Employees may begin participation as of the Plan Entry Date on or following completion of the Eligibility Requirements as stated in your plan document. Once you have met these requirements, request an enrollment package from your employer. The following items will typically be provided during the enrollment period by your employer and/or the investment advisor for the plan:

3. Enrollment Form

4. Beneficiary Designation Form

Enrollment forms must be executed prior to the Plan Entry Date. Participants electing not to participate must still complete an Enrollment Form by indicating a contribution amount of 0%. Participants electing 0% may increase their elections on any subsequent Plan Entry Date.

For name changes due to marriage / divorce etc., please inform your employer. A new Beneficiary Designation Form may need to be completed. In the case where a newly married participant wishes to retain the current beneficiary, then the new spouse must sign a waiver form.

BENEFICIARY DESIGNATION

Every Participant with an account balance should have a completed Beneficiary Designation Form on file.  A new Beneficiary Designation form should be completed whenever the participant has a name change or undergoes a change in marital status. Request a Beneficiary Designation Form from your employer if you are unsure if you have completed one.

If the participant is married and elects someone other that the spouse as the beneficiary, then the spouse must waive his / her rights by completing the Spousal Waiver Form.  This form must be notarized.

EMPLOYEE 401(K) CONTRIBUTIONS

Limits: The maximum allowable 401(k) contribution amount is the lesser of 100% of the participants’ salary, or up to a calendar-year dollar cap. For participants age 50 and over,a higher amount is allowed. Note that the dollar cap applies to all salary deferral plans in which the employee participates. Therefore, employees with more than one employer must monitor their contributions, and notify either this plan, or their other plan(s) should a corrective distribution be required. The dollar maximums are as follows:

1. Trustee submits Request for Distribution to Hicks. If you have not received any type of notice from Hicks, then your employer may not have informed us of your termination.  Please contact your employer to ensure we have been notified.
2. Hicks determines distribution procedures of the plan, and either

1. forwards Benefit Election Forms to Participant, or
2. forwards a Notice to Participant indicating anticipated date of distribution.  A disribution may be delayed for up to 21 months depending on the operational provisions of the plan.

Spousal Signature Requirements: For Defined Contribution Plans (Profit Sharing / 401(k)), signature of particpant's spouse is not required. For Defined Benefit or other Pension Plans, signature of spouse is required. Notarized signatures of spouse are recommended to protect the Trustee and Plan Administrator, but are not legally required.

3. Upon receipt of the Benefit Election Forms, Hicks will determine the amount to be paid, and process the payment pursuant to the plans’ administrative procedures

1. If plan uses an investment company that provides complete record-keeping, source accounting and distribution services, Hicks will process the distribution using the investment companies procedures (either direct via the investment company website, or via completion of the appropriate distribution forms, for execution by the Plan Trustee and forwarding to the investment company. The Participant typically has full control over the management of funds until the date of distribution.

i. The investment company will then prepare the Form 1099R at year end.

2. If plan uses self directed brokerage accounts or other investment provider that does not provide distribution services, Hicks will request that the account be liquidated in order to freeze the gain/loss and to calculate the amounts due the participant and the amounts to be withheld and or forfeited. Hicks will then forward an Instruction to Trustee Form indicating the amounts to be paid. The Plan Trustee must then write the various checks. A copy of the checks should be forwarded to Hicks, along with Part III of the Instruction to Trustee Form signed and dated.

i. Hicks will then prepare Form 1099R at year end.

1.     Trustee prepares Loan Request Form and submits to Hicks (Apply online via the Client Portal).

2.     Within 7 days, Hicks will prepare the loan documents, amortization schedule, and distribution instructions. These documents will be forwarded to the Trustee for review and execution by the Participant.  Trustee must then request check from the investment company.

Spousal Signature Requirements: For Defined Contribution Plans (Profit Sharing / 401(k)), signature of particpant's spouse is not required. For Defined Benefit or other Pension Plans, signature of spouse is required. Notarized signature of spouse is recommended to protect the Trustee and Plan Administrator, but is not legally required.

3.      Trustee retains original set of loan documents. One copy is forwarded to Hicks.

4.      Trustee initiates payroll deduction (after-tax) and monitors payments during the year.

5.      Hicks performs annual accounting of loan during Annual Administration Services.

• Well, maybe, but with a twist. First of all, if a loan is done incorrectly it could be considered a prohibited transaction subject to penalties, a disqualifying event for the plan and a taxable distribution.
  
• Participant loans are an exception to the prohibited transaction rules. Generally, a participant cannot borrow from a qualified plan unless certain requirements are met. Otherwise, the borrowing is prohibited and must be immediately paid back. A 15% penalty per year is assessed on the accrued interest of a prohibited loan until the principal and accrued interest are fully repaid. In addition, a 100% penalty can apply if the prohibited loan is not repaid promptly upon demand by the Internal Revenue Service. Also a prohibited loan is required to be reported on the annual report form 5500 filed with the IRS; and could potentially cause the disqualification of the plan especially if it is made to a highly compensated employee.
  
