On November 1, 2023, the IRS announced the Cost of Living Adjustments (COLAs) affecting the dollar limitations for retirement plans for 2024. In October, the Social Security Administration announced a modest benefit increase of 3.2%. Retirement plan limits also increased over the 2023 limits. COLA increases are intended to allow participant contributions and benefits to keep up with the “cost of living” from year to year. Here are the highlights from the new 2024 limits:

  • The calendar year elective deferral limit increased from $22,500 to $23,000.
  • „The elective deferral catch-up contribution remains $7,500. This contribution is available to all participants aged 50 or older in 2024.
  • „The maximum available dollar amount that can be contributed to a participant’s retirement account in a defined contribution plan increased from $66,000 to $69,000. The limit includes both employee and employer contributions as well as any allocated forfeitures. For those over age 50, the annual addition limit increases by $7,500 to include catch-up contributions.
  • „The maximum amount of compensation that can be considered in retirement plan compliance has been raised from $330,000 to $345,000.
  • „Annual income subject to Social Security taxation has increased from $160,200 to $168,600.

Considering Changes to Your Business? Don’t Forget About Your Plan!

In today’s changing work environment, the sale or purchase of another business is not uncommon. If you’re planning to make changes to your business structure, remember to include the retirement plan in your negotiations. The type of sale can have a major impact on your plan, so it is highly recommended that you understand which type you are considering and notify your Third Party Administrator before taking action.

There are two types of sale transactions that affect the future of a retirement plan: asset sale and stock sale. Let’s take a look at some terminology that may be unfamiliar, so that if you do find yourself in a merger or acquisition situation, you will know what to expect. For this discussion, For Sale is being sold to Buyer, and both firms sponsor retirement plans.

An asset sale is the sale of assets belonging to the business, but not the business itself. In this scenario, For Sale’s retirement plan stays with For Sale; the retirement plan is not one of the assets being sold. For Sale may continue to operate normally and may continue to sponsor the retirement plan. For Sale may also terminate the plan. If For Sale continues to sponsor the plan, there may be a partial plan termination. Partial plan terminations will be discussed later in this article.

  • In an asset sale, if For Sale’s employees are hired by Buyer, they are considered new employees, and are subject to the eligibility and entry requirements for Buyer’s plan. Buyer may waive these requirements, but the plan will need to be amended to do so. A former For Sale employee now working for Buyer may keep their account balance with the For Sale plan if it is not terminated or move their balance to the Buyer plan. If they decide to do the latter, it will be a distribution and a rollover—not a transfer. The former For Sale employee may also pursue other distribution options, per For Sale’s plan document.

A stock sale is the sale of the business itself. In this scenario, For Sale is wholly owned by Buyer. During negotiations, the disposition of the plan should be discussed. The plan can be terminated prior to the sale, merged into the Buyer plan after the sale, or continue as-is under Buyer.

  • If the plan is terminated prior to the date of sale, the participants are all considered 100% vested in their account balances and can take a distribution from the plan. A Form 5500 would need to be filed for each plan year until all distributions are complete and the assets are reduced to $0.
  • The plans can be merged into one plan after the sale. This may result in one plan being merged directly into the other, or both plans being combined into an entirely new plan. Care should be taken to preserve protected benefits. Additionally, in a merger situation, if either plan is affected by a compliance issue, the issue will persist into the merged plan.

The For Sale plan could continue with Buyer as the sponsor. In this case, there will be a transition period, during which the plans continue to be tested separately for coverage. This transition period lasts until the plan year end following the year of purchase, after which the plans must be tested together. For a calendar-year plan purchased July 1, 2023, the transition period would end December 31, 2024. Operating two plans in this manner is often more expensive and may result in coverage testing being more difficult to pass.

If the For Sale plan is retained through the purchase, and is then terminated at a later time, the plan is subject to the successor plan rule. This rule was established to prevent participants from taking distributions of their deferrals prior to age 59½. The basic rule states that the participants of the terminated plan can’t participate in another 401(k) plan sponsored by the same employer for 12 months following the termination date. As the For Sale plan is sponsored by Buyer post-sale, the For Sale participants wouldn’t be able to participate in the Buyer plan for a year after the termination of the For Sale plan. If the intention is to terminate the For Sale plan, it may be best to do so before completion of the purchase.

Sometimes, the sale might be for just a portion of a business’s ownership; other times, ownership is purchased by more than one individual. In these cases, the companies may become part of a controlled group. If a controlled group exists, the plans must be combined to pass coverage testing. The number of owners and their ownership percentages could impact testing and will likely require closer attention to be paid.

A change in ownership can also affect whether a selling or buying company becomes part of an affiliated service group (ASG). An ASG could exist when a significant portion of the business of any company is the performance of services for another related company. Plans impacted by an ASG will be considered one group for coverage testing.

If only part of a company is sold, there may be a partial plan termination. The determination of a partial plan termination is based on the facts and circumstances of the situation, but as a general rule, if at least 20% of the plan participants are involuntarily terminated due to events related to the purchase, those affected participants are considered 100% vested in their accounts.

This is not intended to be legal advice. Consulting with an attorney is highly recommended prior to making any decisions for your business. Your participants’ eligibility for transaction-related distributions should be discussed in detail before any funds leave the plan. Your Third Party Administrator can help you navigate the process to understand which type of sale you may be part of and how it could affect your plan and participants.

Good News on Catch-Up Contributions!

Catch-up contributions are additional employee deferrals that can be made to 401(k), 403(b) and governmental 457 plans for those participants who are age 50 or older. These contributions can be made on a pre-tax or Roth (after-tax) basis.

As originally laid out in the SECURE 2.0 Act of 2022, catch-up contributions for those earning over $145,000 in the prior year would need to be Roth deferrals starting in 2024. However, the Internal Revenue Service (IRS) recently announced a transition period that will delay this requirement until 2026. While there was previously some confusion as to whether the new law eliminated all other catch-up contributions, the IRS has since confirmed that catch-up contributions can continue to be made by all age-eligible participants if allowed by the plan document. The deferrals can continue to be either pre-tax or Roth.

For 2024, the maximum deferral contribution is $23,000 and the maximum catch-up contribution is $7,500.

News Alert: Grace Period Extended for EFAST2 Login Credentials

If you electronically sign your Form 5500 through the ERISA Filing Acceptance System (EFAST2) and haven’t yet obtained new credentials from www.login.gov, you will need to do so by December 31, 2023. This date extends the original September 1 deadline. The new credentials established during this transition can be used across many government services. If you do not currently have login credentials for EFAST2, this action item does not apply to you.

Upcoming Compliance Deadlines for Calendar-Year Plans

December 1st

Participant Notices – Annual notices due for Safe Harbor elections (note that some plans are no longer required to distribute Safe Harbor notices), Qualified Default Investment Arrangement (QDIA), and Automatic Contribution Arrangements (EACA or QACA).

December 29th

ADP/ACP Corrections – Deadline for a plan to make ADP/ ACP corrective distributions and/or to deposit qualified nonelective contributions (QNEC) for the previous plan year.

Discretionary Amendments – Deadline to adopt discretionary amendments to the plan, subject to certain exceptions (e.g., anti-cutbacks).

Required Minimum Distribution (RMD) – For participants who reached age 72 in 2022, the first RMD was due by April 1, 2023. The 2nd RMD, as well as subsequent distributions for participants already receiving RMDs, is due by December 29, 2023. Participants who were at least age 73 and terminated in 2023 may take their first RMD by April 1, 2024.

Contribution Funding – Final funding deadline for 2022 plan year end. See your tax advisor for year of deductibility.

January 31st

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.

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 W-2 – Deadline to distribute Form W-2, which must reflect the aggregate value of employer-provided employee benefits.

Mature couple meeting financial advisor for investment

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.

  1. 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.
  2. 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.

