One of the questions asked by your TPA during the annual census collection may be whether your participant contributions and loan payments were transmitted within the Department of Labor (DOL) safe harbor time frame.

It’s an important question because both the DOL and the Internal Revenue Service (IRS) are interested in seeing employee contributions deposited timely. When contributions are not deposited timely, an operational failure occurs, which could lead to plan disqualification. However, there are ways to correct the failure as well as ways to prevent future occurrences.

The following are a few scenarios that may trigger late deposits:

• Depositing a few pay dates together, later in the month, when you finally have time.
• Depositing late because you were waiting for cash flow to deposit the match at the same time.
• The employee who handles deposits is on vacation and no one else knows the process.
• Starting a deposit submission but getting sidetracked and failing to finish the submission.

The general rule is that employee contributions and loan repayments must be remitted to the plan by the earlier of:

• The date when contributions/loan repayments can reasonably be segregated from the employer’s general assets. (Most 401(k) and 403(b) plans will fall into this category.)

OR

• The 15th business day of the next month.

The number of participants in your plan also affects the permitted time frame.

• If your plan has under 100 participants as of the beginning of the plan year, no later than the 7th business day following the paycheck date is considered timely.
• If your plan has 100 or more participants, though, you likely have less time. In this case, contributions must be remitted on the earliest date possible instead of within 7 business days. If you can make the deposit on the 2nd business day after the paycheck date, for example, that is going to be the standard that the DOL feels is timely for your plan.

Having contributions remitted late to the plan could also cause additional issues for the plan. Depending on the contribution amounts involved and the fluctuation of investment returns around the time of the late deposits, this could lead to potential lawsuits by participants. Also, since the late deposit amount is reported on the Form 5500, it is a possible red flag for IRS and/or DOL audits, unless their correction programs are used. Since your TPA completes additional work to assist with the calculation and correction of late deposits, you may also incur additional administration fees.

If you discover that you missed a deposit, reach out to your TPA for assistance in determining if it is late and what options are available for correction. Your TPA will be able to explain the correction programs available and provide assistance, but ultimately it will be the plan sponsor or fiduciary who decides how to proceed. If the late deposit is discovered during an IRS audit, the Audit Closing Agreement Program (Audit CAP) option uses similar correction steps but involves negotiated sanctions.

How you choose to correct the failure will likely depend on the severity of the failure, such as the number of participants affected, the number of deposits that are late, and the contribution amounts that are late. Late deposit correction options are described below.

Self-Correction Program (SCP) – IRS Employee Plans Compliance Resolution System (EPCRS)

This option is available without contacting the IRS, but you must have procedures in place, and you must review them to determine what changes are needed to avoid the issue in the future.

• Determine which deposits were late.
• Calculate lost earnings to be deposited to affected participants’ accounts.
• Report the late deposit amount on Form 5500 for the year of the failure through the year of correction.
• In addition to the error being an operational failure, it is also considered a prohibited transaction because it is believed to be a loan from the plan to the employer. For 401(k) plans (but not 403(b) plans), this requires payment of a 15% excise tax on the calculated lost earnings using Form 5330.

Voluntary Correction Program (VCP) – IRS Employee Plans Compliance Resolution System (EPCRS)

• Complete the same action steps as SCP above.
• Submit the necessary application to describe the failure and the correction.
• The user fee varies from $1,500 to $3,500, depending on the plan’s asset balance.
• Once the submission is reviewed, the IRS issues a Compliance Statement if the correction methods were approved or if additional steps are required for correction.

DOL’s Voluntary Fiduciary Correction Program (VFCP)

• Complete similar steps as above to determine which deposits were late, and deposit lost earnings to applicable participants’ accounts.
• The completion of an application is also required, but no user fee is due.
• Some corrections may qualify for exemption from the payment of the 15% excise tax.

There are ways to avoid late deposits!

1. Revisit your process. If you don’t really have one, now is the time to create one.

• Who is responsible for making the deposit?
• Who is the back-up person if the usual employee is out?
• How many days after the paycheck do you intend to make the deposit?
• Who will review the transaction confirmation to be sure it’s completed?

Ask a third party for help! Your CPA, TPA, or payroll company may offer contribution remittance services. Reach out to one of them for options and pricing.

2. Find consistency. If you have payroll on Fridays, for example, and you remit your payroll taxes on the following Tuesday, submit the contributions to the plan on Tuesday as well.
3. Ask a third party for help! Your CPA, TPA, or payroll company may offer contribution remittance services. Reach out to one of them for options and pricing. Maybe the person-by-person details can be remitted to the plan’s investment platform on your behalf, and you will simply need to login to review the data and remit the payment portion.

Please note that employer contributions do not have the same timing requirement that employee contributions and loan repayments have. Employee contributions and loan repayments being withheld from your employees’ paychecks should be deposited to their accounts on time. The more checks and balances you have in your deposit process, the smoother it will be and the better chance your deposits will be timely.

Additional resources for this topic:

DOL Federal Register issued 1/14/2010 Volume 75, Number 9: https://www.govinfo.gov/app/details/FR-2010-01-14/2010-430/summary

IRS 401(k) Plan Fix-It Guide (Mistake #8):

https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide

New Information on Participant Statements: Lifetime Income Illustrations

If you sponsor a defined contribution retirement plan, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 now requires additional information be provided to your plan participants on their quarterly account statements. Along with their current account balance, two lifetime income illustrations must now be included once a year. This is intended to help your plan participants understand their current account balance in terms of what it means for them at retirement so they can be better prepared.

When is this required to start?

The Act’s interim final rule was issued on 9/18/21 and the first illustration must be provided within 12 months of that date. The start date will depend on the type of accounts included in your plan.

• Participant-directed accounts which receive quarterly benefit statements: Illustrations must be included on the 6/30/22 quarterly statement (if not already provided on the 3/31/22 statement).
• Non-participant-directed accounts: Illustrations must be included on the statement for the first plan year ending on or after 9/19/21 and must be furnished no later than the filing of the annual return for that year. For calendar year plans, this will be the 12/31/21 statement, furnished no later than 10/15/22.

What illustrations are required?

The following will be provided regardless of the participant’s actual marital status:

• A single life annuity (SLA): This will show a fixed monthly amount for the life of the participant, with no surviving benefit to a spouse after their death.
• A qualified joint and 100% survivor annuity (QJSA): This will show a fixed monthly amount for the life of the participant, and the same fixed monthly amount to the surviving spouse after the participant’s death.

What assumptions are used for the illustrations?

Age: 67 (or actual age, if older)

Interest rate: 10-year Constant Maturity Treasury rate (10- year CMT) as of the first business day of the last month of the statement period. The 10-year CMT approximates the rate used by the insurance industry to price immediate annuities.

