Summer 2024 – Benefit Insights Newsletter

Effective Communication with Participants, Participant Notices: A Quick Overview, Mastering the Act of Distributing Participant Notices, Plan Ahead for 2025 Long-Term Part-Time (LTPT) Employees, Upcoming Compliance Deadlines for Calendar-Year Plans

Effective Communication with Participants

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!

*minimum 500 hours/year over consecutive years

Upcoming Compliance Deadlines for Calendar-Year Plans

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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© 2024 Benefit Insights, LLC. All Rights Reserved.

Spring 2024  – Benefit Insights Newsletter

Is Automatic Enrollment Required for Your Plan? A Refresher on RMDs New Questions on the 2023 Form 5500 Upcoming Compliance Deadlines for Calendar-Year Plans

Is Automatic Enrollment Required for Your Plan?

An automatic enrollment provision can be a useful tool to drive employee engagement in plans, particularly for participants who otherwise have not yet considered their retirement situation.

These provisions allow an employer to withhold deferrals from the employee’s pay without the employee making an election. By utilizing automatic enrollment, an employer can boost participation while simultaneously simplifying the enrollment process.Although commonplace, these provisions have historically been entirely optional. Now, due to the SECURE (Setting Every Community Up for Retirement Enhancement) 2.0 Act of 2022, automatic enrollment provisions will be mandatory in certain cases. While some plans are considered to be “grandfathered” into their current provisions, others will need to be updated to comply with the new requirements starting in 2025. To find out if these new requirements apply to you, consider the following questions:

• Is your plan a 401(k) or 403(b) plan?
• Was your plan adopted after December 29, 2022?*
• Does your business have more than 10 employees?
• Have you been in business for more than three years?

* Please note, if your plan was part of a merger, there are certain exceptions that may apply that are not addressed in this article. We can take a closer look together.

If you answered “Yes” to all of these questions, your plan must include the following automatic enrollment provisions beginning January 1, 2025:

• The default deferral percentage must start between 3% and 10% as determined by the plan.
• On the first day of each new plan year following enrollment, the deferral amount will increase by 1% until it reaches a cap of 10-15%, again determined by the plan. This increase, called auto-escalation, is not required if the initial default rate is set to 10%.
• You will need to choose a Qualified Default Investment Alternative (QDIA) that meets criteria for transferability and safety per the Department of Labor’s (DOL’s) standards. While a QDIA was optional in the past, SECURE 2.0 provisions require it.

If you are not required to include automatic enrollment provisions in the plan, you may choose to add them anyway. In this case, you have more flexibility in your options as you don’t need to fulfill the above requirements. As such, there are various types of automatic enrollment provisions to consider:

The automatic contribution arrangement (ACA) is the most basic type of automatic enrollment. Employees are enrolled when they become eligible for the plan unless they opt out of deferrals or elect to defer at a different rate.

The eligible automatic contribution arrangement (EACA) builds onto the ACA. Instead of applying only to new participants, the EACA also includes any existing participants who have not yet made an election. A participant who elects to stop automatic deferrals within the first 90 days may withdraw the amount deferred, plus any earnings. EACAs also have an additional notice requirement, meaning that certain details must be communicated to employees prior to enrollment, as well as on an annual basis once enrolled.

The qualified automatic contribution arrangement (QACA) is a variant of the EACA which can be used for safe harbor plans, meaning it has stricter requirements. This includes a default deferral percentage that is at least 3%—but not more than 10%—of compensation. Auto-escalation is also required, increasing this default deferral by at least 1% per year until it reaches a cap set between 6% and 15%. Auto-escalation is not required if the initial default rate is set to 6% or more. Your plan document will state the percentages.

Since this pertains to safe harbor plans, one of the following employer contributions is required:

• A 100% matching contribution on deferrals up to 1% of compensation, plus a 50% match for deferrals between 1% and 6% (a maximum of 3.5%), or
• A non-elective contribution of 3% of compensation for all participants.

The safe harbor matching contribution for a QACA is less than the traditional safe harbor plan, which is 4%. In addition, while the employer contribution must be immediately vested in a traditional safe harbor plan, a QACA allows contributions to be 100% vested after two years.

Regardless of the reason the provisions are included in your plan, automatic enrollment is a beneficial feature that helps employees save for retirement, as they no longer need to opt in to begin deferring. Employees who delayed or ignored their initial enrollment will still have their deferred funds to fall back on later. Choosing the initial default deferral rate and the maximum rate after auto-escalation are important plan decisions. While SECURE 2.0 sets the minimum requirements for plans, there may be a certain combination of provisions that best suits your plan (how complex will it be to administer year after year?) and your participants (what percentage will help them save for retirement without drastically impacting their take-home pay?). A discussion with us can help you find the right fit.

A Refresher on RMDs

Although required minimum distributions (RMDs) are now mandatory components of tax-deferred retirement plans, this was not always the case. RMD rules began to apply to qualified plans following the Tax Reform Act of 1986, after policy makers noticed that retirement account holders were saving the funds for their beneficiaries rather than their own retirement spending. A plan retains qualification by following rules designed to delay taxation until the participant’s retirement. However, required minimum distributions require participants to start withdrawing funds from retirement plans and IRAs at a certain age so that the deferred taxes can be recouped.

Fast-forward to the current day, where the RMD rules have continued to evolve as a result of the SECURE Act of 2019 and SECURE 2.0 Act of 2022. To help keep you informed, this article will discuss the most important aspects of RMDs in their present form.

Who needs to take an RMD?