What is 401k plan testing

Understanding Employer Obligations

What is 401(k) Plan Testing? Understanding Employer Obligations

401(k) plans are a fantastic vehicle for helping employees save for retirement. However, for employers, offering a 401(k) plan comes with certain responsibilities, one of which is ensuring the plan’s compliance with federal regulations. Enter the realm of 401(k) plan testing. But what is this testing all about, and how can employers ensure they’re meeting their obligations?

Understanding 401(k) Plan Testing

At its core, 401(k) plan testing ensures that retirement plans don’t heavily favor higher-paid employees or company owners. The Internal Revenue Service (IRS) has established guidelines to make sure that plans benefit a broad cross-section of employees and not just a select few. To this end, several tests are conducted annually, including:

  1. Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) Tests: These tests compare the average contributions of highly compensated employees (HCEs) to those of non-highly compensated employees (NHCEs). If the contributions of HCEs are disproportionately higher, the plan might fail these tests.
  2. Top Heavy Test: This test determines if the total value of the plan assets owned by “key employees” (typically company owners and officers) exceeds 60% of the entire plan’s assets. If so, the plan is deemed “top-heavy,” and certain minimum benefits might need to be provided to NHCEs.
  3. Coverage Test: This ensures that the plan benefits a reasonable percentage of non-highly compensated employees compared to highly compensated ones.

Employer’s Obligations

If a 401(k) plan fails any of the compliance tests, corrective actions are needed. These might include refunding contributions to HCEs or making additional contributions to NHCEs. Not only can these corrections be costly, but consistently failing these tests can also jeopardize the plan’s tax-qualified status.

Employers have the duty to:

  • Regularly review their 401(k) plan’s design and participant behavior.
  • Ensure timely execution of the required tests.
  • Take corrective measures as necessary.

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Offering a 401(k) plan is not just about providing a benefit; it’s about ensuring fairness, compliance, and safeguarding the future of all employees. With the complexities surrounding compliance testing, partnering with experts like PPC can be an invaluable decision, ensuring the plan’s success and the employer’s peace of mind.

What is a traditional 401k blog

… and Why Should Employees Invest in Their Retirement?

What is a Traditional 401(k) Plan and Why Should Employees Invest in Their Retirement?

Retirement planning is a subject that, for many, seems complex and distant. One of the primary vehicles to facilitate this planning in the United States is the traditional 401(k) plan. But what exactly is a 401(k), and why is it crucial for employees to consider investing in their future through this medium?

Understanding 401(k)s

A traditional 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their pre-tax earnings to invest in a variety of assets. The primary appeal of a 401(k) is the tax advantage it offers. The money you contribute is deducted from your paycheck before taxes are taken out, which means you’re taxed on a lower amount of income. Moreover, the investments in a 401(k) grow tax-deferred, meaning you won’t pay taxes on the gains until you withdraw the funds during retirement.

Many employers also offer a matching contribution, effectively providing “free money” to those who participate. For instance, if an employer matches 50% of employee contributions up to 6% of their salary, an employee who contributes 6% of their salary will actually be saving 9% of their salary towards retirement when you include the employer’s match.

The Power of Compounding and Early Investment

Time is an investor’s best friend. The sooner you start investing in your 401(k), the more time your money has to grow through the magic of compound interest. Compounding is the process where the returns on your investments earn returns of their own. Over time, this snowball effect can result in significant growth, especially if you start early and contribute regularly.

The Necessity of Planning for Retirement

Retirement may seem far off, especially for younger workers. But with uncertainties in the future of social safety nets like Social Security and the rising costs of healthcare and living, relying on external factors can be a risky proposition. By investing in a 401(k), employees take control of their financial future, ensuring they have the resources needed to enjoy a comfortable retirement.

Moreover, lifestyles and aspirations differ for everyone. Some dream of traveling the world post-retirement, some think of buying a cozy house by the beach, while others might want to pursue passion projects. A well-funded retirement account ensures that these dreams are not compromised.

A traditional 401(k) is not just another financial product; it’s an investment in one’s future. By leveraging the tax advantages, potential employer matches, and the power of compounding, employees can pave the way for a retirement that aligns with their dreams and aspirations. While today’s financial decisions may seem small, their impact on your future can be profound. Invest wisely, and remember: your future self will thank you.

Happy active senior couple outdoors

The Employee Retirement Income Security Act (ERISA) requires coverage to protect the plan from losses due to fraud and dishonesty.

There are three main types of bond coverage for retirement plans: fidelity bonds, fiduciary liability insurance, and cyber liability insurance. Not all three coverages are required, but understanding what is available and what they cover will help you determine the best protection for your plan.

ERISA Fidelity Bond

An ERISA fidelity bond protects the plan against losses caused by acts of fraud or dishonesty—such as theft, embezzlement, and forgery—by those who handle plan funds or other property. These funds or property are used by the plan to pay benefits to participants. This includes plan investments such as land, buildings, and mortgages. It also includes contributions received by the plan and cash or checks held to make distributions to participants. A person is considered to “handle” plan funds if their duties could cause a loss due to fraud or dishonesty, either by acting alone or in collaboration with others. Per the U.S. Department of Labor (DOL), handling refers to the following:

  • Physical contact with cash, checks or similar property;
  • Power to transfer funds from the plan to oneself or to a third party;
  • Power to negotiate plan property (mortgages, title to land and buildings or securities);
  • Disbursement authority or authority to direct disbursement;
  • Authority to sign checks or other negotiable instruments; or
  • Supervisory or decision-making responsibility over activities that require bonding.

Bond coverage is required for most ERISA employee benefit plans and the amount of coverage is reported on your plan’s Form 5500. The minimum coverage is 10% of prior year plan assets but not less than $1,000. The maximum bond amount is $500,000, or $1,000,000 for plans that hold employer securities. Bonding requirements do not apply to plans that are not subject to Title 1 of ERISA, such as church or governmental plans. Some regulated financial institutions (certain banks and insurance companies, for example) are exempt if they meet certain criteria.

The fidelity bond can be part of your company’s umbrella policy or can stand alone. In either case, the plan must be named and there can’t be a deductible. If your fidelity bond is less than $500,000, including an inflation guard will automatically increase the value of the fidelity bond to cover the growing plan assets so you will always have adequate coverage. It should be noted that the fidelity bond is different than the employee dishonesty bond that may be in effect for your company. While both provide coverage in the case of fraud, the fidelity bond provides protection for the plan, whereas the employee dishonesty bond protects the employer.

Fiduciary Liability Insurance:

Fiduciary liability insurance covers fiduciaries against losses due to a breach of fiduciary responsibility. A fiduciary is defined by the DOL as any of the following:

  • Persons or entities who exercise discretionary control or authority over plan management or plan assets.
  • Anyone with discretionary authority or responsibility for the administration of a plan.
  • Anyone who provides investment advice to a plan for compensation or has any authority or responsibility.

Examples of fiduciaries include plan trustees, plan administrators, and members of the plan’s investment committee. A fiduciary is in a position of trust with respect to the participants and beneficiaries in the plan and is responsible to act solely in their interest, provide benefits, defray reasonable expenses, follow the plan document, and diversify plan investments. The fiduciary must act with care, skill, prudence, and diligence. This bond is not required but can provide protection to the fiduciaries.

Cyber Liability Insurance:

Cyber liability insurance for the plan provides protection from covered losses and expenses in the event of a cyber breach. Your service provider’s insurance may not cover your plan for all losses, so the plan may want to consider its own policy. In May 2023 at the Plan Sponsor Council of America National Conference, DOL Assistant Secretary Lisa Gomez mentioned the importance of cybersecurity. She stressed that many employers may have cyber liability insurance for the company and assume that it covers the plan, but the fine print in the policy clarifies that it does not cover the company in its capacity as a plan sponsor. In 2021, the DOL issued cybersecurity guidance for plan sponsors, plan fiduciaries, record-keepers, and plan participants. The guidance, which is still very relevant, included the following:

  • Tips for hiring a service provider: Includes questions to ask when choosing a service provider to ensure they follow strong cybersecurity practices.
  • Cybersecurity Program best practices: Suggestions of practices and procedures that plan fiduciaries and record- keepers should have in place for risk assessments, secure data storage, cybersecurity training, and incident response.
  • Online Security Tips: Ways that plan participants can reduce the risk of fraud.