Mortality table: Gender neutral mortality table in section 417(e)(3)(B) of the Internal Revenue Code. This is the table generally used to determine lump-sum cash-outs from defined benefit plans.

This is a sample illustration provided by DOL:

Facts: Participant X is age 40 and single. Her account balance on December 31, 2022 is $125,000. The 10-year CMT rate is 1.83% per annum on the first business day of December.

The benefit statement of this participant would show:

Current Account Balance: $125,000

Single Life Annuity: $645 per month for life (assuming Participant X is age 67 on December 31, 2022)

Qualified Joint and 100% Annuity: $533 per month for participant’s life and $533 for the life of spouse following participant’s death (assuming Participant X and her hypothetical spouse are age 67 on December 31, 2022). Source: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/pension-benefit- statements-lifetime-income-illustrations

What does this mean for you as plan sponsor?

Does your plan have to offer annuities? No, the normal form of distributions will still follow your current plan provisions. If your plan does offer annuities as a distribution option, you have options regarding which interest rate assumption to use. However, you will still need to assume age 67 (unless older), assume the spouse and participant are the same age, and show both the SLA and QJSA options.

Will the plan sponsor and fiduciary be liable if the payments at retirement are not as illustrated? No, as long as:

1. the illustrations are based on the DOL assumptions and
2. the illustrations on the statements use the DOL model language (or similar language). The model language will help explain how the calculations were prepared and that they are illustrative and not guaranteed.

Your participants may have questions about the illustrations, especially since the age, gender, and marital status used may differ from their actual situation. The illustrations also only consider the current account balance, not additional contributions and earnings that may be added to that balance over time. Recordkeepers and investment advisors (used by the plan for the participants or the participants’ own personal advisors) will be able to provide additional information since these illustrations may differ from what the participants have seen previously when estimating their future retirement benefits. Participants will need to consider all applicable information that pertains to their personal financial situation. This new requirement, though, is just one more piece of information that hopefully enables them to take additional steps to plan for a successful retirement.

Upcoming Compliance Deadlines for Calendar- Year Plans

May 15th

Quarterly Benefit Statement – Deadline for participant-directed plans to supply participants with the quarterly benefit/disclosure statement including a statement of plan fees and expenses charged to individual plan accounts during the first quarter of this year. Note that May 15th falls on a weekend in 2022. No guidance clearly allows extending the deadline to the next business day.

June 30th

EACA ADP/ACP Corrections – Deadline for processing corrective distributions for failed ADP/ACP tests to avoid a 10% excise tax on the employer for plans that have elected to participate in an Eligible Automatic Enrollment Arrangement (EACA).

July 29th

Summary of Material Modifications (SMM) – An SMM is due to participants no later than 210 days after the end of the plan year in which a plan amendment was adopted.

August 1st

Due date for calendar year-end plans to file Form 5500 and Form 8955-SSA (without extension). Due date for calendar year-end plans to file Form 5558 to request an automatic extension of time to file Form 5500.

August 16th

Quarterly Benefit Statement – Deadline for participant-directed defined contribution plans to provide participants with the quarterly benefit/ disclosure statement and statement of plan fees and expenses that were charged to individual plan accounts during second quarter of 2022.

As a plan sponsor, do you feel your employees have a clear understanding of the company’s retirement plan?

Do most utilize it as a tool to save for retirement—and, if not, do they understand the benefit that they are missing? According to the 2022 PLANSPONSOR Participant Survey, 115 of 774 (14.9%) respondents opted not to participate in a workplace defined contribution plan for various reasons. 18.3% of those that declined to participate said it was because they need to better understand the benefits of participating. 15.7% said they needed their income for day- to-day expenses. 50.5% of the nonparticipating employees were between the age of 18 through 39, 44.3% were age 40 through 59. This means that participants of all ages would benefit from additional education and encouragement.

Getting started is a very important first step. Automatic enrollment provisions are popular and allow participants to begin their employee contribution deferral at a default rate (stated in the plan’s document), such as 3%, unless they elect another amount or proactively opt out. Keep in mind that, since they do not have to make an active election to begin deferrals, they may not take advantage of the education materials available to them as part of the enrollment process. Education materials come in many forms, from simple informative handouts that explain the benefits of starting early, to more advanced retirement accumulation calculators that help the participant understand how the actions that they take now might affect them at retirement age. Websites are available that may help participants determine the appropriate amount to save for their retirement based on their current financial situation. The information shared with participants during the enrollment process will vary based on the recordkeeper or investment platform where the plan funds are held; further resources may be provided by the plan’s investment advisor.

There are several advantages to having participants meet with the plan’s investment advisor, whether as a group or in one-on-one meetings. For participants who may feel like retirement is too far away to be thinking about now, or who want to learn more about the benefits of starting early, information regarding how compound interest (earnings and dividends being reinvested and growing over time) and dollar cost averaging (recurring deposits per paycheck which buys shares at different prices throughout the year) affects their long-term goal is beneficial. An advisor can also help the participant review their full financial picture to determine how much they should contribute to the plan, as well as which investment options might be appropriate based upon their targeted retirement date and risk tolerance. If there is an employer matching contribution available, an initial instinct is to contribute enough to receive the full match, but there may be a higher contribution percentage that should be considered to reach their retirement goals.

It is also quite common in today’s employment arena to have employees who are focused on paying off student debt instead of contributing to a retirement plan. One can certainly understand their dilemma. If your plan currently offers an employer matching contribution, the optional matching contribution on student loan payments may be beneficial. This provision would allow a participant to continue making loan repayments, while remaining eligible to receive a matching contribution funded to the plan on their behalf, helping them to begin building an account balance. This optional matching ability is new and will be available beginning January 1, 2024.

