The plan documents and investment paperwork have been signed by the plan sponsor, your new client. Congratulations! You have helped a business establish a qualified retirement plan. However, you did a lot more than just open an account. You helped plan participants take a step toward the goal of retiring with dignity. This plan will assist them in building their retirement nest egg, open up additional tax benefits, provide an opportunity for the employer to reward employees with matching or profit-sharing contributions, offer asset protection, and deliver many other important benefits. But what does it mean for a plan to be “qualified,” and what responsibilities has your client undertaken by implementing said plan? This article is an overview of a few key plan-related responsibilities; it also offers some diagnostic questions you may want to consider for your periodic meetings with your retirement plan sponsor clients.
What’s in the Name? The name “qualified plan” implies an 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) as well as the Internal Revenue Code. They are governed by statutes 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 lead to substantial monetary penalties imposed on the plan sponsor. In some instances, it may even cause the plan to lose its favorable tax status or become disqualified, potentially putting deductions taken by the business in jeopardy, which in turn can expose the plan sponsor to significant taxes, penalties, and in some cases civil and criminal action.
With the increasing complexity of retirement plan laws and regulations, plan sponsors frequently rely on third- party experts who focus on retirement plan compliance. Compliance, however, is a two‐way street. Reliance on a third-party is only one part of the equation. Ultimately, the buck stops with the plan sponsor. 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 Consider the following set of questions for your next meeting. While not exhaustive, it may be a good start toward establishing a recurring review process:
1. Has your plan document been updated with the changes to regulations impacting plan accounts? Have you executed all required and discretionary amendments in a timely manner and retained them in your plan records? Major changes in retirement plan laws and regulations require modification of plan document language and procedures by deadlines spelled out by the IRS and DOL. In most instances, these required amendments have to be signed by an authorized plan representative.
Plan sponsors must timely execute such documents and retain copies 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 a plan’s favorable tax status, or in the course of a plan merger/termination, the plan sponsor will be required to demonstrate compliance with current and prior law. Among the most recent major pension law changes are GUST, an acronym for a series of four tax laws enacted between 1994 and 2000; the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001; and the Pension Protection Act (PPA) of 2006.
Things to consider: Does your client have access to an electronic vault where all plan documentation is maintained? Is there a recurring process to confirm maintenance of all required documents, as well as a record of 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 perhaps the most common mistake plan sponsors make. In order to operate the plan, understanding its provisions is of utmost importance. It is equally important to establish proper administrative procedures for operating the plan; such procedures must reflect the terms of the plan document.
Things to consider: Does your client have clarity about the plan’s eligibility and entry requirements? What happens when an employee becomes eligible? Are recurring notices distributed on time and to all parties involved? Is your client aware of the loan procedures under the plan? Are these procedures followed properly for the owner and non‐owner employees?
3. Does your plan cover a sufficient number of rank-and-file employees? Have there been or do you anticipate changes in business ownership or in your workforce? Meeting coverage and non‐discrimination requirements is integral to a compliant retirement plan; these issues are often found at the core of IRS audits and enforcement efforts. In order to assure compliance with this principle, the Internal Revenue Code established a number of tests, most of which are mathematical in nature. However, some may rely on or require a “fact and circumstances” analysis. For a plan to be non‐discriminatory, certain level of benefits needs to extend to a specific percentage of eligible non‐owner employees.
Changes in employee demographics like new hires and terminations, rehires, addition of business associates, as well as transactions such as mergers or acquisitions, should be communicated to the third-party administrator, attorney, or ERISA consultant as quickly as possible to assess their impact on a plan’s operation and design. Ownership of other businesses either direct or indirect, such as through a family attribution may also have a significant impact on non‐discrimination testing and should be properly disclosed for plan administration purposes. It is a well-established practice to proactively inquire about changes in business circumstances to diagnose and prescribe a course of action that will allow the plan to continue on track with plan sponsor objectives while remaining compliant.
Things to consider: Does your client have a reliable system of monitoring and reporting the changes to employee population and business transactions which may impact plan’s design and operation?