You can access the full news release here: https://www. dol.gov/newsroom/releases/ebsa/ebsa20210414 Things can happen outside of the control of the plan sponsor. Check with your service providers to determine the type of coverage your plan needs to be protected.

It doesn’t hurt to double check! We’re here for you!

As situations arise during the plan year, it’s always better to double check the plan provisions rather than address a plan failure after the fact. In some situations, it’s easier to ask for forgiveness rather than permission, but that isn’t true in retirement plans. Correcting mistakes can be very costly. Do not hesitate to reach out to us for clarification on what the plan allows. For example:

When a participant (staff or owner) requests a distribution, there is a process to follow to ensure the distribution is permitted by the plan. Questions to be considered:

Eligibility:

  • If a request is made for an in-service or hardship distribution, does the participant satisfy the requirements?
  • For terminated participants, does the plan permit distributions immediately or is there a waiting period defined in the plan document?

Available funds:

  • Is the type of distribution limited to employee contributions or are employer funds available?
  • Is the participant’s vested percentage sufficient if taking employer funds?
  • Has the vesting been updated for current plan year hours, if applicable?

Documentation:

  • Has the necessary online or paper request been completed?
  • Has spousal consent been obtained, if required?

Type of distribution:

  • Is the distribution only permitted in cash or are in-kind distributions permitted? In-kind refers to the transfer of assets to an IRA or another plan rather than liquidating shares and distributing the cash.
  • In the case of an in-kind transfer from a self-directed brokerage account, is the transfer to an IRA or another retirement plan (qualifying it as a rollover distribution) or to another account within the same plan (not a distribution)?

Contributions to the plan must be made per the provisions of the plan. If an employer contribution is usually funded after the end of the year but you find you have funds available during the year, a deposit may have to wait.

  • If the funds are pooled in one account, it’s important to be sure the total employer contribution funded does not exceed the deductible amount for that tax year. This won’t be known until after the end of the year when total compensation figures are available.
  • If the funds are in separate participant-directed accounts, the determination of how much to deposit to each participant is based on payroll as well. Funding some participants early, especially the owners, can also be a discrimination issue.

Are there changes to the company being considered? These events should be discussed prior to the effective date of the change because the plan can be greatly impacted.

  • Changes include buying another company, selling the company, or merging into another one.
    • Depending on the details, it may require plan termination and affect whether the participant account balances can be distributed or if they must be transferred to the other party’s plan.
    • The plan document may need to be amended for eligibility, vesting and other provisions.
  • Change in current ownership.
    • Some plan contribution formulas are suitable for the current demographics of the plan, meaning testing requirements pass. Changes to ownership may negatively affect test results so plan design changes may need to be considered.
    • Since ownership can be attributed to family members, hiring a relative can dramatically affect certain types of contributions and testing.

Any time funds are going into the plan or leaving it, there are terms of the plan that must be followed. If you find the provisions no longer suit you and your employees, an amendment can be considered to make the necessary changes. It is very important to operate the plan in accordance with the plan document, so please ask for clarification as needed!

Are Changes Needed to the Plan?

As time goes by, the needs of a company and the needs of the participants evolve, and a plan may need to be amended to keep up with those changes. This is a good time of year to review plan provisions and determine if any changes are needed before the next plan year. Below are some possible considerations:

Automatic enrollment can boost plan participation. Participants who don’t make an election will have 401(k) deferrals withheld automatically. There are several types of automatic enrollment designs that offer variations that may work best for the plan.

Does the plan fail the Actual Deferral Percentage/Actual Contribution Percentage (ADP/ACP) testing and require refunds to the Highly Compensated Employees? If so, it may be beneficial to add a safe harbor contribution, which could be either a match or a non-elective contribution. If the plan already has a safe harbor contribution, it’s possible that a different type of safe harbor will provide a better result.

Should employees be eligible for the plan earlier, or should they be ineligible for a longer period of time? It may be time to review the plan’s eligibility requirements.

Are the right participants receiving the contribution? For a non-safe harbor contribution, consider how terminated participants, participants who work low hours, and different classes of employees earn a contribution.

Is the best profit-sharing contribution formula being used? There are several ways to allocate a profit-sharing contribution, including pro rata (everyone receives the same percentage), integrated (employees with earnings above a certain dollar amount receive more), cross tested/new comparability (projects benefit to retirement and each person can receive a different contribution) and flat dollar amount (everyone receives the same amount). The best fit may change over time as the employee base changes.

Certain owners looking to boost the employer contribution beyond the limits of an existing 401(k) plan may be interested in adding a cash balance plan. These are some ideas to be considered by plan sponsors throughout the life of a plan. Reach out if you would like to discuss any of these options.

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 2022 employer contributions for those sponsors who filed a tax extension for Partnership or S-Corporation returns for the March 15, 2023 deadline.

September 30th

Deadline for certification of the Annual Funding Target Attainment Percentage (AFTAP) for Defined Benefit plans for the 2023 plan year.

October 16th

Extended due date for the filing of Form 5500 and Form 8955 for plan years ending December 31, 2022.

Due date for 2023 PBGC Comprehensive Premium Filing for Defined Benefit plans.

Contribution deadline for deducting 2022 employer contributions for those sponsors who filed a tax extension for C-Corporation or Sole-Proprietor returns for the April 18, 2023 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, 2022.

Couple enjoying sunset from the sail boat

Demystifying the Cash Balance Plan

A Real-World Scenario

Consider Allison and James, co-owners of a bustling consultancy firm with a four-member operations team supporting their daily endeavors. At 62, both Allison and James are considering aggressive savings strategies for their golden years.

Upon evaluating their retirement strategy, it was discerned that both could allocate $158,400 annually towards their retirement funds. Taking into account the support team’s demographic and income profile, the total contribution for these employees stood at $18,400 for the year. The distribution amongst the staff was contingent on age and salary benchmarks. In this fiscal year, the firm’s combined contribution to the 401(k) and Cash Balance plan amounted to $335,200, with a staggering 94.2% directed towards the principal partners.

A Snapshot

Co-Owners:

  • Allison: $158,400
  • James: $158,400

These figures are indicative, contingent upon annual evaluations and company demographics.

Support Team:

  • Team Member A: $6,050
  • Team Member B: $3,900
  • Team Member C: $3,950
  • Team Member D: $4,500

The annual employer’s commitment undergoes recalibration based on the dynamic average salary and age profile of the eligible staff pool.

The Cash Balance Plan Explained

Cash Balance Plans represent a niche within employer-sponsored Defined Benefit (DB) retirement schemes. Distinct from conventional DB plans, which earmark a monthly stipend upon retirement, Cash Balance Plans guarantee a predetermined account sum.

Commonly, these are complemented with a 401(k) strategy, with funding shouldered by the employer. The plan’s blueprint elucidates eligibility and contribution quotas. Notably, fluctuations in the investment portfolio do not impinge upon the end-game benefits a participant is entitled to at the closure of their tenure or retirement. The enterprise exclusively navigates the financial ebb and flow tied to the portfolio, ensuring annual contributions remain unaffected, underlining the significance of robust company revenue.

For the layperson, annual statements from Cash Balance Plans mirror those from 401(k)/Profit Sharing plans. This resemblance augments comprehension and is lauded by employers and employees alike, the former reaping tax benefits and the latter fortifying their retirement reservoir.

Why haven’t I encountered this before? It’s a question we often encounter, given the specialized nature of such plans.

