Participants sign a "Salary Reduction Election" permitting a payroll deduction on a pre-tax basis. Employee saves on Federal and State income tax, earnings grow tax-deferred, taxes paid at distribution. These contributions are always 100% fully vested. Maximum contribution amount is 100% of salary up to $15,500 in 2008. Catch up Provision for participants age 50 or older of $5,000.

Year	2004	2005	2006	2007	2008
Under Age 50	$13,000	$14,000	$15,000	$15,500	$15,500
Over Age 50	$16,000	$18,000	$20,000	$20,500	$20,500

The “Salary Reduction Election” may be made either pre-tax or post tax. The post-tax option works like a Roth IRA, although the same 401(k) amounts apply. Contributions are deducted from the participant’s paycheck after tax, and are never taxed again. Roth 401(k) contributions are subject to 5 year “seasoning” rule, and may be rolled to a Roth IRA at distribution. Assets in a “Conduit Roth” may be rolled back into a 401(k). Current regulations do not allow regular Roth IRA accounts to be rolled into a ROTH 401(k) Account. Roth contributions are subject to minimum distributions for key employees. No income limits apply – any participant in the 401(k) Plan may elect to make Roth Style Contributions.

Employer Match

The Employer may match a percentage of the Employee’s salary reduction. The matching percentage may be determined annually, generally at the beginning of each plan year to be most beneficial. The matching account can be subject to a vesting schedule. The match can be made concurrently or annually prior to the filing of the Employer’s income tax return.

Qualification Contributions

If the 401(k) feature fails the deferral percentage test. In lieu of refunding the excess deferrals to the highly compensated employees, the employer may elect to make an additional contribution to the non-highly compensated employees in order to pass the test. These contributions are 100% vested immediately.

Discretionary Contributions

The Employer may make an additional discretionary or profit sharing contribution each year. These contributions are determined annually and must be made prior to the filing of the Employer’s income tax return to be deductible for the tax year. These contributions are allocated to all eligible participants on a non-discriminatory basis. Employer discretionary contributions can be subject to a vesting schedule.

CONTRIBUTION AND BENEFIT LIMITS

“Compensation” means any income subject to FICA or Self Employment taxes and is a plan year limit based on the beginning of the plan year. For plan years beginning in 2007, the maximum income that may be used for calculation purposes is $225,000. For plan years beginning in 2008, the maximum compensation amount is $230,000.

The maximum 401(k) deferral limit (under 402(g)) is a calendar year limit, per participant. For the calendar year 2008, an Individual may defer 100% of compensation up to $15,500 ($20,500 for participants age 50 or older at anytime in 2007). Roth 401(k) contributions are included in this maximum figure. Contributions made to other 401(k) plans during the year must be included as well.

Maximum Allocation Amount: 2008: $46,000 / $51,000

The maximum amount that may be allocated to one participant is a plan year limit, based on the year in which the plan year ends. For plan years ending in 2008, the maximum amount allocated to a participant cannot exceed the lower of 100% of compensation or $46,000 ($51,000 for those age 50 and over making 401(k) catch up contributions). This amount includes allocations from all sources – employee contributions: 401(k) & Roth, and employer contributions: 401(k), Match, Profit Sharing, Davis Bacon/Prevailing Wage, and Forfeitures. Roll –Over amounts are not included. Hicks Pension will calculate the maximum allocations as a part of the year end administration service.

Sample Allocations

	2007	2007 Over Age 50	2008	2008 Over Age 50
Compensation	$55,000	$55,000	$55,000	$55,000
Maximum Allocation Amount	100% up to $45,000	100% up to $50,000	100% up to $46,000	100% up to $51,000
Calculation:
Employer Contributions	$28,500	$28,500	$29,500	$29,500
Maximum 401(k)	$15,500	$20,500	$15,500	$20,500
Forfeitures	$ 1,000	$1,000	$ 1,000	$1,000
Total	$45,000	$50,000	$46,000	$51,000

401(K) SAFE HARBOR PLAN

The 401(k) safe harbor rules eliminate nondiscrimination testing (ADP and ACP) for employers providing a certain level of employer contributions to their plans. This allows the highly compensated participants to defer the full $15,500 ($20,500 if over 50) annual limit without fear that any portion will have to be refunded. Plan administration will also be simplified for such safe harbor plans, by reason of (a) the elimination of ADP and ACP nondiscrimination testing, and (b) the absence of the need to process refunds or otherwise address failed 401(k) tests.