An RMD must be taken in the year the participant reaches age 73. Your plan document may have an exception for participants who continue to work after age 73. This exception, however, does not apply to individuals with more than 5% ownership, including attributed ownership, of the company that sponsors the plan.

When must an RMD be taken?

RMDs are due by the end of the calendar year to avoid paying an excise tax. The participant’s first RMD can be delayed until April 1st of the following year; this is called the required beginning date. The taxation of the first RMD should be considered when deciding whether to take the money by the end of the year or delay it until the following year. If the first RMD is delayed, two taxable distributions will be made in the same year.

How much is distributed as an RMD?

For a defined contribution plan, the RMD amount is calculated by taking the account balance (as of the end of the preceding calendar year) and dividing it by a value which estimates life expectancy. The IRS provides tables to determine this value based on the beneficiary’s age and the age of their spouse, if applicable. Prior to 2024, both pre-tax and designated Roth accounts were part of this calculation; beginning in 2024, however, designated Roth accounts are not subject to the RMD rules while the account owner is still alive.

An RMD can’t be rolled over, so it is not subject to the mandatory 20% Federal Income Tax withholding. Instead, the default tax withholding rate for an RMD is 10%. The participant can choose to withhold more or less than this 10%, or even elect to waive the withholding. However, even if the withholding is waived, the amount distributed will still be considered taxable income for the participant.

What happens if an RMD isn’t taken?

The excise tax for failing to take an RMD used to be 50%. SECURE 2.0 lowered this to 25%; however, the excise tax may be further reduced to 10% if a correction is made within two years. This excise tax is paid by the participant, but there may be additional consequences for the plan as a whole. If the RMD isn’t taken on time, the plan could be considered disqualified. Disqualification means that the plan is no longer tax exempt, and funds held by the trust are immediately taxable.

If the participant has an account balance in more than one plan, RMDs must be taken from each plan. Also, taking an RMD from an IRA does not satisfy the requirement to take the RMD from a plan. The RMD for each plan is calculated independently.

Although RMDs are a taxable distribution to the participant, as the plan sponsor, you can help ensure they are issued timely by verifying that dates of birth are correct on the year-end census. In addition, if your plan document has an exception for individuals over 73 who are still employed, dates of termination are critical for those participants. If a question arises regarding when a certain employee is required to receive a distribution, a closer look at age, employment status, and ownership information can help determine the correct answer.

New Questions on the 2023 Form 5500

The IRS Form 5500 is an annual return that is filed for most qualified retirement plans. Here are a few new items you may notice on the form for plan years that began in 2023.

Participant count has been expanded for defined contribution plans.

The large plan audit requirement is now based on the number of participants with account balances at the beginning of the plan year, rather than the total number of participants, which includes participants without balances. This change will likely reduce the number of plans that require an independent accountant’s audit report to be filed with the Form 5500. This information is reflected on the following line items:

• Form 5500 (used by audited plans and plans with non-qualified assets):
  • Line 6g is now 6g(1) and 6g(2)
• Form 5500-SF (the short form for plans that meet exceptions due to size and investments):
  • Line 5c is now split into 5c(1) and 5c(2)

IRS Compliance Questions have been added.

The first question asks if the plan was combined with another plan to pass coverage or non-discrimination testing. Most plans pass individually, but a plan might be combined with another plan based on ownership, business lines or if the plan sponsor maintains another qualified retirement plan.

The second question, specific to 401(k) plans, asks how the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) testing was performed. These tests compare the average deferral percentage or match percentage for the highly compensated employees (HCE) to the average percentage for the non-highly compensated employees (NHCE). Generally, this comparison is made between the current year percentages for HCEs and current or prior year percentages for NHCEs, although testing may not be necessary based on plan design or other factors, such as a plan having no HCEs.

The third question, which asks about an IRS Opinion Letter, is used to ensure that the plan document is up to date.

This information is reflected on the following line items:

• Form 5500, Schedule R:
  • Line 21a, 21b, 22
• Form 5500-SF:
  • Line 14a, 14b, 15
• Form 5500-EZ (plans that cover the owners of the company and their spouses only):
  • Line 12 (the first two questions do not apply)

Administrative expenses for large plan filings have been expanded.

This change provides more detailed reporting of plan expenses—particularly those related to service providers—including fee categories related to contract administration, recordkeeping, audit fees, investment advisory and management, trustee and custodial, actuarial, legal, valuation/appraisal and other expenses. This information is reflected on the following line item:

• Form 5500, Schedule H:
  • Part II, Line 2i

Information provided on the Form 5500 series is used by federal agencies such as the Department of Labor (DOL), Internal Revenue Service (IRS), and Pension Benefit Guarantee Corporation (PBGC) to understand plan operations, funding, and investments. It is also a source of information disclosed to plan participants through the Summary Annual Report (SAR) or Annual Funding Notice (AFN). As reporting needs change over time to adjust to shifting trends, these forms are updated to assist in painting the most accurate picture.

Upcoming Compliance Deadlines for Calendar-Year Plans

Note: The RMD deadline mentioned on the Winter calendar should have referenced age 73 during 2023.

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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© 2024 Benefit Insights, LLC. All Rights Reserved.

Winter 2024  – Benefit Insights Newsletter

Components of Defined Contribution Plan Compliance Testing Does My Plan Need an Audit? 401(k) deferrals: Don’t exceed the limit! Reminder: Long-Term Part-Time Employee Rules Effective January 1 2024 Upcoming Compliance Deadlines for Calendar-Year Plans

Components of Defined Contribution Plan Compliance Testing

Plans must be tested each year to ensure that they are compliant with the laws governing retirement plans. To understand the testing performed for your plan, it may be helpful to review some of the terms that are commonly used. First, let’s examine how your plan’s noteworthy individuals are identified.