Some participants are hesitant to participate in an employer sponsored plan since it can be more difficult to access their account balance for hardships or other life events. To ensure that employees feel as though they will have access to the funds if they do contribute, you can choose to include several types of distributions in your plan document provisions, including the following:

• In-service distributions from your plan are not required to be made available but can be included if participants satisfy the requirements dictated by your plan’s document. An example might be attainment of age 60 and 5 years of service.
• Hardship distributions:
  • Must be taken due to an immediate and heavy financial need.
  • Internal Revenue Service (IRS) regulations consider the following “safe harbor” reasons to meet the immediate and heavy financial need requirement.
    • Medical care expenses for the employee, the employee’s spouse, dependents, or beneficiary.
    • Purchase of an employee’s principal residence (excluding mortgage payments).
    • Tuition related educational expenses for the next 12 months of postsecondary education for the employee, the employee’s spouse, children, dependents, or beneficiary.
    • Prevent eviction or foreclosure from the employee’s principal residence.
    • Funeral expenses for the employee, the employee’s spouse, children, dependents, or beneficiary.
    • Certain expenses to repair damage to the employee’s principal residence.
  • The amount available is that of the financial need, which can include the amounts necessary to pay taxes resulting from the distribution. However, the participant must have the necessary amount available for withdrawal within their account. Your plan document can limit the money types available— such as employee contributions and earnings only— or balances from employer contributions can be made available for withdrawal as well.
• Qualified Birth and Adoption distributions:
  • A distribution up to $5,000 made during the one-year period beginning on the date on which the child of the individual is born, or the legal adoption by the individual is finalized.
  • Each parent has a separate limit, and if there are multiple children, a distribution can be taken for each child.
  • The 10% early withdrawal penalty is not waived for this distribution, but the amount can be repaid to the plan (no time limit applies).
• $1,000 penalty-free emergency withdrawal will be available on or after January 1, 2024:
  • One distribution can be taken per year and can be repaid within three years.
  • The distribution amount is exempt from the 10% early withdrawal penalty.
  • No additional emergency distribution can be taken during the 3-year period if the original distribution was not repaid.
• Distributions to domestic abuse survivors will be available on or after January 1, 2024:
  • The distribution amount is exempt from the 10% early withdrawal penalty.

In conclusion, the more engaged participants are in the conversation about retirement and the more they understand the benefit being offered, the better chance they have for a successful retirement. Understanding the reasons why your participants opt out of plan participation may help you either determine if more education is needed or if there are plan provisions that could be considered that would encourage participation.

Beneficiary on File?

As part of the enrollment process, participants are asked to elect a beneficiary. However, this step is often not completed or kept up to date as time goes on, which can make death distributions more complicated than they need to be. When a participant names a beneficiary, it helps to ensure their account balance will be distributed to the person intended. However, updating the designation is also very important as life events occur.

When a plan includes automatic enrollment provisions, it does help participants begin saving for retirement. However, if they use the default deferral rate and the default investment option, they may neglect to elect a beneficiary at that time since they aren’t filling out any other enrollment paperwork, or maybe they are married and assume the funds will automatically be paid to their spouse. What they need to factor in, though, is how their account balance will be paid if they do not make an election or if they fail to update it as time goes on.

If a current beneficiary election is not on record at the time of a participant’s death, the default rules of the plan will determine the beneficiary, which may be the following order: surviving spouse, children in equal shares, surviving parents in equal shares, and lastly, estates. But what if the participant goes through a divorce and doesn’t update their election? What if there are more children or stepchildren that are not added to the election? What if there is no spouse, parent, or child to benefit and no estate?

Having a beneficiary election on file makes the distribution process much smoother for all involved and requires less interpretation, which often involves engaging in the services of an attorney. When a participant is enrolled in the plan, it is best to have them designate a beneficiary even if it takes making the request several times until they do. Then, make the discussion part of a recurring process to have the participants review and update the information so that it’s not an issue if the need to reference the beneficiary should arise.

News Flash!

Defined Contribution plans: Form 5500 news!

Effective for plan years beginning on or after January 1, 2023, the determination of a large or small plan will be based on the number of participants with an account balance as of the beginning of the year, rather than the number of participants eligible for the plan.

This is welcome news for plans that required an accountant’s audit as a large plan because there were more than 100 eligible participants but not all of those participants had balances. For new plans, the participant count will be based on the number of participants with an account balance as of the end of the year.

Defined Benefit plans: Plan Document news!

The two-year Cycle 3 restatement window for pre- approved defined benefit plan documents opened April 1, 2023, and will end March 31, 2025. Check with your document provider to confirm when they intend to update your plan document for your review and signature during this restatement period.

Reminders:

• Required amendments for SECURE Act, CARES Act and Miners Act: These were originally due as of the last day of the plan year beginning after January 1, 2022 (December 31, 2022, for calendar year plans). Due dates were extended as follows:
  • 401(k) plans, profit sharing plans, money purchase plans, defined benefit plans and 403(b) plans have until December 31, 2025.
  • Governmental plans (including governmental 457(b) plans) have until 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2023.
  • The extension does not apply to tax-exempt 457(b) plans.
• Form 5500 relief for retroactively adopted plans: If a plan is adopted after the end of a plan year but before the employer’s tax filing deadline (including extensions), the plan is considered to be adopted on the last day of the taxable year. No Form 5500 is due for the initial plan year, but the subsequent year form will have a box checked to indicate it is a retroactively adopted plan permitted by SECURE Act Section 201.

Clarification:

• In the last edition, the example of Required Minimum Distribution (RMD) age increases from 72 to 73 should have read as follows:
  • For participants who turn 73 in 2023, they were 72 in 2022 and subject to the age 72 RMD rule in effect for 2022.
  • For those who turn 72 in 2023, their 1st RMD will be due by December 31, 2024 or they may opt to delay it until April 1, 2025. If they choose the latter, they will take both their 1st and 2nd payment in 2025.

Upcoming Compliance Deadlines for Calendar – Year Plans

May 15th

Quarterly Benefit Statement – Deadline for participant- directed plans to supply participants with the quarterly benefit/disclosure statement including a statement of plan fees and expenses charged to individual plan accounts during the first quarter of 2023.

June 30th

EACA ADP/ACP Corrections – Deadline for processing corrective distributions for failed ADP/ACP tests to avoid a 10% excise tax on the employer for plans that have elected to participate in an Eligible Automatic Enrollment Arrangement (EACA).

July 29th

Summary of Material Modifications (SMM) – An SMM is due to participants no later than 210 days after the end of the plan year in which a plan amendment was adopted.

July 31st

Due date for calendar year end plans to file Form 5500 and Form 8955-SSA (without extension).

Due date for calendar year end plans to file Form 5558 to request an automatic extension of time to file Form 5500.

Each year, those in the retirement community collect, analyze and calculate data to ensure plan compliance with the laws that govern qualified retirement plans. The calendar of deadlines repeats each year, challenging plan sponsors and service providers to focus on the current plan compliance along with the myriad of changes that have come into effect in the last few years. In addition, the COVID-19 pandemic created many financial difficulties and workplace changes for millions of employees and business owners. So, keeping abreast of the ‘normal’ routine of retirement planning, compliance has become anything but ‘normal.’

However, as we embrace our new work environment, there’s never been a better time for employers to reevaluate their current plan design. This is an opportunity to add or update features that align with changes to the company’s employee demographic and their business objectives and retirement plan goals, as well as take into account the effect of new regulations.

