A recent survey found that 59% of workers thought that they were contributing to their 401(k) plan and saving for retirement when they weren’t.
The Retirement Security Survey, conducted by Principal, asked participants why they weren’t enrolled in the plan and a surprising number thought they were. Even though plan provisions such as automatic enrollment and employer matching have a positive effect on plan participation, communication can also be a powerful tool.
The Department of Labor (DOL) and Internal Revenue Service (IRS) require a variety of information be shared with plan participants, but some eligible employees can be intimidated by the language in the material and decide that participation is too complicated. Others believe they are automatically enrolled in the plan because they were auto enrolled at a past employer.
If possible, one-on-one meetings are a great way to make sure that an employee understands what is being offered. When an employee is hired, they may receive an email with multiple files attached, including instructions to log onto a website and enroll in the 401(k). Starting a new job is often overwhelming and enrollment can be overlooked.
Enrollment meetings involving both Human Resources and the plan’s investment advisor are a great way to boost communication and participation. Taking the mystery out of available investment options, as well as showing the financial benefits of saving for retirement, helps the participants feel confident in their choices. Enrollment meetings can be done in person or by video meeting, depending on the location of the employees.
If it’s available to you, a retirement readiness report will show each participant their retirement age, current balance, current deferral percentage, current income and what retirement will look like for them. It can be quite an eye-opener for many participants.
Communication is the key to successful plan participation. It also helps your participants have a more positive attitude toward your reirement plan and their retirement future. Feeling like their employer cares about their future leads to a higher level of job satisfaction and feeling appreciated.
Participant Notices: A Quick Overview
Retirement plans exist to provide retirement savings for participants. As a result, the participants need to be informed about plan provisions and their rights at various times. Sometimes it’s when they become eligible for the plan, before the start of a new plan year, or after the end of the plan year. Certain variables affect which of these may apply, such as plan provisions, plan type, and investment provider. Here are some items that may be prepared by your service providers for distribution to your plan participants:
- Participant Fee Disclosure:
- Pertains to participant-directed accounts.
- Provides certain plan information as well as fees that may apply.
- Investment Comparative Chart:
- Pertains to participant-directed accounts.
- Provides plan investment information such as past performance, expense ratio, and fees.
- Automatic Enrollment Notice:
- Pertains to 401(k) plans that include automatic enrollment provisions.
- Provides the default deferral rate that will apply unless they make a different deferral election and the instruction for how to do so.
- Safe Harbor Notice:
- Pertains to plans with Safe Harbor contribution provisions.
- Provides information about contribution and vesting provisions.
- Qualified Default Investment Alternative (QDIA) Notice:
- Pertains to plans that allow for participant direction and utilize a qualified default investment for those participants who don’t make an election.
- Provides information about the investment option that will be used for their contributions if they do not make an investment election.
- Universal Availability Notice:
- Pertains only to 403(b) Plans.
- Provides information regarding the opportunity to contribute to the 403(b) Plan.
While these notices are provided to participants when they become eligible for the plan, they also need to be provided on an annual basis. Other notices are due following certain events:
- Summary Plan Description (SPD):
- This is a simplified version of the plan document provisions which needs to be provided within 90 days of when the employee becomes eligible for the plan.
- Updated copies must be provided every 5 years if there are changes to the plan. Every 10 years if no changes are made.
- Summary Annual Report (SAR):
- Summarizes the plan information on Form 5500 for the participants, such as total plan contributions, distributions, fees, plan asset balance, and participant count.
- Distributed within 2 months after the Form 5500 filing deadline, including extensions.
- Annual Funding Notice (AFN):
- Pertains to defined benefit plans, including cash balance plans, that are covered by the Pension Benefits Guaranty Corporation (PBGC).
- Due 120 days after the close of the plan year for large plans and the earliest of the day that the Form 5500 or the date that it’s due, including extensions, for small plans.
- Summary of Material Modifications (SMM):
- Provides information regarding changes made to plan provisions by a plan amendment.
- Due no later than 210 days after the close of the plan year for which the modification was adopted.
This list does not cover all possible notices that are required for your plan participants, but being familiar with the terminology of these common notices will help you understand the information that is being shared with participants. As plan design changes take place, your notice requirements will too, so it’s important to understand what information is required to keep your participants informed.
Mastering the Art of Distributing Participant Notices
Over the years, regulatory bodies like the DOL and IRS have provided clarity on plan sponsor obligations regarding participant notice delivery. These responsibilities are critical for maintaining transparency and regulatory adherence. Some recordkeepers may offer electronic delivery options, but plan sponsors still need to understand the requirements to ensure the information is reaching all necessary participants. We will now delve into the key points that plan sponsors must cover to effectively manage notice responsibilities.
Define your roles and responsibilities
Defining roles and responsibilities within your plan administration is akin to establishing an Investment Policy Statement for financial decisions. A well-documented communication policy specifies who manages notice distribution, verifies receipt, handles undeliverable notices, and outlines procedures for both active and terminated employees.