Highly Compensated Employees (HCE): There are two factors that determine which employees are HCEs for a plan year:

• Ownership: An employee who owns more than 5% of the company in a plan year, or the year preceding it, is an HCE. A spouse, child, parent, or grandparent who participates in the plan will likewise be considered an HCE due to family attribution rules.
• Compensation: An employee is considered an HCE in a plan year based on their earnings the preceding year. An employee is an HCE for 2023 if they earned at least $135,000 in 2022; for 2024, the employee must have earned at least $150,000 in 2023. Plan document provisions may further limit this definition to the top 20% of earners.

Key Employees: There are three factors that determine which employees are considered key employees:

• Ownership: An employee who owns more than 5% of the company in a plan year, or the year preceding it, is a key employee. A spouse, child, parent, or grandparent who participates in the plan will likewise be considered a key employee.
• Owner compensation: An employee who owns more than 1% of the company and earned more than $150,000 in the prior plan year is a key employee.
• Officer compensation: An officer of the company is considered key in a plan year based on their earnings the preceding year. In 2023, the officer must have earned at least $200,000 in 2022; for 2024, the officer must have earned at least $215,000 in 2023.

Now that these individuals have been categorized, let’s explore some of tests that might be performed on your plan:

Deferral testing: The average deferral percentage for all highly compensated employees (HCE) is compared to the average deferral percentage for all non-highly compensated employees (NHCE) to ensure the gap between the two groups is not too wide. If this test fails, there are several methods to correct the test, including refunding deferrals and earnings for HCEs or making contributions for the NHCEs. This test is known as the Actual Deferral Percentage (ADP) test. Safe harbor 401(k) plans are designed to pass the ADP test.

Match testing: This form of testing is similar to deferral testing but compares employer match instead of deferrals. This is known as the Actual Contribution Percentage (ACP) test. Safe harbor 401(k) plans are also designed to pass the ACP test.

Maximum deferral testing: An employee’s deferrals cannot exceed a yearly maximum; this limit was $22,500 for 2023 and will be $23,000 for 2024. An additional $7,500 catch-up contribution can be deferred in 2023 and 2024 by participants who are at least 50 years old. If a participant has deferred more than the limit, a corrective distribution of the excess deferrals and earnings must be processed by April 15th. This limit is known as the 402(g) limit.

Maximum individual contribution testing: Similar to maximum deferral testing, the combined amount of a participant’s employee and employer contributions cannot exceed a yearly maximum. This combined limit is the lesser of $66,000 for 2023, $69,000 for 2024, or the participant’s total compensation. Catch-up deferral contributions are not included in this limit. This limit is known as the annual additions limit or 415 limit and is an important factor when calculating a maximum company contribution.

Maximum employer contribution: The employer’s tax deduction cannot exceed 25% of compensation for plan participants. This is known as the 404 limit and is also an important factor in the calculation of a maximum company contribution.

Top-heavy testing: A plan is considered top-heavy if 60% or more of the plan assets belong to key employees. A minimum contribution may be required if the plan is top-heavy. Many safe harbor plans are designed to satisfy top-heavy testing.

When calculating a contribution for a participant or the plan, these are some of the parameters that determine the permitted amount. Understanding this terminology may provide clarity to the contribution options provided for a plan year.

Does My Plan Need an Audit?

The main determining factor in whether your plan needs an audit performed by an independent qualified public accountant is the participant count. An audit will be required if the beginning of year participant count is more than 100. For the plan year that began in 2023, there is a change to how the participants are counted. Prior to this, the count included active participants—regardless of whether or not they had an account balance—as well as terminated participants who had an account balance. Now, participants without an account balance are no longer included in the count. This is exciting news because it means that some plans who required an audit for 2022 may no longer require an audit for 2023.

For plans that hover around the 100-participant mark, there is a rule in place to help stabilize the audit requirements from year to year. The 80-120 rule states that if the participant account is from 80 to 120 participants, the plan may retain the same audit status as the previous year. In practical terms, this means that an audit is not required until the participant count reaches 121. However, once an audit is required, it continues to be required until the participant count drops to 99 or less.

In addition to participant count, the type of assets held in the plan may cause the plan to require an audit, even if the participant count is under 100. Small plans are required to have an audit unless the plan fulfills the requirements of one of these exemption waivers:

• At least 95% of the plan’s assets are qualifying plan assets. This criterion is satisfied by most small plans. Qualifying plan assets include qualifying employer securities, participant loans, shares issued by a regulated financial institution, registered mutual funds, investments and annuities issued by an insurance company, and certain assets in an individual account of a participant or beneficiary.
• Less than 95% of the plan’s assets are qualifying, but a fidelity bond is in effect. This fidelity bond must cover 100% of the non-qualifying assets, or provide coverage based on standard ERISA bonding rules, based on whichever value is greater.

Since a large plan audit count is now based solely on individuals with an account balance, paying out your terminated participants could help to lower your participant count. It may be time to review your cash out limit, plan assets, and the account balances of terminated participants in order to minimize the need for an accountant’s audit in the future.

401(k) deferrals: Don’t exceed the limit!

Excess deferrals occur when a 401(k) participant defers a greater amount than the annual IRS limit permits. The annual deferral limit was $22,500 for 2023 and $23,000 for 2024. For participants 50 years old and older, an additional $7,500 can be deferred.