So, what’s happening in 2022? The Internal Revenue Service requires all qualified retirement plans to update their plan documents every six years. These updates are intended to reflect legislative and regulatory changes that occurred since the last restatement. For defined contribution plans, the most recent restatement cycle (called Cycle 3) opened on August 1, 2020 and will close on July 31, 2022. This is an important deadline because all plan documents, unless drafted in late 2020 or later, must be restated and adopted by employers by July 31, 2022. This restatement is mandatory and, if missed, plans will be considered out of compliance and employers may face IRS penalties.

The restatement period provides employers with an opportunity to enhance their existing retirement plans — especially if demographics, operations or hiring strategies at the company have changed. The timing of Cycle 3 means that recent changes, such as the hardship distribution regulations effective in January 2019, the SECURE Act of 2019, and the CARES Act of 2020, will need to be addressed in separate, good-faith amendments and will not be included in this restatement period. Cycle 3 restatements will, however, include language pertaining to regulatory changes enacted prior to February 1, 2017. These changes include:

• Expansion of the definition of “spouse” to include those of the same gender;
• Availability of plan forfeitures to offset additional types of company contributions;
• Ability to amend safe harbor 401(k) plans once the year has already started;
• Creation of in-plan Roth transfers.

Plan document restatement cycles give employers and service providers an opportunity to look at the retirement plan as a whole and evaluate the effects that law changes have on the effectiveness of the overall design and goals for the plan and its participants. For many employers and employees, COVID-19 had a detrimental impact on the ability to contribute to the plan. Additionally, many individuals found themselves withdrawing funds from their retirement savings, creating a downturn that will be challenging to recover from. So, a restatement, while mandatory, gives the employer an opportunity to implement solutions that can help individuals get back on track. Some plan design options to consider are listed below:

Eligibility: Eligibility defines how and when employees can join your retirement plan. Though your current eligibility requirements may fit the company’s employee demographic for full-time employees, the SECURE Act permits long term part-time employees (LTPTs) the ability to enter the plan starting in 2024, provided that they have satisfied the legally mandated requirements. Though SECURE Act law will not be included in this restatement, it seems wise to explore the effects that LTPT employees may have on your plan’s design and filing requirements.

Implement or expand auto-enrollment: Auto- enrollment enables employers to automatically enroll new hires into the retirement plan. Employees can always opt out of auto-enrollment if they decide they do not want to participate in the plan. Auto-enrollment has proven to be a successful tool in expanding retirement plan usage, especially among younger employees. According to a Principal Retirement Security Survey in July 2021, 84% of workers that were automatically enrolled in their workplace retirement plan say they started to save for retirement earlier than if they had to take action to make the enrollment decision on their own. To further help maximize savings and improve outcomes, employers may want to consider enrolling new employees at a higher deferral rate, such as 6%, rather than the standard 3%. The 6% rate will be far more meaningful for retirement and, though there is a risk that more participants could opt-out of the plan, a 2020 report released by John Hancock states the opposite to be true.

Under the SECURE Act, an eligible employer that adds an auto- enrollment feature to their plan can claim a tax credit of $500 per year for a three-year taxable period beginning with the first taxable year the employer includes the auto-enrollment feature.

Increase re-enrollment adoption: Re-enrollment has become increasingly important due to the effects of the COVID-19 pandemic. In a white paper for Voya Financial, Shlomo Benartzi, professor emeritus at UCLA Anderson School of Management, suggested frequently re-enrolling existing participants. He pointed to the U.K., where plan providers are required to automatically re- enroll workers every three years, even if they’ve previously opted out. Principal’s study group stated that they were glad their savings had been “jump-started” and reinforced that, if left to make the decision on their own, many wouldn’t have joined or would have at least delayed their enrollment.

Implement or expand auto-escalation: With auto-escalation, employees’ contributions are automatically increased every year. For example, employers can increase deferral rates by 1% each year up to a maximum of 15% of pay.

Redesign matching contributions.The pandemic has pressured many employers to discontinue or reduce their 401(k) contribution matches. Rebooting the matching contributions will go a long way in revitalizing employee interest in your plan. If the previous formula does not fit economically, employers might consider reducing the overall matching percentage but increase the cap on contributions (Example: 50% match up to 4% of pay changed to 25% up to 8%). This approach encourages the participant to defer a higher percentage of pay to receive the full matching contribution.

Dr. Benartzi suggested considering a fixed amount matching formula. From the participant’s perspective, a dollar amount seems more real than applying percentages to one’s paycheck. “Psychologically, it’s easy to give up a 6% match, but it’s hard to let go of a $1,200 lump sum,” he wrote.

The pandemic presented unprecedented challenges for employers that offer retirement plan benefits. With the future looking brighter and the Cycle 3 restatement deadline around the corner, now is the optimal time for business owners to review, and if necessary, update their plan design to align with the company’s goals and changing employee demographics.

SECURE Act Provisions for Long-Term Part-Time Employees

Historically, 401(k) plans could exclude individuals who worked less than 1,000 hours in the plan year. However, in its effort to expand access to employer retirement plans, the Setting Every Community Up for Retirement Enhancement (SECURE) Act introduced the concept of a “long-term, part-time employee” (LTPT). The Act requires that starting in 2024, 401(k) plans permit LTPTs the opportunity to elect to make salary deferrals to a 401(k) plan.

So, why talk about it now if not effective until 2024? The definition of an LTPT employee is as follows:

• An employee who has completed three consecutive 12-month periods with at least 500 hours of service during each of those periods, and
• Who has reached the age of 21 by the end of the three-year period.

Eligibility – Since eligibility will be determined based upon hours worked in 2021, 2022 and 2023, plan sponsors and service providers must accurately track and report hours for LTPT employees. LTPT employees who meet these requirements must be allowed to contribute salary deferrals to the plan. However, they may be excluded from employer contributions and nondiscrimination testing. Employees covered by a collective bargaining agreement are not covered by the LTPT rules.

The law pertaining to LTPT employees may create dual eligibility requirements under the plan, assuming that the plan’s existing eligibility requirements are not as favorable as those required for LTPT employees. Plan sponsors and their service providers must monitor both the existing service requirement and the eligibility requirements applicable to LTPT employees.

Employer Contributions – LTPT employees may be excluded from employer matching and profit-sharing contributions, as well as safe harbor contributions under a safe harbor 401(k) plan. However, if an LTPT employee satisfies the general minimum age and service requirements by completing at least 1,000 hours of service, they become eligible to participate in employer contributions.

Vesting – In retirement plans, employees, LTPT or otherwise, are always 100% vested in their salary deferral accounts. So, the subject of vesting only applies if an employer voluntarily elects to include LTPT employees in their company contributions that are subject to a vesting schedule. LTPT years of service for vesting purposes must include each 12-month period during which the employee has 500 hours of service or more for all years, including 12-month periods before January 1, 2021.