Clarify who will receive communication
Before distributing notices, it is crucial to identify the recipients. This includes:
- Active employees who are eligible and participating – these are employees who are currently employed and who are contributing to the plan. These employees are required to receive all relevant regulatory notices.
- Terminated employees with a balance in the plan – these are still participants in the plan, even though they are not actively employed. As long as they have assets in the plan, they are required to receive all relevant plan communication. NOTE – these are some of the hardest individuals with which to maintain communication, and therefore require extra effort.
- Active employees who have a balance in the plan but are not actively contributing – these are employees who are currently employed who have either elected not to contribute to the plan or who may be on leave. These employees, with assets in the plan, must still receive all relevant plan notices.
- Active employees who are eligible for the plan, but do not have a balance and who are not contributing to the plan – these employees require a decision from the Plan Sponsor. While providing them with all plan information is never wrong, the Secure Act 2.0 allows for these employees to receive a one time of year Eligibility Notice. The notice serves as a reminder of their opportunity to participate in the plan and their rights to request any or all plan information, but states that until they are participating in the benefit, they will not receive any information from outside of the Eligibility Notice.
- Active employees who are not eligible for the plan — these are employees who are actively employed but have not met the terms of the plan document to become eligible for benefits. These employees are not required to receive any plan communication until they fall within the plan window for eligibility or enrollment.
Define how notices should be distributed
How participant notices are required to be distributed has evolved over time based on requirements by the DOL and IRS. Both first class mail and electronic mail are available, but they have procedures that must be followed.
- First Class Mail – The address provided by the participant within the retirement plan benefit system is used for this mailing unless you are aware that the delivery address on file is not current and/or if the participant has notified you (in writing is best) to utilize a different address.
- Electronic Delivery – There are two segments of the “eDelivery” rules for participant notice distribution:
- Wired at work – for participants who provide a work email address, who are actively employed, and who have access to needed equipment to utilize this email address, the Plan Sponsor is allowed to distribute all notices to this email address. However, a system should be developed on how to provide notices to them after they are no longer active with the company to ensure that their work email is not their plan level contact.
- Personal email – to distribute notices to a personal email address, a paper notice must first be distributed to the participant declaring that future notices will be distributed electronically. This paper notice must provide the participant with (1) confirmation of the personal email address that will be used, (2) how the participant can request use of a different email address, (3) the participant’s right to opt out of electronic notice delivery, and (4) the proper plan contact for any questions regarding the plan. After this paper notice has been distributed, future notices can be sent to the identified email address.
How to address undeliverable notices
After notices have been distributed, it is important to address any notices that were undeliverable. For notices sent by first class mail, this includes mail that was “returned to sender”. For electronic mail, these are emails that “bounced back”.
For any notice that is returned undeliverable, there should be a process in which a better address is identified and the notice is resent. It is also best to confirm if the new address provided is the best ongoing address for future communication or just a temporary contact.
It is very important to confirm that each notice is being received by all participants in your retirement plan. Special attention should be paid to terminated employees with a balance in the plan. These employees have the highest risk of being considered “missing”. Missing participants have been a focal point of the Department of Labor and their plan level audits; therefore, confirming that the plan has good contact information for these participants could prevent the plan the distraction and costs of a plan investigation.
Missing participants
Addressing missing participants is critical to compliance and plan integrity. The DOL’s Employee Benefits Security Administration (EBSA) has outlined Best Practices that the plan should follow regarding communication and location processes for these missing participants:
- Maintain accurate census information for the plan’s participant population
- Implement effective communication strategies
- Attempt missing participant searches
- Document procedures and actions
These suggested practices are explained in more detail on the EBSA website.
Conclusion
Understanding and adhering to notice responsibilities is fundamental for plan sponsors to mitigate risks and ensure regulatory compliance. By defining roles, clarifying recipients, establishing clear distribution methods, and addressing undeliverable notices promptly, sponsors can effectively manage their retirement plans. Remember, diligent tracking and technological tools are essential in confirming receipt and maintaining communication with all participants.
Plan Ahead for 2025 Long-Term, Part-Time (LTPT) Employees
As a reminder, eligibility requirements went into effect for Long-Term, Part-Time (LTPT) employees as of January 1, 2024. However, additional changes that affect who is considered a LTPT employee will be coming for 2025. Please see the chart below to plan ahead and ask us if you have any doubts!
|
2024 |
2025 |
|
|---|---|---|
|
Plan Type |
401(k) only |
401(k) and ERISA 403(b) |
|
Years of service required* |
3 |
2 |
|
Disregard years prior to |
2021 |
2021 for 401(k) 2023 for ERISA 403(b) |
Upcoming Compliance Deadlines for Calendar-Year Plans
© 2024 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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