Frequently Asked Questions About 401k Secure®
Can't disabled employees use their group LTD benefits to offset the loss of their 401k contributions?
Very few disabled employees receive LTD payments that are large enough to enable them to maintain their standard of living and save for their retirement.
Can't employees purchase additional LTD insurance to invest if they become disabled?
Most insurance companies severely limit the amount of disability insurance employees can purchase to limit the risk of anti-selection. In addition, even if the coverage were available, the cost would be relatively high and evidence of insurability would be required.
How do you make sure the insurance is non-discriminatory under IRS Section 401(b) rules?
By calculating insurance eligibility and coverage amount based upon the prior plan year's contributions, the insurance is provided in a non-discriminatory fashion within the plan. Participants who made a contribution to the plan are eligible for insurance coverage that is equal to the amount of contributions in the prior plan year.
If the employer makes an additional contribution to pay for the premium, does this impact the discrimination testing?
If a special premium contribution is made to pay the insurance premium for eligible participants, and it is structured as an additional matching contribution, it would be included as a contribution in the prior plan year. This special contribution could then be tested for the prior plan year under IRC Section 401(m) using a last day of the plan year rule.
If, on the other hand, the special premium contribution is made on behalf of all eligible participants, and it is structured as a non-elective contribution, it would be subject to current year testing under the general nondiscrimination test of IRC Section 401(a)(4). This test would easily be passed if the premium were the same amount for all eligible participants.
Finally, according to PLR 200235043 the employer can pay the premiums as an administrative expense allocated against the participant's accounts. If this payment option is utilized discrimination testing is not applicable.
How do you pass IRC Section 415 maximum annual additions?
Since the insurance policy is an investment of the plan, any disability benefits paid into the plan would be deemed to be investment returns rather than contributions under IRC Section 415.
Is the insurance subject to the incidental benefit limits?
Yes - they cannot exceed 25% of aggregate contributions.
How are premiums paid?
The record keeper will initiate a monthly transaction to pay the premium from the plan.
How are benefits paid?
After the insurer has verified a participant as benefit eligible, a monthly disability benefit will be sent to the trustee. The insurer will notify the record keeper of whom is receiving the benefit and the amount of the benefit payment.
How are disability benefits invested?
The benefits are paid to the plan for the benefit of the disabled participants and are invested according to the participant's election, just like any other plan asset within their account.
How is the plan document affected?
Since the insurance is included within the plan, the plan document will be amended to include the insurance as a plan provision.
Can the plan insure 401k "Mirror" and other non-qualified deferred compensation programs?
Our tax-leveraged supplemental "non-qualified" disability plan can be used to continue accruals and payments into employees' non-qualified deferred compensation programs.
What are the tax and ERISA implications of 401k Secure®?
401k Secure® tax and ERISA issues are covered in detail in the Groom White Paper, Private Letter Ruling 200031060 and Private Letter Ruling 200235043.
- The Groom White Paper is a comprehensive and detailed report -including ERISA issues- written by the Groom Law Group.
- Private Letter Ruling 200031060 addresses a 401k plan that offers 401kSecure® on a voluntary basis.
- Private Letter Ruling 200235043 addresses a 401k plan that offers 401kSecure® on an employer paid basis.
What issued patents apply to 401kSecure?