The main objective of the LTPT rules was to expand retirement coverage to a greater number of working Americans. However, the rules can have significant effects on plans designed under prior law. The possible entry of previously excluded employees and the maintenance of dual eligibility requirements can put an extra burden on plan sponsors and service providers. Considering this new requirement, reviewing the plan’s design is an important “to-do” for 2022.

Navigating the Labyrinth of Required Minimum Distributions

Since the passage of the Tax Reform Act of 1986, taxpayers have been required to withdraw previously untaxed dollars from their qualified plan and IRA accounts. These withdrawals are called Required Minimum Distributions or RMDs. Historically, those at and over the age of 70 1⁄2 must take annual withdrawals from their tax deferred accounts including IRAs, SEP IRAs and 401(k) plans. An RMD is calculated by dividing the previous year’s balance by a life expectancy factor issued by the IRS. For rules that have remained relatively unchanged for over 30 years, RMD policy has had quite an overhaul starting with the changes made by the SECURE Act in 2019 and then, again, with the CARES Act in 2020. As a result of these changes, account owners and beneficiaries have three sets of RMD rules for 2020, 2021, and 2022.

The required minimum distribution rules came into effect in the late 1980s with the passage of the Tax Reform Act of 1986. Plans affected by RMD rules are:

• 401(k) Plans
• Roth IRAs (RMDs not required while the original owner is still living)
• 403(b) Plans
• 457 Plans
• Traditional IRAs
• Simplified Employee Pensions (SEP) IRAs
• Savings Incentive Match Plans for Employees (SIMPLE) IRAs

Note: Defined Benefit and Cash Balance plans satisfy their RMDs by starting monthly benefit payments (or a lump sum distribution) at the participant’s required beginning date. Health Savings Account balances are not subject to the RMD rules.

The SECURE Act, passed into law in late 2019, changed the age at which accounts subject to RMD rules had to start receiving RMDs. If the account holder reached age 70 1⁄2 in 2019, the prior law applied and the first RMD was required by April 1, 2020. If the account holder reached age 70 1⁄2 in 2020 or later, they must take their first RMD by April 1 of the year after turning age 72. Sounds easy, right? But wait…

In 2020, the CARES Act waived RMDs for account holders, including individuals who reached age 701⁄2 in 2019 and had an RMD due in 2020, or had their first RMD due by April 1, 2021. The waiver did not delay distributions in defined benefit and cash balance plans.

However, in 2021, the CARES Act waiver for RMDs was not extended. That means account holders that are subject to RMD rules must make the required distributions for 2021.

• If you reached age 701⁄2 in 2019, your RMDs due in 2020 were waived. You had a 2021 RMD due by December 31, 2021, based on your account balance on December 31, 2020.
• If you reached age 72 in 2021 (and didn’t reach 70 1⁄2 in 2019), your 2021 RMD is due by April 1, 2022, based on your account balance on December 31, 2020. Your 2022 RMD is due by December 31, 2022, based on your account balance on December 31, 2021.

If you’re still employed by the plan sponsor of a 401(k) and are not considered to be a more than 5% owner, your plan may allow you to delay RMDs until you retire. The delay in starting RMDs does not extend to owners of traditional IRAs, Simplified Employee Pensions (SEPs), Savings Incentive Match Plans for Employees (SIMPLEs) and SARSEP IRA plans.

One more twist…

In November of 2020, the IRS announced the update of the life expectancy tables that are used to calculate the annual amount of RMDs. This change brings the tables more in line with the fact that Americans are living longer than assumed in previous calculations. The finalized rules related to the updated tables will apply to distributions in calendar years beginning on or after January 1, 2022.

It’s crucial that account owners become familiar with the changes in the rules pertaining to RMDs. Mistakes can be costly: The IRS assesses a 50% federal penalty tax on the amount of the RMD that should have been taken but wasn’t. So, working with your tax consultants and plan’s service providers is important when making decisions regarding RMDs.

Upcoming Compliance Deadlines for Calendar-Year Plans

January 31st

IRS Form 1099-R – Deadline to distribute Form 1099-R to participants and beneficiaries who received a distribution or a deemed distribution during the prior plan year.

IRS Form 945 – Deadline to file IRS Form 945 to report income tax withheld from qualified plan distributions made during the prior plan year. The deadline may be extended to February 10th if taxes were deposited on time during the prior plan year.

February 28th

IRS Form 1099-R Copy A – Deadline to submit 1099-R Copy A to the IRS for participants and beneficiaries who received a distribution or a deemed distribution during the prior plan year. This deadline applies to scannable paper filings. For electronic filings, the due date is March 31, 2022.

March 15th

ADP/ACP Corrections – Deadline for processing corrective distributions for failed ADP/ACP tests without a 10% excise tax for plans without an Eligible Automatic Contribution Arrangement (EACA).

Employer Contributions – Deadline for contributing employer contributions for amounts to be deducted on 2021 S-corporation and partnership returns for filers with a calendar fiscal year (unless extended).

April 1st

Required Minimum Distributions – Normal deadline to distribute a required minimum distribution (RMD) for participants who attained age 72 during 2021 (and didn’t reach age 70 1⁄2 in 2019).

April 15th

Excess Deferral Correction – Deadline to distribute salary deferral contributions plus related earnings to any participants who exceeded the IRS 402(g) limit on salary deferrals. The limits for 2021 were $19,500 or $26,000 for those age 50 and over if the plan allowed for catch-up contributions.

Employer Contributions – Deadline for contributing employer contributions for amounts to be deducted on 2021 C-corporation and sole proprietor returns for filers with a calendar fiscal year (unless extended).

Every year, most employers file a Form 5500 for each qualified plan that they sponsor. The purpose of the Form 5500 is to provide required information to the Department of Labor (DOL), but it can also provide valuable insight to the plan sponsor.

The Form 5500 has several “types” and the type of form you file will vary based on the size of your plan. The Form 5500-SF is generally for small plans with under 100 participants and the Form 5500, which requires a number of attached schedules, is generally for large plans with 100 or more participants. Additionally, the full Form 5500 requires an accountant’s audit. In some cases, even small plans may be required to file a Form 5500 if the plan assets include employer securities or if the plan is considered a multi-employer or pooled employer plan.