When this limit is exceeded, excess deferrals and earnings need to be removed from the plan and returned to the participant. Employer matching on this excess likewise must be forfeited if it was calculated and funded during the year. Distribution of these excess funds must occur by April 15th.

Even with payroll software that limits the deferrals, there are several situations in which excess deferrals might occur:

• A participant who begins working for you may have made deferrals to a previous employer’s plan during the same calendar year. After meeting any eligibility and entry requirements, they then make deferrals into your plan. Combined, these deferrals may exceed the annual limit, which is individual rather than per-plan. This error is often discovered during the preparation of the participant’s tax return, and correction requests are typically received in the first few months of the year.
• When you make a change to your payroll providers or payroll software, deferral limits may be exceeded if year-to-date deferral information is not transferred correctly.
• If a participant’s date of birth was input incorrectly into your payroll software, the participant may be inadvertently permitted to make a catch-up contribution, even though they haven’t reached age 50.

You may be asked to perform any necessary corrections regardless of whether or not the error occurred on your watch. The best way to prevent excess deferrals is to be sure that all deferrals are tracked in your payroll and that dates of birth are correct for all participants making catch-up contributions. Most payroll software has a field to input deferrals made outside of that software; if you hire a new employee, ask for their year-to-date deferrals, and ensure that this information is given to your payroll provider or entered into your software. If you make a payroll change during the year, check the year-to-date deferrals and ensure that they are correct for each employee.

Reminder: Long-Term, Part-Time Employee Rules Effective January 1, 2024

As part of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), part-time employees who worked at least 500 hours each year in 2021, 2022, and 2023 qualify as Long-Term, Part-Time (LTPT) employees. LTPT employees were eligible to make elective deferrals on January 1, 2024.

What happens if you missed enrolling one of these employees?

• Mistakes happen. When it comes to a missed deferral opportunity, the key is to correct the failure as soon as possible. This may include withholding the proper deferrals going forward, making an employer contribution to the plan, and providing the participant with a written notice regarding the failure. If you feel as though you missed offering an employee the opportunity to defer, please contact us immediately to remedy the situation rather than waiting until the end of the plan year.

What effect does this rule have on Solo 401(k) (One-Participant) Plans?

• If a plan covers a business owner (or owner and spouse) but employees have not met plan eligibility requirements in the past, the new Long-Term, Part-Time (LTPT) rules will have an impact. As the company owner is no longer the only participant, the plan will now be subject to ERISA.
• The ability for the employee to defer will not necessarily impact your employer contribution and testing, but it will have an impact on the plan’s filing status. This means that filing a Form 5500 or 5500-SF will be necessary, rather than filing a Form 5500-EZ. These forms require additional information to be reported, and are publicly available after filing, whereas Form 5500-EZ is not made public.
• The plan will also need to be covered by a fidelity bond to protect the assets, even if part-time employees make no deferrals.

Keep the new LTPT rule in mind when hiring employees—even if not full-time—as they may have an unexpected impact on your plan. Continue to evaluate the status of your part-time employees as well so that you can be prepared for their eligibility for the plan.

Upcoming Compliance Deadlines for Calendar-Year Plans

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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© 2024 Benefit Insights, LLC. All Rights Reserved.

Fall 2023  – Benefit Insights Newsletter

Cost of Living Adjustments for 2024 Considering Changes to Your Business? Don’t Forget About Your Plan! Good News on Catch-Up Contributions! News Alert: Grace Period Extended for EFAST2 Login Credentials Upcoming Compliance Deadlines for Calendar-Year Plans

Cost of Living Adjustments for 2024

Save More for Retirement in 2024

On November 1, 2023, the IRS announced the Cost of Living Adjustments (COLAs) affecting the dollar limitations for retirement plans for 2024. In October, the Social Security Administration announced a modest benefit increase of 3.2%. Retirement plan limits also increased over the 2023 limits. COLA increases are intended to allow participant contributions and benefits to keep up with the “cost of living” from year to year. Here are the highlights from the new 2024 limits:

• The calendar year elective deferral limit increased from $22,500 to $23,000.
• The elective deferral catch-up contribution remains $7,500. This contribution is available to all participants aged 50 or older in 2024.
• The maximum available dollar amount that can be contributed to a participant’s retirement account in a defined contribution plan increased from $66,000 to $69,000. The limit includes both employee and employer contributions as well as any allocated forfeitures. For those over age 50, the annual addition limit increases by $7,500 to include catch-up contributions.
• The maximum amount of compensation that can be considered in retirement plan compliance has been raised from $330,000 to $345,000.
• Annual income subject to Social Security taxation has increased from $160,200 to $168,600.

Considering Changes to Your Business? Don’t Forget About Your Plan!

In today’s changing work environment, the sale or purchase of another business is not uncommon. If you’re planning to make changes to your business structure, remember to include the retirement plan in your negotiations. The type of sale can have a major impact on your plan, so it is highly recommended that you understand which type you are considering and notify your Third Party Administrator before taking action.

There are two types of sale transactions that affect the future of a retirement plan: asset sale and stock sale. Let’s take a look at some terminology that may be unfamiliar, so that if you do find yourself in a merger or acquisition situation, you will know what to expect. For this discussion, For Sale is being sold to Buyer, and both firms sponsor retirement plans.

An asset sale is the sale of assets belonging to the business, but not the business itself. In this scenario, For Sale’s retirement plan stays with For Sale; the retirement plan is not one of the assets being sold. For Sale may continue to operate normally and may continue to sponsor the retirement plan. For Sale may also terminate the plan. If For Sale continues to sponsor the plan, there may be a partial plan termination. Partial plan terminations will be discussed later in this article.

