Qualified Plan: A Balance of Benefits and Responsibilities

You presented a proposal. The plan documents and investment paperwork have been signed by the plan sponsor, your client. Congratulations! You have helped a business to establish a qualified retirement plan. But you have done a lot more than just opened an account. You have helped plan participants to take a few steps toward the goal of retiring with dignity. This plan will assist them in building their retirement nest egg, offer tax benefits, provide an opportunity for the employer to reward his/her employees with matching or profit-sharing contributions, offer asset protection, and deliver many other important benefits. But… what does it mean for the plan to be ‘qualified’ and what responsibilities has your client undertaken by implementing this plan? This short article provides an overview of some of the key responsibilities and offers some diagnostic questions you may want to include as a part of your next meeting with your retirement plan sponsor clients.

What’s in the Name?

The name ‘qualified plan’ implies agreement with a set of standards applicable to tax-favored retirement plans. These standards are established in the Employee Retirement Income Security Act of 1974 (ERISA), the Internal Revenue Code, and are governed by statute and the various interpretive and procedural publications issued by the Internal Revenue Service (IRS) and the Department of Labor (DOL). Failure to follow these requirements in either form (what the plan document says) or operation (how the operation of the plan matches what is stated in the document) may cause the plan to lose its favorable tax status, or become disqualified, putting in jeopardy deductions taken by the business, exposing the plan sponsor to significant taxes, penalties, and in some cases civil and criminal action.

With the increasing complexity of tax and retirement plan laws and regulations, plan sponsors frequently rely on third-party experts who focus on the retirement plan compliance.  Compliance, however, is a two-way street.   Reliance on a third-party is only one part of the equation.   It is the plan sponsor who bears the ultimate burden of responsibility. Recognizing this reality, you, as the trusted advisor working in partnership with a retirement plan consultant can assist your client in creating and maintaining a system of checks and balances to identify areas of concern and promptly address them.

Some Diagnostic Tools

We recommend that in the next meeting with your business owner clients you ask the following set of questions about their qualified retirement plan:

1. Has your plan document been updated with the changes in the tax code? Have you executed the amendments and retained them in your plan records?

Major  changes  in  retirement  plan  law  and  tax  regulations  require  modification   of  plan  document  language  and procedures by specific deadlines spelled out by the IRS and DOL.

Plan   sponsors   must   timely   execute   and   retain   copies   of   all   such documents in their records for the life of the plan. At some point, during an audit, in the process of application for a letter of determination  as to plan’s favorable tax status, or in the course of plan merger/termination, the plan sponsor  will  be  required  to  demonstrate  compliance  with  current  and prior law. Among  the most recent major changes,  frequently  referred  to by their acronyms,  are   GUST,  which  encompassed  a set of Acts which came  into  effect  between  1994  and  2000,  EGTRRA  of 2001,  and  PPA  of 2006. (Clients of Retirement services have access to an electronic vault where all plan documentation is maintained. Retirement plan consultants as a part of their annual due diligence review plan documents to confirm existence of all the required documents, as well a record of their timely and accurate execution.)

2. Do you understand how your plan works? Are the plan’s operations based on the terms of the plan?

Failure  to  follow  the  terms  of  the  plan  document  is the  most  common mistake plan sponsors make. In order to operate the plan, understanding its provisions is of utmost importance. Of equal value is establishing proper administrative procedures for operation of the plan; such procedures must reflect the terms of the plan document. Does your client have clarity about the plan’s eligibility and entry requirements?   What happens when an employee becomes eligible?  Is your client aware of the loan procedures under the plan? Are these procedures followed properly for the owner and non-owner employees? (Plan consultants at First Allied Retirement services offer a detailed plan overview in the course of plan installation and proactively approach these issues as a part of their ongoing periodic consulting calls.)

3. Does your plan cover a sufficient number of the rank-and-file employees? Have there been or do you anticipate changes in business ownership? Have there been or do you anticipate changes in your workforce?

Non-discrimination is a key trait of a qualified retirement plan and, therefore, is a keen focus of the IRS audit and enforcement efforts. In order to assure compliance with this tenet, the Internal Revenue Code has established a number of tests. For a plan to be non-discriminatory, a certain level of benefits should be extended to a specific percentage of eligible non-owner employees.