3% Employer Contribution Safe Harbor: 401(k) plans may avoid ADP and ACP nondiscrimination testing entirely, by providing a minimum employer “nonelective” contribution each year, equal to 3% of compensation, on behalf of each non-highly compensated plan participant who is eligible to make 401(k) elective contributions (whether or not the employee elects to defer). The 3% required employer contribution is similar to a top-heavy required contribution (and will also satisfy the top heavy contribution requirement, if applicable); however, safe harbor contributions must be fully vested. The 3% employer contribution may be made to any defined contribution plan of the employer, such as the 401(k) plan, an ESOP or a money purchase pension plan.

Safe Harbor Match: An alternative safe harbor permits the employer to avoid ADP and ACP testing while limiting its safe harbor contribution to those employees who elect 401(k) deferrals. This safe harbor requires a fully vested matching contribution for all participants equal to:

(a) 100% of the employee’s 401(k) deferrals up to 3% of compensation; and

(b) 50% of the employee’s 401(k) deferrals between 3% and 5% of compensation.

Therefore, if a participant contributes 5% of pay, the employer would contribute 4%. This is the maximum cost of the Safe Harbor Match. Note that the employer may make a higher Safe Harbor Matching contribution – up to 6% of pay if desired.

These safe harbors provide major benefits to 401(k) plan operation and administration. For employers willing to fund the required employer contribution, highly compensated participants can defer the maximum annual $15,500 amount ($20,500 if over 50) without fear that a portion will have to be refunded at year-end; and the employer is saved the expense of monitoring and testing the ADP and ACP limits.

The matching contribution safe harbor should be attractive to employers that have emphasized matching contributions rather than nonelective or discretionary profit sharing contributions to their plans, as a means of encouraging employees to defer. The 100% matching rate will provide a serious incentive for all eligible employees to elect 401(k) contributions.

Both the 3% safe harbor and the matching contribution safe harbor have a special employee notice requirement. A- notice must be provided to participants at least 30 days prior the start of the plan year informing them of the Safe Harbor provision.

AUTOMATIC CONTRIBUTION ARRANGEMENTS

Basic Automatic Contribution Arrangement “ACA”

The Automatic Contribution Arrangement, or “ACA”, refers to a plan design method under which a participant is automatically enrolled into a plan if he or she does not return an enrollment form. In other words, if a participant is provided enrollment materials, and does not make an election at all, then he or she is automatically enrolled at a pre-determined rate. It turns procrastinators into participants. If the participant wishes not to participate, an enrollment form must be returned with a 0% election.

Set Deferral Amount: The employer determines what the minimum deferral amount shall be. Regulations allow for anywhere from 1% - 10%. The national standard is between 3% and 5%. The deferral is a traditional, pre-tax contribution (not Roth 401(k)).

Default Investment: Since the participant has not completed an enrollment form, the employer must select a default investment fund. Typically a professionally managed account such as a balanced fund (stocks and bonds), a lifecycle fund, or a target retirement fund should be used. The DOL has provided Safe Harbor regulations in 2007 which will relieve the employer of fiduciary liability when choosing the default fund, by providing certain notices to the effected participants.

Pros: The provision will, by default, increase participation in the plan. It also acts as a forced savings plan, which some employees may actually perceive as a benefit.

Cons: The employer must be pro-active in enrolling participants who do not complete enrollment forms. Failing to auto-enroll a participant in a timely manner could lead to significant liability. If a matching contribution is offered, the cost of the match will increase as participation increases.

Who can benefit: Plans that desire a higher participation rate and/or fail the 401(k) testing due to low participation will benefit. Plans that pass testing or have a Safe Harbor provision typically are not so concerned about participation rates and therefore would not benefit as much.

Qualified Automatic Enrollment Arrangement “QACA” – New for 2008 The Qualified Automatic Enrollment Arrangement or “QACA”, refers to a special Safe Harbor plan that allows a plan to avoid 401(k) discrimination and Top Heavy testing, much like the traditional Safe Harbor plans. The QACA’s automatic enrollment feature is the biggest difference; yet there are also other differences in the areas of minimum automatic contribution amount, vesting and the mandatory Employer Contribution.

