The Uniformed Services Employment and Reemployment Rights Act of 1994 (“USERRA”) protects the rights of employees who leave their employment to enter military service. Among its protections are a number of rules governing contributions to and the crediting of service under an employer’s retirement plan.
The Department of Labor (“DOL”) recently issued final regulations, effective January 16, 2006, that clarify USERRA’s employee benefit plan requirements and update the notice of USERRA rights that employers are required to provide to their employees.
This newsletter focuses on the final USERRA rules affecting retirement plans.
USERRA’s Scope
USERRA’s retirement plan protections apply to all employers (regardless of size), including foreign employers doing business in the U.S. and many foreign subsidiaries of U.S. companies.
Coverage Under USERRA
USERRA generally protects all employees (but not independent contractors) who serve in any of the following roles:
- Members of the Army, Navy, Air Force, Marine Corps, and Coast Guard;
- Members of the Reserves, Army and Air National Guards (when called up under federal, rather than state, authority);
- Members of the National Disaster Medical System; and
- Members of the Commissioned Corps of the Public Health Service.
To be eligible for USERRA protections, an employee must generally give advance notice to his employer of the need to be absent for military service. Notice may be given orally or in writing. Notice is not required where notice is impossible or unreasonable to give under the circumstances.
After an honorable discharge, an employee must generally apply for reemployment, based on the following timetable, to receive USERRA-provided reemployment benefits:
- Service less than 31 days: The first workday that is at least eight hours after returning home.
- Service from 31-180 days: Within fourteen days after completing service.
- Service in excess of 180 days: Within ninety days of completing service.
If an employee is hospitalized or convalescing from an illness or injury incurred or aggravated during military leave, he must submit an application for reemployment to the employer at the end of the period necessary for recovering from the illness or injury. This period may not exceed two years from the date of the completion of service (except in certain circumstances beyond an employee’s control that make reporting within the period impossible or unreasonable).
Retirement Plans Covered by USERRA
USERRA applies to retirement plans covered by the Employee Retirement Income Security Act of 1974 (“ERISA”) and non-ERISA plans such as those sponsored by a state, government entity (other than the Federal Thrift Savings Plan) or church.
Notice Requirements
Employers are required to post, mail or email notice to their employees of their USERRA rights, benefits and obligations. A revised version of the DOL’s model USERRA notice was published in December 2005 and is required to be used on and after January 18, 2006.
Service Crediting After Reemployment
After an employee is reemployed after military service, he must be treated as having not had a “break in service” under the employer’s retirement plan. Rehired employees are treated as having uninterrupted service with the employer during the entire period of absence related to military service for purposes of determining participation, vesting and accrual of benefits.
Defined Contribution Plans Without Employee Contributions
When an employee is rehired by an employer maintaining a defined contribution plan that does not require employee contributions, such as a money purchase or profit sharing plan, the employer is required to make the contributions that would have been made on the employee’s behalf had he been employed by the employer during the period of military service.
These contributions must be made by the later of:
- Ninety days after the date of reemployment, or
- When plan contributions are normally due for the year in which the military service was performed.
If, however, it is impossible or unreasonable for an employer to make these contributions within this time period, the employer must make the contributions as soon as practicable. An employee is not entitled to any allocation of forfeitures or earnings on missed contributions that he would have received during his period of military service.
Example: Prior to entering military service on January 1, 2007, Harry participated in his employer’s profit sharing plan which provides for an annual contribution of 1% of his compensation. When Harry is reemployed on October 1, 2009, his employer must make profit sharing contributions of 1% of the compensation he would have received during the period he was on military leave.
Contributions for the 2007 and 2008 plan years must be contributed within 90 days of October 1, 2009. Contributions for the 2009 plan year must be made by the due date for regular 2009 contributions. Harry will not be credited with any investment return on these make-up contributions for the period of his military service.
Defined Contribution Plans With Employee Contributions
When an employee is rehired by an employer maintaining a defined contribution plan that permits employee contributions, such as 401(k) deferrals, the employee must be permitted to make up, in whole or in part, the contributions that could have been made had he been employed by the employer during the period of military service. Also, the employer is obligated to match an employee’s make-up contributions if the employee contributions missed during the employee’s military service were eligible for employer matching contributions.
If an employee wants to make up missed employee contributions, the employee must make these contributions within the period that is the lesser of:
- Three times the period of military service, or
- Five years from the date of reemployment.
An employee may only make these contributions while employed with his post-service employer.
Once missed employee contributions have been made, an employer is required to make up the matching contributions, if any, using the same timetable that would normally apply to the contribution of employer matching contributions.
An employee is not entitled to any allocation of forfeitures or earnings on missed contributions that he would have received during his period of military service and may not contribute the amount of earnings he would have received during this period.
Example: Prior to entering military service on January 1, 2007, Susan participated in her employer’s 401(k) plan that provided that an employee’s deferrals would be matched 50¢ for each $1.00 contributed on the first 6% of compensation. When Susan is reemployed on January 1, 2009, her employer must allow her to make up the deferrals she could have made during her period of military service. She has five years from her date of reemployment to make up the missed contributions.
When made, these deferrals must be matched by her employer at 50¢ for each $1.00 under the plan’s matching contribution formula. Make-up matching contributions must be contributed to the plan on the same timetable that applies to regular matching contributions. Susan will not be credited with any investment return on these contributions for the period of her military service.
Defined Benefit Plans
In a non-contributory defined benefit plan, upon reemployment benefits will be the same as though the employee had remained continuously employed during the period of military service. In a contributory plan, the employee will need to make up contributions in order to have the same benefit as if he had remained employed.
Calculation of Compensation
In determining the amount of contributions or accrued benefits, an employer must use the rate of pay that an employee would have received during a period of military service. If the rate of pay the employee would have received is not reasonably certain (for example, where an employee’s compensation is based on commissions), the employee’s average rate of compensation in the twelve-month period prior to entering military service is used as an employee’s compensation.
Repayment of Prior Distributions
If an employee is a participant in a defined benefit plan, he must be permitted to repay any distributions made in connection with the military leave, including interest. Repayment must be made within the same timeframe as employee make-up contributions to a defined contribution plan or such longer time as may be agreed to between the employer and the employee. Distributions from defined contribution plans may not be repaid.
Interest Rate on Plan Loans Capped
Another military service related law, the Servicemembers Civil Relief Act of 2003 (“SCRA”), caps the interest rate on retirement plan loans. The types of military service covered by the SCRA are similar, but not identical, to the types of service covered by USERRA.
Under the SCRA, the maximum interest rate that a plan may charge on plan loans outstanding at the start of active duty service is equal to 6% from the date on which the employee is called to active service. Any interest in excess of the 6% cap must be forgiven, not simply postponed. However, a court may allow an interest rate higher than 6% if the employee’s ability to pay is not materially affected by his or her military service.
Suspension of Plan Loan Payments
Under the Internal Revenue Code, a plan may suspend loan payments for participants in military service. Upon rehire, loan repayments must recommence and be repaid in full (including interest that accrued during the period of military service) by the end of the period which equals the original term of the loan plus the period of military service. The loan can either be reamortized to take into account interest accrued during the suspension, or the participant can make a balloon payment at the end of the extended loan repayment period.
Conclusion
USERRA imposes significant requirements on retirement plan sponsors and administrators. Plan sponsors who employ individuals who enter or return from military service should carefully review their plans to make sure they provide the benefits required by USERRA and SCRA.
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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