In an asset sale, if For Sale’s employees are hired by Buyer, they are considered new employees, and are subject to the eligibility and entry requirements for Buyer’s plan. Buyer may waive these requirements, but the plan will need to be amended to do so. A former For Sale employee now working for Buyer may keep their account balance with the For Sale plan if it is not terminated or move their balance to the Buyer plan. If they decide to do the latter, it will be a distribution and a rollover—not a transfer. The former For Sale employee may also pursue other distribution options, per For Sale’s plan document.

A stock sale is the sale of the business itself. In this scenario, For Sale is wholly owned by Buyer. During negotiations, the disposition of the plan should be discussed. The plan can be terminated prior to the sale, merged into the Buyer plan after the sale, or continue as-is under Buyer.

If the plan is terminated prior to the date of sale, the participants are all considered 100% vested in their account balances and can take a distribution from the plan. A Form 5500 would need to be filed for each plan year until all distributions are complete and the assets are reduced to $0.

The plans can be merged into one plan after the sale. This may result in one plan being merged directly into the other, or both plans being combined into an entirely new plan. Care should be taken to preserve protected benefits. Additionally, in a merger situation, if either plan is affected by a compliance issue, the issue will persist into the merged plan.

The For Sale plan could continue with Buyer as the sponsor. In this case, there will be a transition period, during which the plans continue to be tested separately for coverage. This transition period lasts until the plan year end following the year of purchase, after which the plans must be tested together. For a calendar-year plan purchased July 1, 2023, the transition period would end December 31, 2024. Operating two plans in this manner is often more expensive and may result in coverage testing being more difficult to pass.

If the For Sale plan is retained through the purchase, and is then terminated at a later time, the plan is subject to the successor plan rule. This rule was established to prevent participants from taking distributions of their deferrals prior to age 59½. The basic rule states that the participants of the terminated plan can’t participate in another 401(k) plan sponsored by the same employer for 12 months following the termination date. As the For Sale plan is sponsored by Buyer post-sale, the For Sale participants wouldn’t be able to participate in the Buyer plan for a year after the termination of the For Sale plan. If the intention is to terminate the For Sale plan, it may be best to do so before completion of the purchase.

Sometimes, the sale might be for just a portion of a business’s ownership; other times, ownership is purchased by more than one individual. In these cases, the companies may become part of a controlled group. If a controlled group exists, the plans must be combined to pass coverage testing. The number of owners and their ownership percentages could impact testing and will likely require closer attention to be paid.

A change in ownership can also affect whether a selling or buying company becomes part of an affiliated service group (ASG). An ASG could exist when a significant portion of the business of any company is the performance of services for another related company. Plans impacted by an ASG will be considered one group for coverage testing.

If only part of a company is sold, there may be a partial plan termination. The determination of a partial plan termination is based on the facts and circumstances of the situation, but as a general rule, if at least 20% of the plan participants are involuntarily terminated due to events related to the purchase, those affected participants are considered 100% vested in their accounts.

This is not intended to be legal advice. Consulting with an attorney is highly recommended prior to making any decisions for your business. Your participants’ eligibility for transaction-related distributions should be discussed in detail before any funds leave the plan. Your Third Party Administrator can help you navigate the process to understand which type of sale you may be part of and how it could affect your plan and participants.

Good News on Catch-Up Contributions!

Catch-up contributions are additional employee deferrals that can be made to 401(k), 403(b) and governmental 457 plans for those participants who are age 50 or older. These contributions can be made on a pre-tax or Roth (after-tax) basis.

As originally laid out in the SECURE 2.0 Act of 2022, catch-up contributions for those earning over $145,000 in the prior year would need to be Roth deferrals starting in 2024. However, the Internal Revenue Service (IRS) recently announced a transition period that will delay this requirement until 2026. While there was previously some confusion as to whether the new law eliminated all other catch-up contributions, the IRS has since confirmed that catch-up contributions can continue to be made by all age-eligible participants if allowed by the plan document. The deferrals can continue to be either pre-tax or Roth.

For 2024, the maximum deferral contribution is $23,000 and the maximum catch-up contribution is $7,500.

News Alert: Grace Period Extended for EFAST2 Login Credentials

If you electronically sign your Form 5500 through the ERISA Filing Acceptance System (EFAST2) and haven’t yet obtained new credentials from www.login.gov, you will need to do so by December 31, 2023. This date extends the original September 1 deadline. The new credentials established during this transition can be used across many government services. If you do not currently have login credentials for EFAST2, this action item does not apply to you.

Upcoming Compliance Deadlines for Calendar-Year Plans

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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© 2024 Benefit Insights, LLC. All Rights Reserved.

Summer 2023 – Benefit Insights Newsletter

Bonds: Is your plan covered?, It doesn’t hurt to double check! We’re here for you!, Are Changes Needed to the Plan?, Upcoming Compliance Deadlines for Calendar-Year Plans

Bonds: Is your plan covered?

The Employee Retirement Income Security Act (ERISA) requires coverage to protect the plan from losses due to fraud and dishonesty.

There are three main types of bond coverage for retirement plans: fidelity bonds, fiduciary liability insurance, and cyber liability insurance. Not all three coverages are required, but understanding what is available and what they cover will help you determine the best protection for your plan.