  • Is this above board? Absolutely. [DOL guidelines provide clarity.]
  • What’s the maximum I can allocate? It’s contingent on age and earnings. Some professionals can earmark upwards of $210,000 annually via a comprehensive Cash Balance plan.
  • Any caveats? No underlying pitfalls. However, there are operational specifics to be apprised of, such as the annual funding imperative. We’re here to delve deeper and assess if a Cash Balance scheme aligns with your enterprise’s objectives.
Businessman and botanist reviewing sample data

Understanding ADP/ACP Testing for Employers Setting Up Retirement Plans

Setting up a retirement plan for your company is not just about offering a valuable benefit to your employees. It also requires understanding the intricate compliance aspects to ensure the plan operates fairly and within federal guidelines. One key component employers should familiarize themselves with is the ADP/ACP testing, a mechanism to ensure 401(k) plans do not disproportionately favor Highly Compensated Employees (HCEs).

Breaking Down ADP/ACP Testing

Employee deferrals in a traditional 401(k) come with specific testing requirements. Here’s what employers should know:

  1. HCEs and their Contribution Limits: HCEs typically can defer up to 2% more than the average deferral percentage of Non-Highly Compensated Employees (NHCEs).
  2. Key Employee Account Balances: The total account value held by key employees should not surpass 60% of the entire plan’s value.
  3. HCE Participation Dependence: The extent to which HCEs can participate might be restricted if NHCEs don’t contribute significantly.

A Practical Scenario

Consider Devon and Taylor, two equal stakeholders in a thriving business with 10 loyal employees.

The employees, on average, save about 4% of their income. Under a traditional 401(k) structure, Devon and Taylor’s contributions are contingent upon their employee’s average deferral rate. They can save an additional 2% over their employee average. Hence, in this scenario, Devon and Taylor are capped at a 6% contribution.

The Implications

Traditional 401(k) plans are mandated to fulfill certain non-discrimination criteria. To verify these, the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests are executed annually. Here’s what they entail:

  • ADP/ACP Testing assesses the average deferral/contribution percentage of HCEs against that of NHCEs. This ensures no undue advantages are given to the HCEs.
  • Defining HCEs: HCEs encompass any owner with over 5% business interest in the present or previous year, immediate family members of such owners, and any employee whose compensation exceeds an annually defined threshold.
  • Calculating Deferral Percentage: This is determined by dividing the individual’s deferral by their compensation. Subsequently, to determine the groups’ averages, the sum of the deferral percentages is divided by the total number of eligible employees in each category (HCEs and NHCEs). To successfully pass the ADP test, the HCE group’s ADP should not outstrip the NHCE’s ADP by more than 2%.

Conclusion

For employers, understanding ADP/ACP testing is fundamental when setting up a 401(k) plan. Ensuring compliance not only helps in maintaining the plan’s tax-advantaged status but also reinforces a sense of fairness and equity among all employees, irrespective of their compensation levels.

Business woman talking to her colleagues during a meeting in a boardroom

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.

Business woman talking to her colleagues during a meeting in a boardroom

In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act increased the Required Minimum Distribution (RMD) age for retirement plan participants from age 70 1/2 to 72.

Additionally, it introduced opportunities for Long Term Part Time (LTPT) employees to make deferral contributions to retirement plans in situations where they have not yet met the plan’s eligibility requirements. An updated version of the SECURE Act—the SECURE 2.0 Act of 2022—was signed by President Biden on December 29, 2022, as part of the Consolidated Appropriations Act of 2023. While this omnibus spending bill covers a variety of topics, changes to qualified retirement plans were included to encourage earlier plan participation and a better retirement outcome. SECURE 2.0 modifies the original RMD and LTPT provisions while introducing new rules.

Here is what lies ahead:

Effective as of the date of enactment:

  • Distributions to terminally ill participants will be exempt from the 10% early withdrawal penalty tax.
  • Plan sponsors of a 401(k), 403(b) or 457(b) plan may permit participants to elect their company matching and non-elective contributions be treated as Roth contributions.

Effective for Plan years beginning on or after 1/1/23:

  • Required Minimum Distribution (RMD) age increases from 72 to 73.
    • If a participant turned 72 prior to 1/1/23 and they have begun receiving their RMD, they will continue to receive their RMD in 2023.
    • For participants who turn 73 in 2023, their 1st RMD is due by 12/31/23 or they may opt to delay it until 4/1/24. If they choose the latter, they will take both their 1st and 2nd payment in 2024.
    • The penalty assessed to the participant for not taking an RMD timely is reduced from 50% of the amount not distributed to 25%.
    • The age increases further to 75 in 2033.

Effective for Plan years beginning on or after 1/1/24:

  • RMDs will not be required from Roth 401k or Roth 403(b) balances.
    • Currently Roth IRAs are exempt from RMDs but Roth balances in qualified plans are included in the calculation of the required amount to be distributed. Calculations for 2023 RMDs will include Roth 401(k) balances but they will be excluded from future calculations.
  • Catch-up contributions to qualified retirement plans must be Roth deferrals.
    • This does not apply to participants with compensation under $145,000 in the prior year.
  • Matching contributions on student loan repayments.
    • Sponsors of a 401(k) Plan, 403(b) Plan or SIMPLE IRA will be able to match student loan repayments made by employees. This also applies to governmental employers who sponsor a 457(b) Plan.
    • The employee will make student loan payments on the loan that was taken to pay for qualified higher education expenses and the employer will be permitted to deposit a matching contribution into the qualified plan on their behalf.
  • Hardship rules for 403(b) plans will conform to the rules that apply to 401(k) Plans.
    • In addition to employee contributions being available as a hardship distribution, earnings on those contributions will be available as well.
  • Distributions will be available for domestic abuse survivors.
    • The available amount will be the lesser of $10,000 or 50% of the participant’s account and will be exempt from the 10% early withdrawal penalty tax.
    • The amount will be eligible to be repaid to the plan over 3 years.
  • Emergency distributions up to $1,000 will be available.
    • One distribution per year for unforeseeable or immediate financial needs relating to personal or family emergency expenses.
    • The distribution will be exempt from the 10% early withdrawal penalty tax.
    • The amount will be eligible to be repaid within 3 years.
    • No additional emergency distribution during the 3-year period will be available unless repayment has occurred.
  • Long Term Part Time (LTPT) Employees will be eligible to contribute elective deferrals to their employers’ 401(k) Plans.
    • LTPT Employees are those who have worked at least 500 hours a year for three consecutive years.
    • Plan Sponsors may opt to offer matching contributions (subject to vesting schedule).
    • Hours of service prior to 2021 are disregarded for both eligibility and vesting.
    • This provision does not apply to collectively bargained plans.

Effective for Plan years beginning on or after 1/1/25:

  • Long Term Part Time (LTPT) Employees will be eligible to contribute elective deferrals after TWO consecutive years of working 500 hours instead of three years.
    • This provision will now apply to both 401(k) Plans and ERISA 403(b) Plans.
    • Hours of service prior to 2023 are disregarded for 403(b) Plans.
  • Increased Catch-Up Contributions.
    • Participants aged 60 to 63 will be eligible to defer larger catch-up contributions.
  • Required automatic enrollment provisions.
    • New 401(k) and 403(b) plans must include automatic enrollment provisions where the default employee contribution rate is at least 3% but not more than 10%. Each following year, the amount is increased by 1% until it reaches at least 10% but not more than 15%.
    • This provision does not apply to businesses with 10 or fewer employees or new companies in business less than 3 years.
    • Plans that exist as of December 29, 2022 (date of enactment) are grandfathered and, therefore, are not required to include automatic enrollment provisions.
    • Plans that are established in 2023 and 2024 should pay attention to this provision, though, since the provision may apply to them for 2025.

Is it already time to complete another year-end data request?

When Plan Sponsors are asked to provide company and employee census information for a recent plan year, the details being collected affect the contributions that must be calculated and funded as well as which compliance tests the plan must satisfy. The same questions are asked year after year because changes in the company affect the plan a great deal. Information collected may include:

Employee Census:

Details about all employees on payroll must be provided, whether they are full time, part time or only worked a few weeks.