• The rules that must be followed to allow non-prohibited participants to borrow are summarized as follows:

1. There must be a bona fide loan program.

2. There must be specific plan loan provisions.

3. Loans must be available on a reasonable equivalent basis.

4. Loans cannot be available to highly compensated employees in amounts greater than for other employees.

5. Loans must be adequately secured.

6. Loans must bear a reasonable rate of interest.

• Usually plans that offer loans provide for written loan programs and specific loan provisions that are communicated to the participants. If loans are available to all participants on the same terms and conditions, usually the equivalency and anti-discrimination rules are met. A participant’s creditworthiness at the time of the loan can be taken into account without violating these latter requirements.
  
• If the loan is evidenced by a promissory note and secured by not more than 50% of the participant’s account balance (i.e. the account balance is at least twice the amount of the loan), it is adequately secured. Other property, such as a home, could also secure the loan. The plan must have the ability to foreclose a loan that is in default. While it may be relatively easy to foreclose on the participant’s account, it may be more difficult to foreclose on other assets. This difficulty usually dissuades trustees from allowing other security for loans. Finally, foreclosing on a loan has tax consequences as will be discussed further.
  
• What constitutes a reasonable rate of interest is not always clear. An interest rate must be equivalent to commercial rates charged for similar loans. Passbook and brokerage account loans may be similar. The trustees have the responsibility to determine the reasonableness of the interest rate. This is because the loan is considered a plan investment even if the participant is investing in his own loan. Often interest rates of 1-1/2 to 2 points above prime are charged; but whether this is reasonable depends upon the circumstances.
  
• A loan is treated as a taxable distribution unless the tax rules are followed. If the loan constitutes a taxable distribution, not only can it be subject to income tax but also to the 10% premature distribution penalty, e.g. if the distribution takes place before the participant reaches age 59 ½, or terminates employment before the participant reaches age 55, or becomes disabled, or dies. A premature distribution from a 401(k) plan could cause the plan to be disqualified.
  
• The rules for a non taxable loan can be generally summarized as follows:

1. The loan cannot exceed the lesser of 50% of the vested account balance or $50,000, at the time of the loan.

2. The loan must be repaid within 5 years (with one exception).

3. The loan must be repaid in substantially level payments of principal and interest not less frequently than quarterly.

• The 50% rule requires that the amount of the proposed new loan plus the outstanding balances of other existing loans cannot exceed 50% of the vested account balance at the time the new loan is taken out. Of course, determining the correct value of the participant’s account and vesting percentage becomes important. If the participant’s account balance should decline after the time the new loan is taken out, the 50% rule is not violated. However, if the loan is secured solely by the participant’s account balance, a decline in the value of the other assets in the account below the balance of the loan could raise adequate security issues.
  
• The $50,000 maximum rule requires that the amount of the proposed new loan plus the highest outstanding balance of any other loan during the prior 12 months cannot exceed $50,000 at the time the new loan is taken out. So, a prior loan that was paid within the last 12 months may impact on the permitted amount of the new loan. Accrued interest on the prior loan is also taken into account in determining the $50,000 limit.
  
• Loans must be repaid within 5 years. The promissory note should clearly indicate a term of not more than 5 years. An original loan extended beyond 5 years will violate the five-year rule. The only exception is a loan used to purchase the participant’s principal residence. Such a loan may have a longer term. The trustees should consider what term is reasonable in light of collectibility. For example, 10-15 years may be reasonable under the circumstances.
  
• Level payments are required with some minor deviations permitted. While payments must be made no less frequently than quarterly, loan payments are usually done through payroll deductions. This practice helps to keep the loans current. If payments are made by check, the trustees should take reasonable steps to make sure payments are made on time.
  
• What happens if the loan goes into default? Proposed IRS rules give a participant a grace period of up to the end of the quarter following the quarter in which a payment is missed. The promissory note, however, may provide for a shorter grace period. If the loan goes into default, the entire amount of the loan, including accrued interest at the time of default, is due. The loan is then deemed to have been distributed. This deemed distribution is taxable for the year in which the default takes place, and may be subject to the 10% premature distribution penalty.
  
• If there has been a deemed distribution there may also be an actual distribution (foreclosure) of the loan at the time of default if foreclosure is permissible. Until the loan is actually distributed, however, the trustees must take reasonable steps to collect on the loan and interest must still be accrued. If the loan is secured by the participant’s elective deferral account, the loan cannot be actually distributed until permitted under the 401(k) plan rules (e.g. until a hardship occurs, termination of employment or after attaining age 59 ½). When there has been a previous deemed taxable distribution and the defaulted loan is later actually distributed, the participant is not again taxed on the actual distribution including accrued interest.
  
• There are other considerations. For example, an actual distribution of a loan that is taxable (e.g. where there has been no earlier deemed distribution) is an eligible rollover distribution; whereas a deemed distribution is not. Neither distribution is subject to tax withholding. In case of a request for a hardship distribution from a 401(k) elective deferral account, the participant must first take out the maximum amount of a loan available to him. If you need more information on participant loans, please contact us.