ERISA Fidelity Bond

An ERISA fidelity bond protects the plan against losses caused by acts of fraud or dishonesty—such as theft, embezzlement, and forgery—by those who handle plan funds or other property. These funds or property are used by the plan to pay benefits to participants. This includes plan investments such as land, buildings, and mortgages. It also includes contributions received by the plan and cash or checks held to make distributions to participants. A person is considered to “handle” plan funds if their duties could cause a loss due to fraud or dishonesty, either by acting alone or in collaboration with others. Per the U.S. Department of Labor (DOL), handling refers to the following:

• Physical contact with cash, checks or similar property;
• Power to transfer funds from the plan to oneself or to a third party;
• Power to negotiate plan property (mortgages, title to land and buildings or securities);
• Disbursement authority or authority to direct disbursement;
• Authority to sign checks or other negotiable instruments; or
• Supervisory or decision-making responsibility over activities that require bonding.

Bond coverage is required for most ERISA employee benefit plans and the amount of coverage is reported on your plan’s Form 5500. The minimum coverage is 10% of prior year plan assets but not less than $1,000. The maximum bond amount is $500,000, or $1,000,000 for plans that hold employer securities. Bonding requirements do not apply to plans that are not subject to Title 1 of ERISA, such as church or governmental plans. Some regulated financial institutions (certain banks and insurance companies, for example) are exempt if they meet certain criteria.

The fidelity bond can be part of your company’s umbrella policy or can stand alone. In either case, the plan must be named and there can’t be a deductible. If your fidelity bond is less than $500,000, including an inflation guard will automatically increase the value of the fidelity bond to cover the growing plan assets so you will always have adequate coverage. It should be noted that the fidelity bond is different than the employee dishonesty bond that may be in effect for your company. While both provide coverage in the case of fraud, the fidelity bond provides protection for the plan, whereas the employee dishonesty bond protects the employer.

Fiduciary Liability Insurance:

Fiduciary liability insurance covers fiduciaries against losses due to a breach of fiduciary responsibility. A fiduciary is defined by the DOL as any of the following:

• Persons or entities who exercise discretionary control or authority over plan management or plan assets.
• Anyone with discretionary authority or responsibility for the administration of a plan.
• Anyone who provides investment advice to a plan for compensation or has any authority or responsibility.

Examples of fiduciaries include plan trustees, plan administrators, and members of the plan’s investment committee. A fiduciary is in a position of trust with respect to the participants and beneficiaries in the plan and is responsible to act solely in their interest, provide benefits, defray reasonable expenses, follow the plan document, and diversify plan investments. The fiduciary must act with care, skill, prudence, and diligence. This bond is not required but can provide protection to the fiduciaries.

Cyber Liability Insurance:

Cyber liability insurance for the plan provides protection from covered losses and expenses in the event of a cyber breach. Your service provider’s insurance may not cover your plan for all losses, so the plan may want to consider its own policy. In May 2023 at the Plan Sponsor Council of America National Conference, DOL Assistant Secretary Lisa Gomez mentioned the importance of cybersecurity. She stressed that many employers may have cyber liability insurance for the company and assume that it covers the plan, but the fine print in the policy clarifies that it does not cover the company in its capacity as a plan sponsor.

In 2021, the DOL issued cybersecurity guidance for plan sponsors, plan fiduciaries, record-keepers, and plan participants. The guidance, which is still very relevant, included the following:

• Tips for hiring a service provider: Includes questions to ask when choosing a service provider to ensure they follow strong cybersecurity practices.
• Cybersecurity Program best practices: Suggestions of practices and procedures that plan fiduciaries and record-keepers should have in place for risk assessments, secure data storage, cybersecurity training, and incident response.
• Online Security Tips: Ways that plan participants can reduce the risk of fraud.

You can access the full news release here: https://www.dol.gov/newsroom/releases/ebsa/ebsa20210414

Things can happen outside of the control of the plan sponsor. Check with your service providers to determine the type of coverage your plan needs to be protected.

It doesn’t hurt to double check! We’re here for you!

As situations arise during the plan year, it’s always better to double check the plan provisions rather than address a plan failure after the fact. In some situations, it’s easier to ask for forgiveness rather than permission, but that isn’t true in retirement plans. Correcting mistakes can be very costly. Do not hesitate to reach out to us for clarification on what the plan allows. For example:

When a participant (staff or owner) requests a distribution, there is a process to follow to ensure the distribution is permitted by the plan. Questions to be considered:

• Eligibility:
  • If a request is made for an in-service or hardship distribution, does the participant satisfy the requirements?
  • For terminated participants, does the plan permit distributions immediately or is there a waiting period defined in the plan document?
• Available funds:
  • Is the type of distribution limited to employee contributions or are employer funds available?
  • Is the participant’s vested percentage sufficient if taking employer funds?
  • Has the vesting been updated for current plan year hours, if applicable?
• Documentation:
  • Has the necessary online or paper request been completed?
  • Has spousal consent been obtained, if required?
• Type of distribution:
  • Is the distribution only permitted in cash or are in-kind distributions permitted? In-kind refers to the transfer of assets to an IRA or another plan rather than liquidating shares and distributing the cash.
  • In the case of an in-kind transfer from a self-directed brokerage account, is the transfer to an IRA or another retirement plan (qualifying it as a rollover distribution) or to another account within the same plan (not a distribution)?

Contributions to the plan must be made per the provisions of the plan. If an employer contribution is usually funded after the end of the year but you find you have funds available during the year, a deposit may have to wait.