There is an even briefer version of the 5500 series called the 5500-EZ. This version of the 5500 is typically filed by one-participant plans (usually the self-employed (and spouse) or one or more partners (and spouses)). The following are examples of the useful information provided on the Form 5500-SF or Form 5500:

Participant Count

Small plan vs large plan

• Whether your plan is considered a large or small plan depends on the number of eligible participants at the beginning of the plan year. This includes terminated participants with an account balance as well as active participants without a balance. As your count gets closer to 100 participants, you will need to plan for the additional work and expense of becoming a large plan, which is when your Form 5500 requires an accountant’s audit be attached when filed.
• If you file a Form 5500-SF as a small plan, the 80-120 rule will apply. This means that if your participant count remains under 120, you can continue to file Form 5500-SF as a small plan and do not require an audit. Once your beginning of the plan year count reaches 121, you will then be considered a large plan with an audit requirement.
• If you are a brand-new plan, though, and have over 100 participants on the first day of the first plan year, the 80-120 rule does not apply and you will require an audit. The 80-120 rule allows you to file as you did the prior year, and new plans do not have a filing for the prior year.

Eligible participants vs active participants with an account balance

• In addition to tracking eligible participants, the number of active participants with an account balance is also listed. This shows you how many of your eligible active participants have a $0 balance.
• If your plan provides for your participants to contribute 401k deferrals, automatic enrollment is an option to increase participation. In this case they must opt out, rather than opt in.

Terminated participants with an account balance

• As this number increases, it is a good time to review the list of terminated participants with account balances. If a participant has an account balance over $5,000, they generally must make a written election in order to withdraw the funds either as a cash distribution or rollover to an IRA or another qualified plan. However, smaller balances may be eligible for automatic payment without the participant’s election if the terms of the plan allow mandatory distributions (these may also be referred to as force- out distributions).
• If you are getting close to having 100 participants, distributions to terminated participants is one way to help lower the plan’s participant count and avoid the additional expense of being a large plan.

Erisa Fidelity Bond Coverage Amount

• An ERISA fidelity bond is a type of insurance that protects the plan against losses caused by acts of fraud or dishonesty.
• The dollar amount of your bond in effect for the plan year is listed on the form. The required coverage amount is the greater of $1,000 or 10% of plan assets as of the first date of the plan year. If less, or listed as $0, it can be a red flag to the DOL.
• If it is the first year of the plan and the form shows a $0 balance at the start of the year, an estimated asset balance should be used for the 10% calculation when considering the level of coverage for your plan’s bond.
• In the event you did not establish a bond by the close of the plan year, a bond provider may be able to assist you with a policy that provides retroactive coverage. Some policies can also include an inflation guard going forward so that as plan assets increase, the bond coverage automatically increases to the required amount.
• Not sure where to obtain a fidelity bond? Your property and casualty insurance agent may be able to add this as a rider to your current business policies or your TPA may be able to provide contact information for a vendor that they have seen in the industry.
• So, what happens if I don’t have a bond? The correction for not having a bond is to get a bond put in place as soon as possible. However, having an insufficient bond amount noted on the Form 5500 could lead to an IRS or DOL audit where they may review more than just the bond amount.

Late Deposits of Employee Contributions and Loan Repayments

• Another red flag to the DOL is the dollar amount of late deposits. There is a safe harbor deposit rule for small plans that states that deferrals and loan repayments must be deposited to the plan no later than the 7th business day following the paycheck date. Large plans have less time with contributions required to be remitted on the earliest date possible instead of within 7 business days.
• Late employee contributions or loan repayments for the plan year are reported on the Form 5500 or Form 5500-SF. In addition, if the correction for late deposits took place the following year, the amount is reported again on that year’s Form 5500.

Your Form 5500 preparer, often your TPA, will prepare the form on your behalf for your review and signature. They will be able to help guide you through the information that is reported on the form and be sure you understand the information as it reflects on the plan year. The more you understand the Form 5500, the more proactive discussions you can have.

New IRS Pre-Examination Compliance Program Announced

In June 2022, the IRS began piloting a pre-examination retirement plan compliance program. This is beneficial to plan sponsors because it provides an opportunity for plan sponsors to correct mistakes at a reduced cost and possibly avoid a full IRS examination. Anytime you receive a correspondence from the IRS or DOL, you should inform your TPA or service provider as soon as possible to determine if a response is needed. In some situations, no action is required. In this case, however, the letter opens a 90-day window. Within that time frame, you will need to:

• Review your plan document and operations.
• Determine if they meet current tax law requirements.
• Self-correct any mistakes that qualify under the Employee Plans Compliance Resolution System (EPCRS).
• Respond to the letter and provide your conclusion:
• No mistakes were found.
• Mistakes were found and self-corrected (provide the details of the error and correction).
• Mistakes were found, but they do not qualify for self-correction. You may request a closing agreement. This means that the cost could be much less than if the IRS found the mistakes during an IRS examination.

Your TPA or service provider will be able to review the plan information with you to ensure that all necessary steps were previously taken to maintain compliance. If an issue is discovered as part of this review, they can discuss the correction options available. Of course, you don’t have to wait until you receive a letter from the IRS to be sure your plan is compliant! Understanding the terms of the plan and operating the plan according to the document are very important actions to help avoid mistakes.

Once you submit your response, it is reviewed to see if they agree with your conclusion. The IRS will either issue a closing letter or conduct a limited or full scope examination. The intention is that this program will reduce taxpayer burden and the shorten the time spent on retirement plan examinations. The end date of this pilot program is not known, but the process may continue after the pilot period if they find it to be successful.

If you do not provide a response, you will be contacted to schedule the examination. Of course, this is the least favorable option. It is best not to ignore any letter from the IRS or DOL. It is in the best interest of your plan to take action when it is requested, and a 90-day window can close pretty fast!

Q&A Corner

Q: I didn’t file my 12/31/21 plan year end Form 5500 by 7/31/22, now what?

A: Contact your Form 5500 preparer! First, confirm whether or not an extension applies. This would occur with a Form 5558 filed before 7/31, or possibly a special extension or automatic extension. If so, you have until 10/15/22 to file the Form 5500. No extension? The Delinquent Filer Voluntary Compliance Program (DFVCP) is a DOL program designed for this purpose. Using this program, the maximum penalty is $750 for a small plan and $2,000 for a large plan. This is much lower than the IRS late filing penalty ($250 a day, up to $150,000) and the DOL late filing penalty (up to $2,529 per day, with no maximum).

Q: What if I didn’t sign the document restatement for my 401(k) Profit Sharing plan that was due by 7/31/22?

A: This plan document restatement (commonly referred to as Cycle 3, Tricycle or Post PPA) required signatures by 7/31/22. Contact your TPA as soon as possible, or your document provider if handled by someone other than your TPA. The steps to ensure your document remains in compliance will vary based on the type of plan document and provisions included, but the options are not as cut and dry as a late Form 5500. Be sure to act promptly!

