations. Vesting
is discussed below. For a 401(k) plan eligibility cannot be more than one year.
Forty years ago plans would commonly exclude part-time and only cover fulltime employees. The words “full-time” and
“part-time” were considered imprecise,
so in 1974 the rules were changed to express eligibility requirements in terms of
years of service. A year of service for eligibility purposes is a twelve-month period,
starting with an employee’s date of hire, in
which he works 1,000 hours. For example,
24

if an employee is hired July 15, 2014, and
works 1,000 hours by July 14, 2015, he has
completed one year of service. 1,000 hours
in a twelve-month period is approximately
19.23 hours per week, the current measuring stick for determining full-time or parttime employees. If a plan has an eligibility requirement of less than one year (such
as a six-month eligibility requirement) then
hours aren’t counted. An employee has met
eligibility requirements as to service once
the eligibility time period has been met.
This means that employees otherwise considered “part-time” will enter the plan without regard to hours worked.
The nondiscrimination requirements of
the Code are based upon a comparison
of the treatment of the highly compensated employees (HCEs) with the treatment
of the non-highly compensated employees
(NHCEs). If all eligible HCEs participate in
a plan the plan must cover 70% of all eligible NHCEs. At the same time, most plans
require eligible employees to meet an accrual requirement to receive an allocation.
Typical accrual requirements are that a participant be employed on the last day of the
plan year and/or work a minimum number
of hours.
Part-time employees, however, tend to
turn over quickly, and often fail to meet accrual requirements. By allowing part-time
employees to become eligible, but not giving them an allocation because of their failure to meet the accrual requirement(s), a
plan can easily fail the 70% minimum participation rule