• If the funds are pooled in one account, it’s important to be sure the total employer contribution funded does not exceed the deductible amount for that tax year. This won’t be known until after the end of the year when total compensation figures are available.
• If the funds are in separate participant-directed accounts, the determination of how much to deposit to each participant is based on payroll as well. Funding some participants early, especially the owners, can also be a discrimination issue.

Are there changes to the company being considered? These events should be discussed prior to the effective date of the change because the plan can be greatly impacted.

• Changes include buying another company, selling the company, or merging into another one.
  • Depending on the details, it may require plan termination and affect whether the participant account balances can be distributed or if they must be transferred to the other party’s plan.
  • The plan document may need to be amended for eligibility, vesting and other provisions.
• Change in current ownership.
  • Some plan contribution formulas are suitable for the current demographics of the plan, meaning testing requirements pass. Changes to ownership may negatively affect test results so plan design changes may need to be considered.
  • Since ownership can be attributed to family members, hiring a relative can dramatically affect certain types of contributions and testing.

Any time funds are going into the plan or leaving it, there are terms of the plan that must be followed. If you find the provisions no longer suit you and your employees, an amendment can be considered to make the necessary changes. It is very important to operate the plan in accordance with the plan document, so please ask for clarification as needed!

Are Changes Needed to the Plan?

As time goes by, the needs of a company and the needs of the participants evolve, and a plan may need to be amended to keep up with those changes. This is a good time of year to review plan provisions and determine if any changes are needed before the next plan year. Below are some possible considerations:

Automatic enrollment can boost plan participation. Participants who don’t make an election will have 401(k) deferrals withheld automatically. There are several types of automatic enrollment designs that offer variations that may work best for the plan.

Does the plan fail the Actual Deferral Percentage/Actual Contribution Percentage (ADP/ACP) testing and require refunds to the Highly Compensated Employees? If so, it may be beneficial to add a safe harbor contribution, which could be either a match or a non-elective contribution. If the plan already has a safe harbor contribution, it’s possible that a different type of safe harbor will provide a better result.

Should employees be eligible for the plan earlier, or should they be ineligible for a longer period of time? It may be time to review the plan’s eligibility requirements.

Are the right participants receiving the contribution? For a non-safe harbor contribution, consider how terminated participants, participants who work low hours, and different classes of employees earn a contribution.

Is the best profit-sharing contribution formula being used? There are several ways to allocate a profit-sharing contribution, including pro rata (everyone receives the same percentage), integrated (employees with earnings above a certain dollar amount receive more), cross tested/new comparability (projects benefit to retirement and each person can receive a different contribution) and flat dollar amount (everyone receives the same amount). The best fit may change over time as the employee base changes.

Certain owners looking to boost the employer contribution beyond the limits of an existing 401(k) plan may be interested in adding a cash balance plan.

These are some ideas to be considered by plan sponsors throughout the life of a plan. Reach out if you would like to discuss any of these options.

Upcoming Compliance Deadlines for Calendar-Year Plans

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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© 2023 Benefit Insights, LLC. All Rights Reserved.

Spring 2023 – Benefit Insights Newsletter

Plan Participants: The More They Know, The Better, Beneficiary on File?, News Flash!, Upcoming Compliance Deadlines for Calendar-Year Plans

Plan Participants: The More They Know, The Better

As a plan sponsor, do you feel your employees have a clear understanding of the company’s retirement plan?

Do most utilize it as a tool to save for retirement—and, if not, do they understand the benefit that they are missing? According to the 2022 PLANSPONSOR Participant Survey, 115 of 774 (14.9%) respondents opted not to participate in a workplace defined contribution plan for various reasons. 18.3% of those that declined to participate said it was because they need to better understand the benefits of participating. 15.7% said they needed their income for day-to-day expenses. 50.5% of the nonparticipating employees were between the age of 18 through 39, 44.3% were age 40 through 59. This means that participants of all ages would benefit from additional education and encouragement.

Getting started is a very important first step. Automatic enrollment provisions are popular and allow participants to begin their employee contribution deferral at a default rate (stated in the plan’s document), such as 3%, unless they elect another amount or proactively opt out. Keep in mind that, since they do not have to make an active election to begin deferrals, they may not take advantage of the education materials available to them as part of the enrollment process. Education materials come in many forms, from simple informative handouts that explain the benefits of starting early, to more advanced retirement accumulation calculators that help the participant understand how the actions that they take now might affect them at retirement age. Websites are available that may help participants determine the appropriate amount to save for their retirement based on their current financial situation. The information shared with participants during the enrollment process will vary based on the recordkeeper or investment platform where the plan funds are held; further resources may be provided by the plan’s investment advisor.

There are several advantages to having participants meet with the plan’s investment advisor, whether as a group or in one-on-one meetings. For participants who may feel like retirement is too far away to be thinking about now, or who want to learn more about the benefits of starting early, information regarding how compound interest (earnings and dividends being reinvested and growing over time) and dollar cost averaging (recurring deposits per paycheck which buys shares at different prices throughout the year) affects their long-term goal is beneficial. An advisor can also help the participant review their full financial picture to determine how much they should contribute to the plan, as well as which investment options might be appropriate based upon their targeted retirement date and risk tolerance. If there is an employer matching contribution available, an initial instinct is to contribute enough to receive the full match, but there may be a higher contribution percentage that should be considered to reach their retirement goals.

It is also quite common in today’s employment arena to have employees who are focused on paying off student debt instead of contributing to a retirement plan. One can certainly understand their dilemma. If your plan currently offers an employer matching contribution, the optional matching contribution on student loan payments may be beneficial. This provision would allow a participant to continue making loan repayments, while remaining eligible to receive a matching contribution funded to the plan on their behalf, helping them to begin building an account balance. This optional matching ability is new and will be available beginning January 1, 2024.

