Answer: It depends on the type of compensation being paid. Let us explain.

There are two types of compensation that an employee can receive after he or she terminates employment: severance pay and/or post-severance pay. Big difference here.

Severance pay is pay that an employee receives only if he or she leaves, meaning it is not payment for services rendered. This means that severance pay does not meet the definition of plan compensation, and therefore you should not withhold any 401(k) contributions, or it should not count toward any employer contributions, such as match.

Post-severance pay, on the other hand, does qualify to meet the definition of plan compensation and should be taken into consideration when determining contributions, so as long it is paid by the later of 2-1/2 months or by the end of the plan’s limitation year. Example of post severance pay include:

• Unused sick pay, PTO, and vacation
• Bonuses or commissions earned but not yet paid

Answer: Yes.

The purpose of the bond is to protect retirement plan participants against losses caused by acts of fraud or dishonesty. Although such events are rare, it does happen and IRS wants to make sure you and your plan participants are protected.

Generally, a 401(k) or 403(b) must be bonded for at least 10 percent of the total plan assets as of the first day of the plan year, subject to a minimum of $1,000 and maximum of $500,000. It can only be purchased from a surety or reinsurer that’s named on the Department of the Treasury’s Listing of Approved Sureties.

The not-so-good: There are substantial risks associated with not meeting ERISA’s bonding requirements. For example, failing to report a sufficient bond on the Form 5500 can trigger a plan audit. Or a plan fiduciary can be held personally liable for losses that should have been covered by a fidelity bond.

The good: Obtaining a sufficient fidelity bond is typically inexpensive and easy, sometimes only a few hundred dollars.

Need help obtaining a bond for your plan? Send us an e-mail or give us a call.

Answer: Yes, but not all fees. (And you thought this was going to be an easy answer? Well, don’t worry, we will make it easy for you).

Background

Think of it this way: If a specific service is required in order to keep your plan in full compliance, the expenses for that service can be paid from the plan. For example, TPA fee for performing annual non-discrimination testing and government filings, such as Form 5500, can be paid using plan asset. Another is annual CPA audit expenses if your plan is a large filer (generally, plans with 100 or more participants). You don’t have to memorize this as we provide a whole list of fees that can or cannot be paid below – so you can come back here when you need to or print this page as a reference.

Settlor vs. Non-Settlor Expenses

The Department of Labor has indicated that “settlor” which are business expenses related to a retirement plan (and are not expenses for the administration of the plan), cannot be paid by the plan. Only reasonable administration expenses can be paid by the plan. In other words, “settlor” expenses can be paid using plan asset, but not “non-settlor” fees.

Fees That Can Be Paid Using Plan Asset (Non-Settlor Expenses)

• Fee to amend the plan to reflect law changes affecting the plan document
• Annual valuation of trust assets
• Independent appraisal of hard-to-value assets held by plan
• Service provider fees (recordkeeper fees, reporting fees, accounting fees, disclosure expenses such as preparation of the SPDs, benefit statements, fee disclosure to participants, etc.)
• Expenses for monitoring and evaluation for appointed fiduciaries
• Investment education materials for plan participants
• Fees for investment advice services
• Premiums for ERISA fidelity bond
• IRS determination on the plan termination

Fees That Cannot Be Generally Paid Using Plan Asset (Settlor Expenses)

• Fee for plan design proposals
• Legal fees regarding corporate issues relating to the establishment of the plan
• Fee for discretionary amendment (for example, changing the eligibility, allocation formula, vesting, permitting loans, etc.)
• Penalty fee for late Form 5500 filing under DOL’s DFVCP program
• Fees incurred in making a decision to terminate the plan

Final Words

Even if a fee is non-settlor expense and therefore can be paid from the plan, the amount cannot be unreasonable. It is a critical fiduciary decision for employers to determine what is reasonable, so be sure to consult with your retirement plan expert beforehand.

If you’re unsure about what fees you can or cannot charge to your plan, send us an e-mail or give us a ring. While we cannot make the final determination for you, we are happy to talk through the particulars with you to help you arrive at an appropriate decision.

The IRS Form 5500 is an annual report that retirement plans must file with the IRS and DOL to report information about the plan’s financial condition and operations. The due date for filing Form 5500 varies depending on the type and size of the plan. For Dec. 31 plan year ends, the due date is July 31, or if extended Oct. 15.

Certain retirement plans, such as those with 100 or more participants with account balances, are required to undergo an annual audit by an independent qualified public accountant. Plan sponsors are responsible for overseeing the audit process and ensuring compliance with IRS and DOL requirements. An experienced retirement plan expert, such as NESA, can help with the audit process and make the client’s life easier by providing guidance, preparing necessary documentation, and facilitating communication with the auditor, thus ensuring a smoother and more efficient audit experience.

The SAR is a condensed version of the Form 5500 Annual Return/Report that provides plan participants with a summary of the plan’s financial and operational activities for the year. It includes key information such as the plan’s assets, liabilities, income, and expenses. The SAR serves as a communication tool to help participants understand the overall health and performance of the retirement plan. Additionally, it provides participants with important details about their rights and benefits under the plan, including how to obtain additional information or address any concerns they may have. The SAR is typically due to be distributed to participants within nine months after the end of the plan year.