  • Employee information allows your retirement plan professional to determine who met the plan eligibility requirements, who is required to be included in compliance testing and who is eligible to receive employer contributions being funded for the plan year.
  • If your payroll information is collected per payroll, you may be asked to confirm its accuracy at year end to be sure that no payrolls were missed and that, for calendar year compensation years, the amounts tie to the Form W-3.
  • With the new rules for Long Term Part Time (LTPT) employees, it is very important to track hours worked for part time employees to determine who falls into this category.
  • If you are an owner only plan (sole proprietor and spouse, or partnership and spouses of partners), be sure to reach out to your retirement plan professional if you are considering hiring employees. Depending on the plan provisions, even seasonal or short-term hires could have an unexpected impact.

Ownership % and other businesses owned by those owners:

Not only does it matter who owns a part of your business, how much they own makes a difference as well.

  • Ownership of more than 5% means they are a Highly Compensated Employee (HCE) for compliance testing purposes, and this may affect the contribution amount they are able to receive. If the spouse of the owner is also employed, the ownership attribution applies to them as well. This applies to parents, children, and grandparents of 5% owners.
  • If the owners of your company have ownership in another company, it could be a controlled group or affiliated service group situation and the employees of that other company may need to be included in the compliance testing for your qualified plan.
  • Changes in ownership should be communicated as they are being planned, rather than after the change takes effect. For example, if the owners plan to retire at year end with their children taking over, the compliance testing for the plan could be affected by the change in ages of the HCEs. There are ways to make this a smooth transition with plan provision changes if discussed in advance.

ERISA fidelity bond:

The amount in place for your plan at year end is requested to determine if it is sufficient or needs to be increased.

  • The amount of the bond is reported on the Form 5500 filed for the plan year and the required amount is 10% of plan assets. Certain exceptions apply.
  • For the 1st year of the plan, the amount of coverage is to be based on 10% of the expected contribution amount for the year.

Stay tuned! Secure 2.0 Act of 2022 includes some action items that may produce beneficial changes in the future.

Within 18 Months:

  • Effectiveness of notice provided for eligible rollover distributions: A 402(f) notice, often referred to as a Special Tax Notice, must be provided to the recipient of a distribution that is eligible for rollover. The notice must contain required language regarding rollover options and the tax implications that may apply. The Government Accountability Office must issue a report to Congress on the effectiveness of these notices.

No Later Than Two Years After the Date of Enactment:

  • Retirement Savings Lost and Found: A national online database will be created to help connect former participants who are trying to reach a prior employer with Plan Sponsors who are trying to reach them regarding a remaining account balance.
  • Consolidation of defined contribution plan notices: Regulations are to be amended so that the individual notices currently provided to participants by the plan can be consolidated.

Within Five Years:

  • Report on pooled employer plans: The Department of Labor (DOL) Secretary must conduct a study on the new and growing pooled employer plan industry and issue a report within five years. Subsequent reports will be completed every five years after.

Upcoming Compliance Deadlines for Calendar-Year Plans

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, 2023.

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).

March 31st (April 1st Falls on a Weekend)

  • Required Minimum Distributions: Normal deadline to distribute a Required Minimum Distribution (RMD) for participants who attained age 72 during 2022.

April 14th (April 15th Falls on a Weekend)

  • 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 2022 were $20,500 or $27,000 for those aged 50 and over if the plan allowed for catch-up contributions.

April 18th (April 15th Falls on a Weekend)

  • Employer Contributions: Deadline for contributing employer contributions for amounts to be deducted on 2022 C-corporation and sole proprietor returns for filers with a calendar fiscal year (unless extended).
Business people discussing work with a client in an informal meeting

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).

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Save even more for retirement in 2023 due to record breaking increases in limits.

On October 21, 2022, the IRS announced the Cost of Living Adjustments (COLAs) affecting the dollar limitations for retirement plans for 2023. Retirement plan limits increased well over the 2022 limits, the largest increase in over 45 years. COLA increases are intended to allow participant contributions and benefits to keep up with the “cost of living” from year to year. Here are the highlights from the new 2023 limits:

  • The calendar year elective deferral limit increased from $20,500 to $22,500.
  • The elective deferral catch-up contribution increased from $6,500 to $7,500. This contribution is available to all participants aged 50 or older in 2023.
  • The maximum available dollar amount that can be contributed to a participant’s retirement account in a defined contribution plan increased from $61,000 to $66,000. The limit includes both employee and employer contributions as well as any allocated forfeitures. For those over age 50, the annual addition limit increases by $7,500 to include catch-up contributions.
  • The maximum amount of compensation that can be considered in retirement plan compliance has been raised from $305,000 to $330,000.
  • Annual income subject to Social Security taxation has increased from $147,000 to $160,200.

New Plan Year Checklist

Each year, a great deal of attention is paid to the upcoming year end work: census gathering, compliance testing, 5500s, oh my! But the year-end also brings with it a host of items that may need attention before the year closes. Below are a few action items that may need to be considered. 

  • Changes were made for the current plan year or upcoming plan year that required an amendment. Example: As of January 1, 2023, in-service distributions are available to participants at age 59 1⁄2.
    • Do you have a signed copy of the amendment on file?
    • Have you revised your processes to ensure you are following the new terms of the plan?
  • Are there terminated participants with small balances?
    • If your plan is like most and permits force-out or mandatory distributions of terminated participant account balances, the distributions must be completed by the plan year end.
    • Check with your service provider to ensure the amounts will be paid out before the current plan year end.
  • If your plan includes automatic enrollment provisions, the following may help you keep on track.
    • Identify participants who will be eligible at the start of the plan year and be sure that deferrals are scheduled to begin on time for those that do not opt out.
    • For plans that include auto-escalation of contributions, create a list of participants whose deferrals need to be increased in accordance with the plan’s schedule.
  • With the significant increase in limits for 2023, it will be a great year for both participants and plan sponsors to take advantage of saving for retirement. It may make sense to review your current plan specifications to ensure that participants can take advantage of the higher limits. Some examples are raising your company match cap to a higher limit or letting employees enter the plan more quickly.
  • The 2023 COLAs significantly raised the annual compensation limit from $305,000 to $330,000. If you fund employer contributions during the year, be sure to adjust your calculations for the upcoming plan year based upon the new limit.
  • While some actions are needed ahead of the start of a plan year, the SECURE Act provided that a new plan can be added after the end of the year to which it applies. For example, if you maintain a 401(k) Plan and choose to add a Cash Balance Plan, the new plan can be implemented up to the due date of the company’s tax filing. This means that even if you choose to add a Cash Balance Plan for 2022, the plan document can be executed in 2023 if it’s adopted prior to filing the 2022 company tax return.

Be sure to speak with your TPA or service provider about any additional steps that need to be taken in order to be ready for a new plan year.

Save or Toss? Proper Plan Record Storage a Must!

As the year comes to a close, you may wonder what plan records must be kept and what items can be tossed. Historical plan records may need to be produced for many reasons: an IRS audit, a DOL investigation or simply questions from participants about their benefits or accounts to name a few.

