Owner Only Exemption from PBGC Coverage

All defined benefit plans (including cash balance plans) are covered by the PBGC unless the plan qualifies for a statutory exemption from PBGC coverage.

There is an exemption for plans that cover only substantial owners.  If a defined benefit plan covers even one employee who is not a substantial owner, then the plan does not qualify for this exemption.  

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How Do You Get Paid?

It is important to understand how any service provider to the 401(k) plan gets paid.  Ideally, each and every 401(k) provider would proactively disclose any indirect compensation, and there are fee disclosure regulations effective later this year that will require this.  But, if a 401(k) third party administrator (‘TPA’) does not volunteer this information, a business owner should directly ask.  It is best to ask the TPA directly and not filter the question through the financial advisor.

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Plans Covered by the PBGC

The general rule is that all defined benefit plans are covered by the PBGC unless, the defined benefit plan qualifies for a statutory PBGC coverage exemption. These statutory exemptions are covered in ERISA Section 4021(b).

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Questions to ask a 401(k) TPA

A financial advisor goes out to a small business owner and presents three options for a 401(k) record-keeper.  He talks about each of the record-keeper’s due diligence on the funds, the investment fees, the enrollment material, and the website.  There is a lengthy and robust discussion about the pros and cons of each record-keeper.  At some point in the process, the financial advisor explains that a third party administrator (TPA) will do the plan document, Form 5500/Form 5500-SF, and the IRS-required nondiscrimination testing.  Usually the time spent on the choice of TPA is minimal, but sometimes a representative of the TPA attends the meeting.

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Nova 401(k) Associates Announces 2009 Form 5500s 95% Complete

Houston, TX, July 19, 2010 – Nova 401(k) Associates, a leading Third Party Administration (“TPA”) firm in the 401(k) industry, announced today the company delivered 2009 Form 5500s to over 95% of their 401(k) clients by June 30, 2010.  The Form 5500 is the annual return for 401(k) plans.  For calendar year plans, the regular deadline for 2009 Forms to be filed is August 2, 2010.  The 2009 plan year is the first plan year for which electronic filing is required.

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