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 in the Internal Revenue Code and ERISA. Determination of eligibility becomes more complex when leased, contracted or shared employees are involved, and therefore help of a properly trained retirement consultant 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.
Things to consider: Do your clients have access to a support system designed to help them fulfill their obligation to notify eligible participants? This may include consultation on complex issues relating to eligibility and guidance in determining newly eligible participants, notification of eligibility to participate in the plan, and more.
5. Have you deposited employee salary deferral contributions and loan repayments in a timely manner? It is the employer’s responsibility to deposit salary deferral contributions into the retirement plan account on time. However, there has been some confusion over what is considered “timely.” The DOL requires deferrals to be deposited into the plan trust on the earliest date that these amounts can be segregated from the employer’s general assets, but no later than the 15th day of the following month. Many focus on the latter part of this requirement, often leading to deposits being classified as untimely. “The 15th day of the month” is the last date to make deposits from the previous month and is not a safe harbor practice. Depositing salary deferral contributions (and loan repayments) on the date of the payroll tax transmission for that pay period is frequently used as a recommended best practice in alignment with the DOL’s requirements. Employee contributions to a retirement plan with less than 100 participants are deemed timely as long as they are deposited within 7 business days of withholding. Failure to deposit employee salary deferrals in a timely manner may be considered a prohibited transaction, which requires corrective contributions be paid to affected participants and an excise tax be charged to the employer.
Things to consider: Does your client review their plan’s deferral and loan repayment activity to identify potential areas of concern, to correct and to prevent reoccurrence?
6. Have you provided all eligible participants with the required annual notices and statements? Qualified plans require that certain information be made available to plan participants and beneficiaries. Below are examples of the most common notices. Consult your plan provider to identify notices applicable to a particular plan type, participant and beneficiary population, and investments:
The Summary Plan Description (SPD) is a document distributed to participants to communicate their benefits, rights and responsibilities in plain language. The SPD should be provided to all new participants and beneficiaries. It should be updated periodically and made available upon request.
The Summary of Material Modifications (SMM) informs 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.
The Summary Annual Report (SAR) is a narrative of a plan’s financial information outlined on Form 5500; this report must be made available to all defined contribution plan participants on an annual basis. Defined benefit plans do not require this report; instead, they are accompanied with a detailed funding notice.
Individual Benefit Statements provide information about a participant’s account balance or accrued benefits. This statement explains what portion of those benefits is vested, or owned, by a plan participant. Such statements should be provided to plan participants at least quarterly for participant‐directed accounts, at least annually for trustee‐directed accounts, at least once every 3 years to defined benefit plan participants, or once upon written request in any 12‐month period.
A Blackout Notice should be provided to participants in all participant-directed retirement plans 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 and acquisitions.
The Fee Disclosure (from plan sponsor to plan participant) must initially be provided to participants on or before the date they can direct their investments. After the initial disclosure, it needs to be distributed at least annually. If changes are made, the disclosure should be provided at least 30 days, but no more than 90 days, before the changes.
Things to consider: Is your client aware of the required notices and their timing? Does your client keep a record of the distributed notices with proof of timely distribution?
Complying with the qualified retirement plan rules and regulations can be a daunting task. Consequently, plan sponsors may find it difficult to avoid inadvertent mistakes. Often, when a plan sponsor identifies the problems prior to a regulatory audit or outside of the determination letter process, these mistakes can be fixed utilizing self‐ correction (SCP) and voluntary correction programs (VCP) at a significantly reduced cost. As you guide your clients through a plan self-audit, reach out to the client’s retirement plan consultant for support. A qualified plan consultant can help you successfully navigate the complexities of the qualified plan world to proactively address hot button issues before they become areas of significant concern.
Tax laws are complex and subject to change. This material is provided for information purposes only. Individuals are urged to consult a properly licensed tax or legal advisor to understand the tax and related consequences of any actions they may choose to undertake as relates to their retirement accounts and investments.