The Internal Revenue Service (IRS) takes the position that plan records should be kept until all benefits have been paid from the plan and the audit period for the final plan year has passed. This additional audit period is important to note. It may seem that with the final payout the plan is gone, but the reality is that the plan can be selected for audit for 6 years after the plan assets are paid out and your final Form 5500 is filed. The items that are typically needed in the event of an audit are:

  • Plan documents and amendments (all since the start of the plan, not just the most recent)
  • Trust Records: investment statements, balance sheets and income statements
  • Participant records: Census data, account balances, contributions, earnings, loan records, compensation data, participant statements and notices

Under the Employee Retirement Income Security Act (ERISA), the following documentation should be retained at least six years after the Form 5500 filing date, including, but not limited to:

  • Copies of the Form 5500 (including all required schedules and attachments)
  • Nondiscrimination and coverage test results
  • Required employee communications
  • Financial reports and supporting documentation
  • Evidence of the plan’s fidelity bond
  • Corporate income

In addition, ERISA states that an employer must maintain benefit records, in accordance with such regulations as required by the Department of Labor (DOL), with respect to each of its employees that are sufficient to determine the benefits that are due or may become due to such employees. These items don’t necessarily have a set time frame, so you may want to consider keeping these items indefinitely. Documentation needed may include the following:

  • Plan documents, amendments, SPD, etc.
  • Census data and supporting information to determine eligibility, vesting and calculated benefits
  • Participant account records, contribution election forms and beneficiary forms
  • Documentation related to loans and withdrawals

It is the plan sponsor’s responsibility to ensure documentation is kept regardless of which service providers are used during the life of the plan. Establishing a written process regarding how long to keep documentation is important as well as giving careful thought to whether the records will be electronic or paper. This ensures that, as staff members change over time, your processes will remain consistent and all necessary information will be handled appropriately. When storing plan records electronically, consider a naming convention that will make documents accessible to the proper personnel and easy to locate.

Security of the information should be considered as well to protect the confidentiality of personally identifiable information or PII. Many types of plan records include items considered PII, like social security numbers, dates of birth or account numbers. This information should be kept in a secure manner to avoid the possibility of identity theft and fraud. Take the necessary steps to ensure that the plan’s service providers also have adequate policies in place to protect participant’s PII as well.

Deadline for CARES Act and SECURE Act Amendments Extended

The original due date of the CARES Act and SECURE Act amendments for qualified plans, other than governmental plans, was the last day of the first plan year beginning on or after January 1, 2022, which means December 31, 2022, for calendar year plans. This has been extended to December 31, 2025, regardless of plan year end. However, the deadline for governmental plans (414(d) plans, 403(b) plans maintained by public schools or 457(b) plans) is 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.

This does not restore the availability of Coronavirus Related Distributions or larger loan limits but refers to the amendments that document the provisions used to operate the plan. Check with your TPA or document provider to confirm if the amendments for your plan were already filed or if the extended deadline will apply to you.

Upcoming Compliance Deadlines for Calendar-Year Plans

December 1st

Participant Notices – Annual notices due for Safe Harbor elections, Qualified Default Investment Arrangement (QDIA), and Automatic Contribution Arrangements (EACA or QACA).

December 30th

ADP/ACP Corrections – Deadline for a plan to make ADP/ ACP corrective distributions and/or to deposit qualified nonelective contributions (QNEC) for the previous plan year.

Discretionary Amendments – Deadline to adopt discretionary amendments to the plan, subject to certain exceptions (e.g., anti-cutbacks).

Required Minimum Distribution (RMD) – For participants who attained age 72 in 2021 (and attained age 70 on or after July 1, 2019), the first RMD was due by April 1, 2022. The 2nd RMD, as well as subsequent distributions for participants already receiving RMDs, is due by December 30, 2022.

January 31st

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.

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

IRS Form W-2 – Deadline to distribute Form W-2, which must reflect aggregate value of employer-provided employee benefits.

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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.

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On November 4, 2021, the IRS announced the cost of living adjustments affecting the dollar limitations for retirement plans for 2022.

In October, the Social Security Administration announced a benefit increase of 5.9%, the largest increase in nearly 40 years. Following suit, many retirement plan limits have increased as well over the 2021 levels. Contribution and benefit increases are intended to allow participant contributions and benefits to keep up with the “cost of living” from year to year. Here are the highlights from the 2022 limits:

  • The calendar year elective deferral limit increased from $19,500 to $20,500.
  • The elective deferral catch-up contribution remains unchanged at $6,500. This contribution is available to all participants age 50 or older in 2022.
  • The maximum allowable dollar amount that can be contributed to a participant’s retirement account in a defined contribution plan increased from $58,000 to $61,000. The limit includes both employee and employer contributions as well as any allocated forfeitures. For those over age 50, the annual addition limit increases by $6,500 to include catch-up contributions.
  • The maximum amount of compensation that can be considered in retirement plan compliance has been raised from $290,000 to $305,000.
  • Annual income subject to Social Security taxation has increased to $147,000 from $142,800.

If you have any questions on how these increases will affect your plan, please contact your representative.

Form 5500 Filing Extension for FEMA Designated Disaster Areas

On August 31st, 2021, the IRS issued guidance extending tax filing deadlines for form 5500 in areas designated by the federal emergency management agency (FEMA) As qualifying for assistance due to hurricane Ida and other recent natural disasters.

This extension applies not only to Form 5500 filings but also to Form 8955-SSA.

The list of FEMA-designated disaster areas due to Hurricane Ida and other natural disasters continues to grow. Plan Sponsors are eligible for this relief if their principal place of business is located in a covered disaster area. Plan Sponsors can check the updated Disaster Relief page (IRS.gov/newsroom/tax-relief-in-disaster-situations) or check with your service provider to see if your plan qualifies for the extension or for updates to the list of covered areas.

Hurricane Ida

This tax relief postpones filing deadlines for Form 5500s originally due, with valid extensions, starting on or after August 26. For a calendar year plan, subject to extension, with a due date of October 15, 2021, the 5500 is now due on January 3, 2022. Covered disaster areas due to Hurricane Ida include the states of Louisiana and Mississippi and several counties in New Jersey, New York and Pennsylvania.

Tropical Storm Fred

For businesses whose principal place of business is located in certain counties of North Carolina, Form 5500 filings that were originally due, with valid extensions, starting on or after August 16, are now due on December 15, 2021.

California Wildfires

For businesses whose principal place of business is located in certain counties of California, Form 5500 filings that were originally due, with valid extensions, starting on or after July 14 and before November 15 are now due on November 15, 2021.

Tennessee Severe Storms and Flooding

For businesses whose principal place of business is located in certain counties of Tennessee, Form 5500 filings that were originally due, with valid extensions, starting on or after August 21 and before January 3, 2022, are now due on January 3, 2022.

These disaster extensions are automatic if the plan qualifies for the extension. Both Form 5500 and Form 8955-SSA have a section to be completed by the Plan Administrator to designate the applicable disaster giving rise to the extension.

The Coronavirus Pandemic, Without a Doubt, Has Changed the Way We Do Business. It Has Also Created Some Unanticipated Vulnerabilities.

For instance, since the start of the “new normal,” there has been an increase of cyberattacks on retirement plans and participant accounts through unauthorized distributions. How did this happen? In March of 2020, Congress passed the CARES Act legislation that increased access to retirement funds for those affected by the COVID-19 pandemic. At the same time, many employees started to work from home, many on personal devices and in unsecure environments. The heightened level of plan distributions together with the security risks associated with electronic communications and working remotely, may have created the perfect storm for exposure of participants’ confidential and personal data to cybercriminals. Why would these sophisticated criminals target retirement plans? To quote the famous bank robber, Willie Sutton, when asked why he robbed banks, “because that’s where the money is.” With $6.7 trillion of total assets in 401(k) plans, it seems that Willie would agree that it’s where the money is.

Participant distributions have become a particular focus for fraudsters. Retirement accounts typically have higher balances than checking or savings accounts and they also tend to be less monitored by the participant. Participants are typically encouraged NOT to change their investment selections too frequently, so many only view their statements on a quarterly basis. Though cases of distribution fraud were detected by the FBI as early as 2017, the instances of attacks against retirement accounts have skyrocketed during the pandemic. Additionally, retirement plans tend to have many service providers, like TPAs, recordkeepers, and financial advisors. Some even contract with an outside trustee or trust company to facilitate participant distributions. So, in the unfortunate case that a data breach or fraudulent distribution occurs, who is the responsible party? The answer is not as clear as one might think given that ERISA, the main body of law governing retirement plans, was passed into law in 1976, long before the use of the internet or electronic processing. So, with so many parties involved, the courts have many times indicated shared liability between the plan sponsor and other service providers.