Upcoming Compliance Deadlines for Calendar-Year Plans

September 15th

Required contribution to Money Purchase Pension Plans, Target Benefit Pension Plans, and Defined Benefit Plans. Contribution deadline for deducting 2021 employer contributions for those sponsors who filed a tax extension for Partnership or S-Corporation returns for the March 15, 2022 deadline.

September 30th

Deadline for certification of the Annual Funding Target Attainment Percentage (AFTAP) for Defined Benefit plans for the 2022 plan year.

October 17th

Extended due date for the filing of Form 5500 and Form 8955 for plan years ending December 31, 2021. Due date for 2022 PBGC Comprehensive Premium Filing for Defined Benefit plans.

Contribution deadline for deducting 2021 employer contributions for those sponsors who filed a tax extension for C-Corporation or Sole-Proprietor returns for the April 18, 2022 deadline.

Due date for non-participant-directed individual account plans to include Lifetime Income Illustrations on the annual participant statement for the plan year ending December 31, 2021.

Most Plan Sponsors Can Relate to the Trials And Tribulations of Having Missing Participants in Their Retirement Plan.

At times, it may feel like you are on the losing end of an intense game of hide-and-seek. Your opponents, the missing participants, may not have intended to pick the best hiding spots, but in many cases, they have surely succeeded. Now you are tasked with tracking them down and upping your game to avoid this scenario in the future.

So, what are missing participants, exactly? Missing participants are former employees who left an account balance in a retirement plan and did not keep their contact information up to date. In addition, they may no longer actively manage their accounts. There are a few factors that have led to an increase in the number of missing participants in retirement plans over the years. Unlike the generations of our parents and/or grandparents, employees do not typically work their entire career with one firm anymore. Another contributing factor is the mobilization of the workforce. The ability to work remotely has mobilized employees even more these days. Some have chosen to relocate across the country while others find themselves living in a new locale every few months. Many of us can relate to this, especially over the past 18 months. With these two factors alone, it can be difficult to keep track of plan participants once they leave your firm.

It is important to develop procedures to ensure contact information is up to date and to illustrate the proactive measures employed in this effort. Whatever steps you implement, you should relay to employees and participants why keeping these details current is important and how it can affect them. Ask any employee if they would be okay with losing track of their retirement account – the answer would probably be a resounding no. A few ideas based on the Department of Labor’s (DOL’s) Best Practices are included below.

• Annual Review: Have plan participants verify their contact information on file at least annually. This includes addresses, phone numbers, and email addresses. You can also include a review of beneficiaries at this time. Keep in mind this does not only include current employees but terminated or retired participants as well. Also consider making the review part of your company’s exit interview.
• Mailings: When completing a mailing, provide a form where recipients can update their contact information.
• Returned Mail: Initiate searches for participants as soon as mail has been returned as undeliverable. This includes mail marked as “return to sender,” “wrong address,” “addressee unknown,” or otherwise.
• System Log In: If participants regularly log into a system, set a reminder or pop-up directing users to verify their contact information.

Unfortunately, even with the best of plans in place, plan sponsors may still have participants who go missing. So, not only do you need to incorporate procedures for ensuring contact information is up-to-date, but you also need to document procedures for locating participants once they go missing. The DOL provides a list of search methods that should be used to locate missing participants. Some of these methods are included below.

• Send a notice using certified mail through USPS or a private delivery service with similar tracking features.
• Check the records of the employer or any related plans of the employer.
• Send an inquiry to the designated beneficiary or emergency contact of the missing participant.
• Use free electronic search tools or public record databases.

At some point, most plan sponsors will find themselves with participants who have gone missing. It’s important to remember plan sponsors have a fiduciary responsibility to follow the terms of the plan document and ensure participants are paid out timely. Having a well-documented, organized process which addresses missing participants, along with proof the process is followed, will prove worthwhile. More information regarding the Department of Labor’s Best Practices can be located on their website.

https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/retirement/missing-participants-guidance/best-practices-for-pension-plans

A Crucial Requirement for 401(K) Plans Is That the Plan Must Be Designed So It Does Not Unfairly Favor Highly Compensated Employees (Hces) Or Key Employees (Such As Owners) Over Non-highly Compensated Employees (Nhces).

To satisfy this requirement, the IRS requires that plans pass certain nondiscrimination tests each plan year. These tests analyze the rate at which HCE and key employees benefit from the plan in comparison to NHCEs. Failed tests can result in costly corrections, such as refunds to HCEs and key employees or additional company contributions. Luckily for plan sponsors, there is a plan design option – a safe harbor feature, that allows companies to avoid most of these nondiscrimination tests. To be considered safe harbor and take advantage of the benefits afforded to safe harbor plans, there are several requirements that must be satisfied. Below we will take a look at the key characteristics of a safe harbor plan. The plan must include one of the following types of contributions. The chosen formula is written in the plan document, and with the exception of HCEs, must be provided to all eligible employees each plan year. Please note that additional options, not covered here, are provided for plans that include certain automatic enrollment features.

• Safe Harbor Match: With this option, the company makes a matching contribution only to those employees who choose to make salary deferral contributions. There are two types of safe harbor matching contributions:
  • Basic Safe Harbor Match: The company matches 100% of the first 3% of each employee’s contribution, plus 50% of the next 2%.
  • Enhanced Safe Harbor Match: Must be at least as favorable as the basic match. A common formula is a 100% match on the first 4% of deferred compensation.
• Safe Harbor Nonelective: With this option, the company contributes at least 3% of pay for all eligible employees, regardless of whether the employee chooses to contribute to the plan.

Unlike company profit sharing or discretionary match contributions, safe harbor contributions must be 100% vested immediately. In addition, the contribution must be provided to all eligible employees, even those who did not work a minimum number of hours during the plan year or who are not employed on the last day of the plan year.

In most cases, an annual safe harbor notice must be distributed to plan participants within a reasonable period before the start of each plan year. This is generally considered to be at least 30 days (and no more than 90 days) before the beginning of each plan year. For new participants, the notice should be provided no more than 90 days before the employee becomes eligible and no later than the employee’s date of eligibility. The safe harbor notice informs eligible employees of certain plan features, including the type of safe harbor contribution provided under the plan.

If all safe harbor requirements have been satisfied for a plan year, the following nondiscrimination tests can be avoided.

• Actual Deferral Percentage (ADP): The ADP test compares the elective deferrals (both pre-tax and Roth deferrals, but not catch-up contributions) of the HCEs and NHCEs. A failed ADP must be corrected by refunding HCE contributions and/or making additional company contributions to NHCEs.
• Actual Contribution Percentage (ACP): The ACP test compares the matching and after-tax contributions of the HCEs and NHCEs. A failed ACP must be corrected by refunding HCE contributions and/or making additional company contributions to NHCEs.
• Top Heavy Test: The top heavy test compares the total account balances of key employees and non-key employees. If the total key employee balance exceeds 60% of total plan assets, an additional company contribution of at least 3% of pay may be required for all non-key employees. It is important to note that a plan will lose its top heavy exemption if company contributions, in addition to the safe harbor contribution, are made for a plan year (e.g., profit sharing or discretionary matching contributions).