Changes in employee demographics, such as new hires, terminations, rehires, addition of business associates, transactions (mergers, acquisitions, sales) should be communicated to the third-party administrator as quickly as possible to assess the impact of those events on the plan’s operation. Ownership of other businesses, either direct or indirect (such as through family attribution), may also have a significant impact on non-discrimination testing and should be properly disclosed for plan administration purposes. (Retirement Plan consultants at First Allied proactively inquire about changes in circumstances to diagnose and prescribe a course of action that will allow the plan to continue to stay on track in terms of plan sponsor objectives and from plan compliance perspective.)

4. Have all eligible participants been notified about their eligibility to participate in the plan and have they been informed about their rights under the plan?

It is not uncommon for employees working on a part-time basis or those electing not to make salary deferrals to be automatically considered ineligible. The retirement plan document spells out who is considered an eligible employee for purposes of the retirement plan based on exact eligibility and participation standards specified by the Internal Revenue Code. Determination of eligibility becomes more complex when leased, contracted or shared employees are involved, and therefore help of a properly trained retirement professional becomes crucial.

Once identified, newly eligible participants should be notified and educated about their benefits, rights, and responsibilities under the plan. It is prudent to establish a procedure for such communication to ensure consistency and completeness. (Both First Allied Retirement Services and alliance partners who offer investment record keeping solutions offer broad support to help plan sponsors fulfill their obligation to notify eligible participants, including consulting on complex issues relating to eligibility, guidance in determination of new eligible participants, notification of eligibility to participate in the plan, and more).

5. Have you timely deposited employee salary deferral contributions?

It is the responsibility of the employer to timely deposit salary deferral contributions into the retirement plan account. The DOL’s  rules  require  that  deferrals  are  deposited  into  the  plan  trust  on  the  earliest  date  that  these  amounts  can  be segregated from the employer’s general assets, but in no event later than the 15th day of the following month. It should be noted that the 15th day of the month is the latest deadline and does not constitute a safe harbor. Employee contributions to a retirement plan with less than 100 participants are deemed made timely as long as they are deposited within 7 business days of withholding. Depositing  salary  deferral  contributions  on  the  date  of  the  payroll  tax  transmission  for  that  pay  period  has  been frequently used as a recommended best practice.  Failure to timely deposit employee salary deferrals may be considered a prohibited transaction. (Retirement plan consultants at First Allied, in the course of their annual compliance regimen, review plan’s deferral and loan repayment activity to identify areas of concern in order to proactively address those issues.)

6. Have you provided all eligible participants with the required annual notices and statements?

Qualified plans require that certain plan information be made available to plan participants and beneficiaries:

Summary Plan Description (SPD) is a document distributed to participants to communicate their benefits, rights and responsibilities in plain language. SPD should be provided to all new participants and beneficiaries. It should be updated periodically and made available upon request.

Summary  of  Material  Modifications  (SMM)  advises  plan  participants  of  amendments  made  to  the  plan.  It should  be distributed no later than 210 days after the end of the plan year in which the change was made.

Summary Annual Report (SAR) is a narrative of plan’s financial information outlined on the Form 5500; this report must be made available to all defined contribution plan participants on an annual basis. Defined benefit plans are not required to provide this report; instead, they provide a detailed funding notice.

Individual  Benefit  Statements  provide  information  about  participant’s  account  balances  or accrued  benefits  and  explain what portion of those benefits is vested, or owned, by plan participant. Such statements should be provided to plan participants at least quarterly for participant-directed accounts, at least annually for the trustee-directed accounts, and at least once every 3 years to defined benefit plan participants (or once upon written request in any 12-month period).

Blackout Notice should be provided to all profit-sharing plans with or without a 401(k) feature 30 days in advance of any plan activities that may restrict participants’ access to plan funds. Examples of such plan activities include change of investment options, transfer to a different investment platform, or mergers/acquisitions.

Ready to Help

Compliance  with  the  qualified  retirement  plan  rules  and  regulation  can  be a very  daunting  task;  consequently,  plan sponsors find it difficult to avoid inadvertent mistakes. Often, as long as the plan sponsor identifies the problems prior to an IRS audit or outside of the determination letter process, these mistakes can be fixed utilizing self-correction (SCP) and voluntary correction (VCP) programs at a significantly reduced cost. As you walk your clients through this sample questionnaire, we invite you to utilize the capabilities available through Retirement Services to help navigate the complexities of the qualified planning world and proactively address the compliance hot buttons before they become areas of concern. Contact us today by phone at (866) 926-0600 or e-mail pensions@firstalied.com.

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