How Can the Chance of Cyberattacks Be Mitigated?

Monitor the Plan’s Service Providers

Some plan sponsors believe that the hiring of external experts like trust companies and other fiduciaries will protect them in the case of fraud. Under ERISA, the employer/plan sponsor has the fiduciary duty to not only protect participant data but to also select and monitor plan service providers. Service providers, like recordkeepers and trust companies, say they are constantly upgrading their cybersecurity systems, but plan sponsors should be asking questions about their cyber policies as well as improvements to their systems. Mid Atlantic Trust Company, which provides trust and custody services to over 125,000 retirement plans, has taken steps to guard against distribution fraud in its paying agent services, a solution that can be used by recordkeepers, TPAs or even directly by the plan sponsor to process participant distributions. Michele Coletti, who serves as Mid Atlantic’s Chief Operating Officer, states that when processing distributions, “Mid Atlantic includes several layers of review at pre-set release levels determined by the clients, as well as confirming distributions against an industry-leading fraud prevention service.” Additionally, Mid Atlantic looks for distribution red flags in its processes, such as transfers to newly opened bank accounts or funds being transferred to accounts where the registrations don’t match.

Transmit All Plan Data Securely

Although it may take a few more clicks and the creation of another password protected account, plan sponsors and participants should always use a secure portal or encrypted email to send personally identifiable information (PII). That means not using company or personal email to send census information, distribution forms or other communications containing PII in an unsecure fashion.

Learn, Learn, Learn

Like most things involving cybersecurity, education is key. Educating staff members and participants about phishing emails and click bait schemes that are used to trick the recipient into revealing personal information is a highly effective way to stop fraud. Fraudsters use catchy subject lines like “Approve Changes to your 401(k) Account” or “Click here to update your information” to get participants to reveal information to them. This type of education isn’t once and done but should be repeated on at least an annual basis and as part of employee orientation.

Establish Online Access

Though it may sound counter intuitive, encourage all participants to set up their online account access and check them regularly even if they prefer to receive paper statements. Unclaimed online accounts are easier for hackers to access and take control. Participants should also choose strong passwords and set up multifactor authentication (MFA) which sends codes to multiple devices to verify the account holder’s identity. Avoiding the use of public Wi-Fi to access retirement accounts greatly decreases the potential of being hacked.

Good Policies and Procedures Go a Long Way

It’s important to note that not all fraud will be electronic. There are reported cases where fraudsters have used fax, phone and even paper documents by mail to perpetrate distribution fraud. Plan sponsors should follow strict procedures, and ensure that their service providers do as well, to reduce the chance of a fraudulent withdrawal from a participant’s account. Will retirement accounts ever be 100% secure? Though we may wish so, account theft will continue to evolve as fraudsters find ways of mining personal information whether it be from social media sites, like LinkedIn and Facebook, or by hacking email accounts or passwords. Maintaining good administrative practices as a participant or plan sponsor and selecting service providers who remain vigilant in upgrading their cyber security systems will be key to protecting plan data and assets from cyberattacks.

Upcoming Compliance Deadlines for Calendar-Year Plans

1st December 2021

Participant Notices – Annual notices due for Safe Harbor elections, Qualified Default Contributions (QDIA), and Automatic Contribution Arrangements (EACA or QACA).

31st

ADP/ACP Corrections – Deadline for a plan to make ADP/ACP corrective distributions and/or to deposit qualified nonelective contributions (QNEC) for the previous plan year. Discretionary Amendments – Deadline to adopt discretionary amendments to the plan, subject to certain exceptions (e.g., anti-cutbacks).

31st January 2022

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.

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

IRS Form W-2 – Deadline to distribute Form W-2, which must reflect aggregate value of employer-provided employee benefits. The CARES Act gives the DOL the authority to delay retirement plan deadlines due to public health emergencies. The dates above are in effect as of the date of this publication.

Young african american woman presenting her glass savings jar with a budding plant growing out from it at home. Happy mixed race person smiling while planning, saving and investing for her future

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.

Senior middle aged happy couple using laptop together at home

Some Would Say That Retirement Plan Administration Is a Team Sport!

Putting together technical and compliance competence with ongoing investment and fiduciary expertise is key to keeping your plan healthy and participants happy. So, what roles and responsibilities should you look to fill for your firm to have a successful and compliant plan?

The first and most important role is you, the Plan Sponsor. Plan Sponsors elect to establish the plan and offer it to their employees. Though many employers act as the named Plan Administrator of the plan, to ensure a successful outcome, they assemble a team of professionals to fulfill the key roles that keep a plan on track. The team’s goal, following the direction of the Plan Sponsor, is to deliver a program that provides retirement security for the plan participants.

Key Team Players

Beyond the sponsorship and ultimate oversight of the plan, the following are key roles which are vital to a well-run plan.

Third Party Administrator (TPA) – Not to be confused with the named Plan Administrator, the TPA plays a critical role in the maintenance of the plan and the coordination of the team. The TPA is typically the “go-to” resource for HR personnel for questions regarding the day-to-day operation of the plan and the coordinator among other service providers in the plan’s ecosystem. More than reliable customer service, TPAs are trained professionals that provide technical expertise to ensure the plan complies with current regulations governing retirement plans. ERISA, DOL regulations, and case law are complex and frequently change. Compliance is daunting, and penalties and back taxes can be significant. So, it is important that a dedicated TPA is engaged. Common duties include:

  • Providing guidance on plan design.
  • Preparing and maintaining legal plan documents.
  • Performing compliance testing.
  • Preparing annual valuations and benefit statements.
  • Completing and filing all forms with the government.
  • Performing non-discrimination testing.

Financial Advisor – An equally important counterpart to the TPA role is the plan’s financial advisor. In tandem with the TPA, advisors help Plan Sponsors decide the goals for the retirement plan. These goals are then translated, with the TPA, into a plan design and ultimately a written plan document that guides the operations of the plan from year to year. The financial advisor also helps the Plan Sponsor select and monitor the investments in the retirement plan. In a 401(k) plan, where participants may direct their account balances, the advisor will assist the Plan Sponsor in selecting a recordkeeping platform and a line-up of investment options from which the plan’s participants will choose. The advisor may also:

  • Oversee investment meetings.
  • Act as a guide and educator to the plan’s participants through the initial enrollment process and subsequent enrollment meetings.
  • Act as a co-fiduciary to the plan.

Recordkeeper/Custodian – The recordkeeping platform in a participant directed 401(k) plan keeps track of the participant’s investment selections and account balances. The plan’s custodian holds the plan’s assets and handles buying and selling of investments for contributions, investment exchanges, and distributions. These services can be provided as a bundle or independently offered.

Other important members of the team:

  • Payroll Providers – Payroll providers play a key role in 401(k) plans by recording participant salary deferral percentages and calculating the deductions and appropriate taxes on the contributions to the plan.
  • Plan Auditor – For plans over 100 participants, a financial statement audit is performed by a certified public accountant.
  • Retirement Plan Fiduciary – Though not a requirement, many advisors have migrated to taking on a fiduciary role in retirement plans by acting in a 3(21) or 3(38) capacity.
  • ERISA Attorney – Many Plan Sponsors and TPAs may need the assistance of an ERISA attorney in certain areas of retirement plan administration such as QDROs, voluntary compliance programs, or in the event of a legal action against the plan.
  • 3(16) Fiduciary – A Plan Sponsor may hire a firm to fill the role of the Plan Administrator as stated in the plan document.