Minimum / Maximum Contribution Amount: The QACA requires that the minimum amount of salary deferred is 3% and the maximum is 10%. The employer may adopt one of two methods to calculate the participant’s contribution amount:

1. Automatic Escalator Method: The method allows deferral contributions to increase each year not to exceed 10%. Each participant subject to the ACA would begin at 3%, and each year would automatically be escalated by 1% until reaching a maximum of 6% after 4 years, for instance; or

2. Flat Amount Method: each participant subject to the ACA would begin immediately at an amount anywhere from 6% to 10% of salary. No escalation required..

Mandatory Employer Contribution: There are two types of Employer Contributions required:

a. 3% Nonelective Contribution to all employees eligible to defer at anytime during the plan year; or

b. Graded Employer Matching contribution equal to 100% of the first 1% of salary deferred by the participant, and 50% of the next 5% of salary deferred. So, if a participant defers 6% or more of salary, the employer will contribute 3.5% of salary as a Match. This is the maximum possible matching liability for the employer.

Vesting: Participants participating in a QACA vest 100% after two years of service, instead of 100% immediately like the traditional Safe Harbor.

Pros: The QACA will, by default, increase participation in the plan. It also acts as a forced savings plan, which some employees may actually perceive as a benefit. In addition, 401(k) and Top Heavy discrimination testing is not require, allowing Highly Compensated Employees to defer the maximum 401(k) amount without regard to participation rates by other employees. Finally, funds vest after two years, providing employees more incentive to stay with the company.

Cons: The employer must be pro-active in enrolling participants who do not complete enrollment forms. Automatic Escalation may be a daunting task. Failing to auto-enroll a participant in a timely manner could lead to significant liability. If a matching contribution is offered, the cost of the match will increase as participation increases.

Who can benefit: Plans that desire a higher participation rate and/or fail the 401(k) testing due to low participation will benefit. Plans that are currently a Safe Harbor Matching plan, may save .50% in employer matching contributions, and vest participants in 2 years rather than immediately.

Roth 401(k) is yet another provision of EGTRRA that has been available since January 1, 2006. Plan Sponsors of 401(k) plans have the option of adding the Roth 401(k) feature to their plans.

CONTRIBUTIONS

Taxation: Contributions are made after-tax, and distributions are tax-free.

Limits: The 401(k) limit remains the same – 100% of income up to $15,000 in 2006, plus an additional $5,000 Catch-Up contribution for those age 50 and over in 2006. The limit is an individual maximum of all 401(k) contributions – traditional and/or Roth 401(k).

Participant Elections: Participants may elect to contribute pre-tax (traditional), after-tax (Roth), or any combination of both. How and when they may actually make contributions is controlled by the plan amendment. We recommend limiting participants to one type of 401(k) election per year - Traditional or Roth – but not both.

Record-Keeping: Due to unique tax characteristics, Roth contributions must be tracked in a separate account. Most 401(k) investment providers have upgraded their systems to track Roth 401(k) contributions in 2006. Be sure to check with your investment provider.

Administration: Most payroll providers have an “after-tax” slot for Roth contributions. If a participant is making both Roth and Traditional contributions, you’ll need to ensure the overall combined limitation of $15,000 is not exceeded. At year end, we will require a listing of 401(k) contributions made, by type.

Employer Contributions: Employer Matching Contributions remain unchanged. Any matching contributions offered must apply to Traditional and/or Roth 401(k) contributions. Matching contributions remain pre-tax, by the employer, and tracked in a separate account.

Testing: Roth contributions are subject to the same discrimination and top-heavy testing as traditional 401(k) contribution. If an ADP Test fails, and a HCE has both Roth and Traditional contributions, the plan may provide the option to choose which type of contribution is distributed.

Conversion: Traditional 401(k) accounts cannot be converted to Roth 401(k) accounts.

IRA Contributions: If a participant meets the income limitations, Roth IRA contributions can also be made, separate from the Roth 401(k). This means that for 2006, a participant could make a Roth 401(k) contribution of $15,000, a Roth IRA contribution of $4000, and if he/she is age 50 or more, Catch-Up contributions of $5000 to the 401(k) and $1,000 to the Roth IRA, totaling $25,000.