So, how do you know if a safe harbor plan is a good fit for your company? As discussed above, the primary benefit of a safe harbor plan is automatic passage of certain annual nondiscrimination tests. If your plan typically fails these tests, resulting in refunds or reduced contributions to HCEs and key employees, your company may benefit from a safe harbor feature. Predictable annual contributions also provide a great incentive for employees to save for their retirement. However, if you do not currently offer an annual match or profit sharing contribution to your employees, a safe harbor formula may significantly impact your company’s budget. Except for a few limited exceptions, safe harbor contributions cannot be removed during the plan year, so it’s important that a company is able to fund these required contributions. As with all things qualified plan related, the key is working with an experienced service provider who can design a plan to suit your company’s needs!

Looking To Maximize Savings? Cash Balance Could Be the Answer!

So, You Established a 401(K) Plan For Your Company And Have Been Contributing Consistently for Years.

The plan has likely afforded your company significant tax savings and has allowed you to attract and retain quality employees. While a 401(k) plan is a great savings vehicle, did you know there is a type of qualified retirement plan that will allow you to contribute significantly more than the maximum allowed in a stand-alone 401(k) profit sharing plan?

We are all familiar with defined contribution plans (e.g., 401(k) and profit sharing plans). You are probably also familiar with traditional defined benefit plans, or pension plans, historically sponsored by large companies to provide monthly retirement benefits to their retirees. For business owners that are looking for large tax deductions, accelerated retirement savings, and additional flexibility, another type of defined benefit plan, a cash balance plan, may be the perfect solution.

How Does a Cash Balance Plan Work?

As mentioned above, a cash balance plan is a type of defined benefit plan. In general, defined benefit plans provide a specific benefit at retirement to participants. While traditional defined benefit plans define an employee’s benefit as a series of monthly payments for life to begin at retirement, cash balance plans state the benefit as a hypothetical account balance. Each year, this hypothetical account is credited with following:

• A pay credit, such as a percentage of annual pay or a fixed dollar amount that is specified in the plan document.
• A guaranteed interest credit (either a fixed rate or a variable rate that is linked to an index such as the one-year treasury bill rate).

The accounts in a cash balance plan are referred to as hypothetical because, unlike defined contribution plans, the plan assets are held in a pooled account managed by the employer, or an investment manager appointed by the employer. The hypothetical account balances are an attractive feature of cash balance plans because these accounts tend to be easier for participants to understand, as the annual benefit statements reflect the value of their account, similar to 401(k) profit sharing plan account statements.

Unlike a 401(k) profit sharing plan, a defined benefit plan guarantees the benefit each participant will ultimately receive. The plan’s actuary calculates the benefits earned each year based on the terms of the plan document, which in turn determines the required employer contribution due to the plan.

When a participant becomes entitled to receive their benefit from a cash balance plan, the benefits are defined in terms of an account balance and can be paid as an annuity based on that account balance. In many cash balance plans, the participant also has the option (with consent from his or her spouse) to take a lump sum benefit that can be rolled over into an IRA or to another employer’s plan.

What if I Already Sponsor a 401(K) Profit Sharing Plan?

In most cases, cash balance plans work best when paired with a 401(k) profit sharing plan. To optimize the combined plan design, it’s possible that certain provisions in your current plan may need to be amended. This is especially true if the cash balance plan covers non-owner employees. Due to the large benefits that are typically earned by the owner and/or other key employees, the combined plans must pass certain nondiscrimination tests. These tests are more easily passed when employer contributions are provided to the staff under the 401(k) profit sharing plan as safe harbor nonelective and profit sharing contributions. While company contributions in a stand-alone 401(k) profit sharing plan may be discretionary, when combined with a cash balance plan, these contributions become required as well, since without them, the combined plans will likely not pass all required nondiscrimination tests.

Are Cash Balance Plans a Good Fit for Everyone?

Unfortunately, the answer to this question is no. The first question to ask yourself is if you wish to make contributions in excess of the defined contribution limit ($58,000 or $64,500 for participants over age 50 for 2021). If the answer to this is yes, then the demographics of the employer must be considered. Since the maximum contributions are age dependent, cash balance plans typically work best when targeted employees are older than the average age of other staff members. And maybe most importantly – do you anticipate consistent profits that will allow you to fund all required contributions for the foreseeable future?

Cash Balance Plans Sound Too Good To Be True. What’s the Catch?

If you’ve decided setting up a cash balance plan sounds like the perfect way to meet your retirement goals and attract and retain quality employees, you may be right! However, as good as this sounds, there are many important factors to consider before jumping in. Here are a few key considerations:

• Cash balance plans can be designed with some flexibility, such as setting up pay credits using a percentage of annual pay, but the annual contribution calculated by the actuary is required. When paired with a 401(k) profit sharing plan to pass nondiscrimination testing, the employer contributions to that plan become required as well.
• Because the annual interest credit is guaranteed, the employer bears the investment risk for the plan. If the rate of return on investments is less than expected, the required contribution may increase to make up for the shortfall.
• Qualified retirement plans must be established with the intent of being permanent. Many service providers recommend maintaining the plan for at least three to five years to satisfy this requirement.
• Cash balance plans are often more complex, and as a result, more costly to establish and maintain than defined contribution plans.

For employers that desire increased retirement savings and tax deductions, cash balance plans may be the perfect addition to their employee benefit program. However, as previously mentioned, they are not a good fit for everyone. It’s important to work with an experienced service provider to determine if a cash balance plan is right for you.

Upcoming Compliance Deadlines for Calendar-Year Plans

15th September 2021

Required contribution to Money Purchase Pension Plans, Target Benefit Pension Plans, and Defined Benefit Plans.
Contribution deadline for deducting 2020 employer contributions for those sponsors who filed a tax extension for Partnership or S-Corporation returns for the March 15, 2021 deadline.

30th

Deadline for certification of the Annual Funding Target Attainment Percentage (AFTAP) for Defined Benefit Plans for the 2021 plan year.

15th October 2021

Extended due date for the filing of Form 5500 and Form 8955.

Due date for 2021 PBGC Comprehensive Premium Filing for Defined Benefit Plans.

Contribution deadline for deducting 2020 employer contributions for those sponsors who filed a tax extension for C-Corporation or Sole-Proprietor returns for the April 15, 2021 deadline.