Bundled vs Unbundled Servicing Options

As with most things in life, there is no perfect answer that fits everyone in every situation. Many of the services mentioned in this article can be linked together and offered in “bundles.” On the surface, this may seem the easier route, but bundled does not give the Plan Sponsor the ability to evaluate each component on its own, so many trade-offs in services and expertise may occur. An unbundled approach strives to offer the Plan Sponsor a more a la carte approach to the services they use to design their plan. With a good TPA and advisor relationship, the Plan Sponsor can be easily guided through the selection process by relying on the experience of these professionals. Many believe this approach ultimately ends up with the design and structure that works best for their employees. Be aware that, though cheaper fees and overall costs may be offered through bundled providers, it is possible that recordkeeping or compliance costs are being offset in other areas like investment management fees.

Ultimate Oversight

Ultimately, the Plan Administrator and Plan Sponsor must ensure that the service providers are fulfilling their duties. By relying on a close relationship with their TPA and Financial Advisor, Plan Sponsors can feel confident that they are creating a plan that will serve the retirement needs of their employees and steer clear of any issues with governing entities.

Congratulations! It’s a Retirement Plan!

So, You’ve Sold Your Business and Now You’re Asking the Question “What Happens to the Retirement Plan?”

You are not alone. In the world of mergers and acquisitions, it is not uncommon for retirement plans to be overlooked in the process. The options available depend upon the type of transaction taking place and the timing, that is — has the transaction already occurred, or is it set for a prospective date? The transaction that takes place is typically classified under one of two categories, an asset sale or a stock sale. We will explore each of these transaction types along with the options available under each below.

Asset Sale

In an asset sale, the assets of an entity are purchased by another company. Some examples of assets include equipment, licenses, goodwill, customer lists, and inventory. While the seller’s assets have been purchased, their entity will continue to exist until properly closed down. The buyer generally does not acquire the liabilities of the seller in this scenario. This includes the retirement plan. Once the sale takes place, the seller can terminate the retirement plan and distribute all assets, or they can continue

operating the plan as long as the sponsoring entity continues to exist. Employees who transition to the buyer will be considered new hires and terminated under the seller’s firm. In most cases, the terminated employees will have the option to roll over their account balances to the retirement plan of the buyer. It is common for the buyer’s plan to be amended, allowing for immediate eligibility for these new employees. If it is not amended, the new employees will need to satisfy the eligibility requirements defined under the buyer’s plan.

Stock Sale

In a stock sale, the buyer purchases the stock of the seller’s company. The company is absorbed by the buyer, becoming part of the buyer’s firm. The buyer becomes the employer and assumes all liabilities tied to the seller. This includes the retirement plan unless specifically addressed in the purchase agreement. Under this scenario, there are generally three options available with regard to the seller’s retirement plan. First, the buyer could require the seller’s plan be terminated prior to the effective date of the sale set forth in the purchase agreement. In this case, with the proper board resolution, the seller would be responsible for completing the termination of the plan. It is important that the termination process set forth by the IRS be followed in order to avoid violating successor plan rules.

Another option is to maintain both plans. As long as both plans satisfy coverage rules immediately before the transaction and there are no significant changes in the terms or coverage of the plan, the sponsor may rely on the transition rule where coverage requirements are considered satisfied. This means the plans can be separately maintained through the end of the transition period. This period runs through the end of the year following the year in which the transaction took place. After the transition period has expired, if the sponsor continues to maintain both plans, they must be tested together.

The third option available is to merge the plans. This is typically the option most plan sponsors choose. In this case, the seller’s plan is usually merged into the plan of the buyer. This is accomplished through a resolution and amendment to the surviving plan. It is important the seller’s plan be reviewed for any protected benefits. These benefits, such as vesting and certain distributable events, cannot be eliminated. It is also important to note that with the merging of the two plans, the surviving plan

inherits any compliance issues or failures that exist. The buyer should complete their due diligence with regard to review of the seller’s plan before going this route. Any deficiencies will need to be addressed and corrected accordingly. This review and the subsequent documentation will prove beneficial should the seller’s plan be selected for audit, as the IRS can audit a plan up to three years from the date the final Form 5500 was filed.

While every transaction is unique, some advance planning with regard to retirement plans can save you from quite a few headaches down the road. Take the time to consult with your advisors, including your CPA, attorney, etc., when considering buying or selling a business. As a buyer, if you don’t, you could suddenly find you are the proud sponsor of a retirement plan!  

On April 14, 2021, the Dol’s Employee Benefits Security Administration (Ebsa) Issued Long-Awaited Guidance Designed to Protect Participants From Both Internal And External Cybersecurity Threats.

The guidance is far-reaching and is directed at plan sponsors, plan fiduciaries, recordkeepers, and plan participants. This is the first time the DOL has issued guidance on cybersecurity for employee benefit plans and is a welcome step forward as it provides best practices and tips to help mitigate cybersecurity risks.

The guidance is set forth in three parts:

Tips for Hiring a Service Provider: Provides practical steps plan sponsors and fiduciaries can take when selecting retirement plan service providers.

  • Ask about the service provider’s information security standards, practices, and policies, as well as audit results, and compare them to the industry standards adopted by other financial institutions.
  • Ask the service provider how it validates its practices, and what levels of security standards it has met and implemented. Look for contract provisions that give you the right to review audit results demonstrating compliance with the standard.
  • Evaluate the service provider’s track record in the industry, including public information regarding information security incidents, other litigation, and legal proceedings related to vendors’ services.
  • Ask whether the service provider has experienced past security breaches, what happened, and how the service provider responded.
  • Find out if the service provider has any insurance policies that would cover losses caused by cybersecurity and identity theft breaches (including breaches caused by internal threats, such as misconduct by the service provider’s own employees or contractors, and breaches caused by external threats, such as a third-party hijacking a plan participant’s account).
  • When you contract with a service provider, make sure that the contract requires ongoing compliance with cybersecurity and information security standards – and beware of contract provisions that limit the service provider’s responsibility for IT security breaches. Also, try to include terms in the contract that would enhance cybersecurity protection for the Plan and its participants.

Cybersecurity Program Best Practices: Includes best practices designed to assist plan fiduciaries and recordkeepers in managing cybersecurity risks.

  • Have a formal, well documented cybersecurity program.
  • Conduct prudent annual risk assessments.
  • Have a reliable annual third-party audit of security controls.
  • Have clearly defined and assigned information security roles and responsibilities.
  • Have strong access control procedures.
  • Ensure that assets or data stored in the cloud or managed by a third-party service provider are subject to appropriate security reviews and independent security assessments.
  • Conduct cybersecurity awareness training at least annually for all personnel and update to reflect risks identified by most recent risk assessment.
  • Implement a Secure System Development Life Cycle Program (SDLC).
  • Have a business resiliency program that addresses business continuity, disaster recovery, and incident response.
  • Encrypt sensitive data stored and in transit.
  • Have strong technical controls implementing best practices.
  • Take appropriate action to respond to cybersecurity incidents and breaches.

Online Security Tips: Directed at plan participants and beneficiaries who check their retirement accounts online. It provides basic rules to reduce the risk of fraud and loss.

  • Register, set up, and routinely monitor your online account.
  • Use strong and unique passwords.
  • Use multi-factor authentication.
  • Keep personal contact information current.
  • Close or delete unused accounts.
  • Be wary of free Wi-Fi.
  • Beware of phishing attacks.
  • Use anti-virus software and keep apps and software current.
  • Know how to report identity theft and cybersecurity incidents.

Additional information on the tips and best practices summarized above can be found in three documents provided by the DOL.

  • Tips for Hiring Service Providers with Strong Cybersecurity Practices
  • Cybersecurity Program Best Practices
  • Online Security Tips

If you have any questions about the guidance and how it may impact your plan, please contact your representative.

Upcoming Compliance Deadlines for Calendar-Year Plans

15th May 2021

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 2021. No clear guidance allows extending the deadline to the next business day.

30th June 2021

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).

29th July 2021

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.

2nd August 2021

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.

14th

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 the second quarter of 2021. Note that August 14th falls on a weekend in 2021. No clear guidance allows extending the deadline to the next business day.