DISTRIBUTIONS

Tax Free Qualification: In order to be a Qualified Roth Distribution (totally tax-free), there are two conditions:

1) The Distribution must be made after the 5 year non-exclusion period, AND

2) The Distribution must be for a Qualified Purpose: age 59½, Disability or Death

5-Year “Seasoning” Rule: The 5 year rule is satisfied after the end of the 5 taxable year period beginning with the first year in which the Roth 401(k) contribution was deposited. This means that a participant could make their first Roth 401(k) contribution on December 1, 2006, and provided they have a Qualified Purpose, make a Qualified Roth 401(k) distribution on January 1, 2011, just 4 years and 1 month later.

Hardship: Hardship withdrawals are allowed, yet are not a qualified Roth Distribution.

Loans: Loans are available from the Roth 401(k) source.

Roll-Over: Roth 401(k) can be rolled but only to a Roth IRA or another Roth 401(k) or Roth 403(b). Roth IRA cannot be rolled into a Roth 401(k).

Minimum Required Distributions: At age 70½, distributions must begin from Roth 401(k). However, the Roth 401(k) can be rolled to a Roth IRA which does not require such withdrawals.

WHO WILL WANT ROTH 401(k)?

• Those who are prevented from having a Roth IRA due to their income.

• Workers who are in a low tax bracket but expect to be taxed at a higher rate in retirement (young participants).
• Workers in any tax bracket who expect their tax rate in retirement to be higher than today’s rate (and may have fewer itemized deductions in the future).
• Workers with large assets (retirement and otherwise) who want to minimize/manage their taxes – great for estate planning (leaving assets for heirs).
• Workers who are just not sure what the future will hold and simply want to have all options available for flexibility.

ACCOUNTING & RECORD-KEEPING

There are 3 levels of “Accounting” or “Record-Keeping” required for qualified retirement plans: Plan Level, Participant Level, and Source Level.

1. PLAN LEVEL: A Trust Financial Report is required at the plan level. This report is a culmination of all transactions made during the year, rolled up into macro figures. The income and expense portion of the report reflects the total contributions, distributions, gains, losses, fees, loans etc. made during the year. The balance sheet portion reflects the current position of assets as of the beginning and end of the plan year. The Trust Financial Report is required information which is included on the Form 5500 filed each year. Trustee access to plan level reports is typically offered.

2. PARTICIPANT LEVEL: Accounts must be maintained for each participant in the plan -- typically known as “FBO” accounts. Although the account is “owned” by the plan trustee, the participants are typically given control over the management of assets within his or her FBO account. All transactions at the participant level are accounted for in this account. They must then be rolled up to plan level figures to generate the Trust Financial Report. Participant Access via 1-800# and the internet is typically offered.

3. SOURCE LEVEL: A plan can have numerous sources of monies, including participant contributions (401(k)), employer match, employer profit sharing, roll-over, loans, etc. Vesting and tax treatment at distribution may differ among sources. For instance, 401(k) is 100% vested, profit sharing may be on a 6-year schedule. 401(k) monies are taxed by the State of Hawaii at retirement, employer source funds are not. For these reasons, participant accounts must be accounted for by source.

Typically, a 401(k) plan will allow it’s participants to direct their own investments. This is typically done by either choosing a 401(k) vendor or setting up brokerage or single mutual fund accounts.

401(k) VENDOR: A 401(k) vendor typically offers one or more families of mutual funds. Participants are limited in choice to only those funds within the program. All three levels of accounting are provided by the vendor. Full communication and enrollment are provided, including the new disclosure requirements of the PPA 2006. A local service representative is typically paid a commission to service the plan. Most vendors charge a fee to provide this level of service. Typically in the range of $15 - $45 per participant per year plus an Asset Management Charge.

BROKERAGE ACCOUNTS: Individual brokerage accounts may be established for each participant, and participants are a wide range of investment opportunities including stocks, bonds, mutual funds etc. Typically these accounts offer Participant Level accounting and internet access, yet do not provide Plan Level or Source Level accounting. Therefore, Hicks must provide these accounting services.

The Hicks Fee Schedule for 401(k) plans is based on using a 401(k) Vendor program. The costs to provide additional accounting services for brokerage accounts (or any other investment account that does not provide plan level and source accounting) is $80.00 per hour, and typically runs .5 – 1 hour per participant per year. Please contact us for an exact quote if you are considering this type of investment account.