Maintaining a retirement plan for your employees is no easy task. At various points during the year, employers and HR departments field participant questions, help with enrollments, deliver notices and statements, and participate in the distribution process. However, an additional responsibility, and one of the most important, is the collection of data that is used for compliance testing and government reporting. Though all these duties are important, one task drastically affects the outcome of your compliance testing; accurate reporting of all employee information to your third-party administrator. Sound onerous? Not really.
On the surface, this appears like an easy-to-do. Of course, you know who your employees are! But, for retirement plan purposes, do you really know who is considered an employee? The definition provided by the Employees Retirement Income Security Act (ERISA) isn’t much help. ERISA states, “The term employee means any individual employed by the employer.”. Well, that much is probably obvious. However, the answer can be much more complex than it seems and has tripped-up many well-intentioned companies. In fact, employers as large as Microsoft, Coca-Cola, and Time Warner have found themselves in litigation over this very issue.
Why does this matter? Each year, your TPA analyzes your submitted census and applies the applicable regulations to ensure that the plan is in compliance with current law. Compliance items like eligibility, allowable employee and employer contribution levels, and tax deductibility (just to name a few) are calculated each year to ensure your retirement plan remains qualified, meaning that the tax-advantaged status of the funds in the plan remain tax-deferred. While your TPA may do the complicated part, the data upon which compliance work is based comes from the you, the employer.
So, what do you need to know to enroll and report the proper employees? We’ve listed some common employee status types below.
W-2 employees
You’ve got this part! This represents any employee for which you issue a form W-2. For calendar year plans, be sure that the number of employees and compensation amounts reported match the form W-3. No matter how many, or few, hours a W-2 employee works, be sure that the information is reported for compliance purposes.
Partners and Sole Proprietors
This should include partners that report income on a Schedule K-1 or sole proprietors that report income on a Schedule C.
Independent Contractors
For example, Aaron, the owner of a local golf club, tells Spencer, a college student looking for summer work, that he can come on board for the summer as an independent contractor. He will work as a groundskeeper, is to report to work daily from 7:30 to 5:00, and will use the club’s equipment to perform his duties. His hourly compensation will be reported on a Form 1099, no taxes will be withheld, and he will not be eligible for benefits. Both agree to these terms in writing. Is Spencer an independent contractor or an employee?
Unfortunately, it’s not as simple as pointing to Aaron and Spencer’s agreement or the fact that Spencer will receive a 1099 form instead of a W2. Under audit, the IRS would focus on whether a company has the right to control the worker. There are several factors to consider, including whether the company has the right to:
- Set the work schedule,
- Establish the work location,
- Pay by the time worked rather than by the job or on commission,
Furnish equipment for the worker’s use, and - Require work-related training.
Based on these criteria, it is likely that Spencer would be considered an employee for retirement plan purposes.
Leased Employees
In a different scenario, Aaron decides to engage the services of a professional employer organization (PEO) for his golf club. The PEO will provide all payroll and HR functions and is officially “the employer”. Aaron will still manage the day to day activities of the staff. Unless some extenuating circumstances exist, the employees that have been transferred to the PEO are still considered employees of Aaron’s for retirement plan purposes.
Employees of a controlled group of entities
Aaron, who still owns the local golf club, decides to purchase a company that owns a local bowling alley. The golf club sponsors a retirement plan, the bowling alley does not. Depending on several factors, including the level of ownership that Aaron has in each company, the employees of the bowling company could be considered as being eligible for retirement plan benefits.
Aaron decides that he will put the company that owns the bowling alley in his daughter Annabelle’s name. Does this change the outcome? The answer is no. Due to laws that govern attribution of ownership among family members, you’ll need to report any other companies owned by shareholders, and shareholders’ family members, to your TPA.
Employees of an Affiliated Service Group (ASG)
An ASG works similarly to a controlled group of entities regarding an employee’s eligibility for retirement benefits. Determination of the existence of an ASG is complicated, so alert your TPA if your firm is affiliated with other entities. An example of an ASG would be a service organization that provides both regular and continuing management functions for affiliated, but separate, companies.
Shared Employees
A shared employee is someone who works for more than one business at a time. If those businesses are “controlled or affiliated” as described above, all compensation for the shared employee could be considered for benefit purposes. For example, if Aaron asks Spencer to work at both the golf club and the bowling alley, and the companies are considered a controlled group of entities or an ASG, all of Spencer’s hours and compensation would be included for benefit purposes.
Excluded Classes of Employees
Aaron’s golf club maintains a plan for the benefit of his employees. Under the terms of the plan, groundskeepers are not eligible for benefits. Retirement plans can be designed with certain groups excluded from benefits. This does not change the importance of reporting employees like Spencer for compliance testing purposes. Benefit exclusions are still subject to coverage testing each year, making it important to accurately report all employees regardless of class (if stated in the plan document, collectively bargained employees have an unlimited exclusion). Be especially careful to report seasonal and part-time employees as both of these groups are subject to testing.
Plan Sponsors need not become retirement plan professionals to make the determination of who is eligible for their plan’s benefits. Ask your TPA for guidance about any employee relationships that might affect your retirement plan.
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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