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.
©2022 Benefit Insights, LLC All rights reserved.
This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.
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Spring will arrive soon, promising new growth and a fresh beginning. It could also be the perfect time to do some spring cleaning for your plan. Let’s look at some areas that you might consider reviewing to ensure your retirement plan is operating efficiently.
Document your processes and procedures to make certain that plan tasks can be handled in case of any absences during an enrollment or pay period. Having a backup in place can prevent errors and delays that could lead to penalties.
Make sure to have a process in place to notify all new enrollments of their eligibility, regardless of whether the plan has automatic enrollment. Depending on the timing for plan entry, including the plan enrollment paperwork with the new hire paperwork could make entry easier for you. Please reach out with any questions regarding when an employee enters the plan.
Deposits of employee deferrals and loan repayments must be submitted to the plan as soon as possible to avoid penalties and corrections. For plans with less than 100 participants, a safe harbor rule allows deposits to be made within seven business days. For larger plans, the expectation is that the money will be deposited more quickly. Depositing these funds on the pay date will avoid the possibility of being late.
Monitoring deferral contribution limits during the calendar year will avoid refunds after year end. Make sure that your payroll is set up to stop deferrals once the limit is reached, including any catch-up contributions for those who have reached age 50.
To keep the plan in compliance, employer contributions must be deposited timely. Due dates are impacted by the type of contributions, required status and tax deductibility. If you have questions on when to deposit your employer contribution or even whether to make an employer contribution, please contact us.
Most plans must be covered by a fidelity bond. The minimum coverage is 10% of plan assets (rounded up to the next $1,000) and the maximum coverage is $500,000. Additional requirements apply to plans with employer securities or non-publicly traded assets. If your fidelity bond is insufficient, now is the time to raise the coverage. Inflation clauses that increase the bond amount as the plan assets increase can ensure that your bond coverage is always adequate. Contact us or your insurance provider if you don’t have a fidelity bond.
Another area to review is communication with participants. Helping your employees understand and trust the plan can increase their contributions. Be sure that your procedures include distributing any plan-related communications—including required participant notices.
Distributions also involve communication, including some of the aforementioned notices. Discussing distribution options with terminated participants, possibly as part of an exit interview, can help to reduce risk of lost participants. We’ll provide instruction on distributions for force-out distributions for small balances, testing corrections and required minimum distributions.
Your plan document is the legal source on how the plan should be administered; operating within its parameters is critical. It’s always worth taking time to review the plan document to ensure that you fully understand and are following its provisions. We’ll cover more details about the plan document later in this newsletter. We’re here to support you in keeping your plan in compliance. Please feel free to reach out with any questions.
Addressing the Challenge of Uncashed Distribution Checks
Uncashed distribution checks present a persistent and often overlooked challenge for retirement plan sponsors. Despite the best efforts of plan administrators, some participants fail to cash their distribution checks, leading to administrative burdens, fiduciary concerns and potential compliance issues. A recent publication by Retirement Management Services (RMS) sheds light on this issue and offers practical guidance for employers seeking to manage and mitigate the risks associated with uncashed checks.
Uncashed checks can arise for various reasons. Participants may have moved without updating their contact information, may not recognize the check as legitimate or may simply forget to deposit it. Regardless of the cause, the responsibility for addressing these uncashed funds ultimately falls on the plan sponsor. This creates a fiduciary obligation to act in the best interest of the participant while ensuring compliance with IRS and Department of Labor (DOL) regulations.
Sponsors are encouraged to maintain up-to-date contact information for all plan participants and to follow up promptly when checks remain uncashed. This may involve sending reminder letters, making phone calls or using certified mail to confirm receipt. In some cases, plan sponsors may also consider using electronic payment methods to reduce the likelihood of checks going uncashed in the first place.
The IRS and DOL have issued guidance on how to handle these situations, including the use of forfeiture accounts and escheatment to state unclaimed property programs. However, these options come with their own set of rules and potential pitfalls. For example, using a forfeiture account may require the plan document to explicitly allow for such treatment. Escheatment laws, which allow the government to assume control of unclaimed property, vary by state. As such, plan sponsors must carefully evaluate their options and consult with legal or compliance experts as needed.
Another important consideration is the documentation of all the efforts made to contact participants and resolve uncashed checks. Maintaining a clear audit trail can help demonstrate fiduciary prudence and protect the plan sponsor in the event of an audit or legal challenge. It is extremely important to have a written policy in place that outlines the steps to be taken when a check remains uncashed beyond a certain period.
By taking a proactive, well-documented and compliant approach, employers can fulfill their fiduciary duties, reduce administrative burdens and ensure that participants receive the benefits they are entitled to.
Source: Retirement Management Services – “Uncashed Distribution Checks” https://www.consultrms.com/Resources/59/Plan-Sponsor-Tips-and-Help/212/Uncashed-Distribution-Checks
Divorce and the Retirement Plan
When a participant in a qualified retirement plan undergoes a divorce, the participant’s account balance may be an asset that is split with the former spouse. As the plan exists for the exclusive benefit of its participants, a court order is required to transfer the participant’s benefits to the ex-spouse. Once approved by the plan administrator, this court order is called a Qualified Domestic Relations Order (QDRO).
The QDRO is a judgment, decree or order that must be issued by a state authority (usually a court). It can be part of the divorce settlement or it may be a separate document. Because of the serious nature of separating the participant’s account balance, the QDRO is more than just an agreement made by both parties — it must also be signed by a judge.
A QDRO will describe how to divide the participant’s account balance between the participant and the ex-spouse, referred to as the alternate payee. In some cases, a set dollar amount will be allocated; in others, a percentage of the account may be designated. In the latter case, the amount assigned to the alternate payee represents the given percentage of the participant’s total vested account balance as of a specified valuation date. This percentage will apply to all sources — such as deferrals, matching or profit sharing — unless specified by the QDRO. Any interest and investment gains/losses that accrue between this valuation date and the date the funds are separated into an account for the alternate payee are often factored into this final calculation. If the participant has outstanding loans, the QDRO will usually indicate how the loans are handled.
Contributions such as deferrals and employer matching made after the valuation date are credited to the participant’s account. Earnings and losses are applied to the account balances. Once the division is complete, the alternate payee’s portion (either dollars or shares) is transferred to an account in the alternate payee’s name.
If the plan allows, the alternate payee may be paid out in a cash or rollover distribution. Not all plan documents allow the alternate payee to receive a distribution before reaching normal retirement age, so it’s important to follow the terms of the plan. In addition, the QDRO cannot violate the provisions of the plan document by requiring a plan to provide an alternate payee or participant with any type or form of benefit not otherwise provided under the plan.
Although the most common situation for a QDRO is a divorce, it can be issued in other situations, such as to a dependent in the case of child support. If the alternate payee is a minor child or legally incompetent, the order can also require payment to the individual with legal responsibility for the alternate payee. If a participant or their attorney provides you with a copy of a divorce decree that references the plan or a QDRO, please contact us immediately, and we will work with you to ensure it meets the requirements of the plan.
Important note for defined benefit plans: For 2025 plan years, PBGC premiums are due one month earlier than usual, specifically on the 15th day of the ninth month after the beginning of the plan year. For calendar year plans, this means the premium is due on September 15, 2025, instead of the usual October 15. This accelerated deadline is due to a provision in the Bipartisan Budget Act of 2015.
Upcoming Compliance Deadlines for Calendar-Year Plans
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