Some participants are hesitant to participate in an employer sponsored plan since it can be more difficult to access their account balance for hardships or other life events. To ensure that employees feel as though they will have access to the funds if they do contribute, you can choose to include several types of distributions in your plan document provisions, including the following:

• In-service distributions from your plan are not required to be made available but can be included if participants satisfy the requirements dictated by your plan’s document. An example might be attainment of age 60 and 5 years of service.
• Hardship distributions:
  • Must be taken due to an immediate and heavy financial need.
  • Internal Revenue Service (IRS) regulations consider the following “safe harbor” reasons to meet the immediate and heavy financial need requirement.
    • Medical care expenses for the employee, the employee’s spouse, dependents, or beneficiary.
    • Purchase of an employee’s principal residence (excluding mortgage payments).
    • Tuition related educational expenses for the next 12 months of postsecondary education for the employee, the employee’s spouse, children, dependents, or beneficiary.
    • Prevent eviction or foreclosure from the employee’s principal residence.
    • Funeral expenses for the employee, the employee’s spouse, children, dependents, or beneficiary.
    • Certain expenses to repair damage to the employee’s principal residence.
  • The amount available is that of the financial need, which can include the amounts necessary to pay taxes resulting from the distribution. However, the participant must have the necessary amount available for withdrawal within their account. Your plan document can limit the money types available—such as employee contributions and earnings only—or balances from employer contributions can be made available for withdrawal as well.
• Qualified Birth and Adoption distributions:
  • A distribution up to $5,000 made during the one-year period beginning on the date on which the child of the individual is born, or the legal adoption by the individual is finalized.
  • Each parent has a separate limit, and if there are multiple children, a distribution can be taken for each child.
  • The 10% early withdrawal penalty is not waived for this distribution, but the amount can be repaid to the plan (no time limit applies).
• $1,000 penalty-free emergency withdrawal will be available on or after January 1, 2024:
  • One distribution can be taken per year and can be repaid within three years.
  • The distribution amount is exempt from the 10% early withdrawal penalty.
  • No additional emergency distribution can be taken during the 3-year period if the original distribution was not repaid.
• Distributions to domestic abuse survivors will be available on or after January 1, 2024:
  • The distribution amount is exempt from the 10% early withdrawal penalty.

In conclusion, the more engaged participants are in the conversation about retirement and the more they understand the benefit being offered, the better chance they have for a successful retirement. Understanding the reasons why your participants opt out of plan participation may help you either determine if more education is needed or if there are plan provisions that could be considered that would encourage participation.

Beneficiary on File?

As part of the enrollment process, participants are asked to elect a beneficiary. However, this step is often not completed or kept up to date as time goes on, which can make death distributions more complicated than they need to be. When a participant names a beneficiary, it helps to ensure their account balance will be distributed to the person intended. However, updating the designation is also very important as life events occur.

When a plan includes automatic enrollment provisions, it does help participants begin saving for retirement. However, if they use the default deferral rate and the default investment option, they may neglect to elect a beneficiary at that time since they aren’t filling out any other enrollment paperwork, or maybe they are married and assume the funds will automatically be paid to their spouse. What they need to factor in, though, is how their account balance will be paid if they do not make an election or if they fail to update it as time goes on.

If a current beneficiary election is not on record at the time of a participant’s death, the default rules of the plan will determine the beneficiary, which may be the following order: surviving spouse, children in equal shares, surviving parents in equal shares, and lastly, estates. But what if the participant goes through a divorce and doesn’t update their election? What if there are more children or stepchildren that are not added to the election? What if there is no spouse, parent, or child to benefit and no estate?

Having a beneficiary election on file makes the distribution process much smoother for all involved and requires less interpretation, which often involves engaging in the services of an attorney. When a participant is enrolled in the plan, it is best to have them designate a beneficiary even if it takes making the request several times until they do. Then, make the discussion part of a recurring process to have the participants review and update the information so that it’s not an issue if the need to reference the beneficiary should arise.

News Flash!

Defined Contribution plans: Form 5500 news!

Effective for plan years beginning on or after January 1, 2023, the determination of a large or small plan will be based on the number of participants with an account balance as of the beginning of the year, rather than the number of participants eligible for the plan.

This is welcome news for plans that required an accountant’s audit as a large plan because there were more than 100 eligible participants but not all of those participants had balances. For new plans, the participant count will be based on the number of participants with an account balance as of the end of the year.

Defined Benefit plans: Plan Document news!

The two-year Cycle 3 restatement window for pre-approved defined benefit plan documents opened April 1, 2023, and will end March 31, 2025. Check with your document provider to confirm when they intend to update your plan document for your review and signature during this restatement period.

Reminders:

• Required amendments for SECURE Act, CARES Act and Miners Act: These were originally due as of the last day of the plan year beginning after January 1, 2022 (December 31, 2022, for calendar year plans). Due dates were extended as follows:
  • 401(k) plans, profit sharing plans, money purchase plans, defined benefit plans and 403(b) plans have until December 31, 2025.
  • Governmental plans (including governmental 457(b) plans) have until 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2023.
  • The extension does not apply to tax-exempt 457(b) plans.
• Form 5500 relief for retroactively adopted plans: If a plan is adopted after the end of a plan year but before the employer’s tax filing deadline (including extensions), the plan is considered to be adopted on the last day of the taxable year. No Form 5500 is due for the initial plan year, but the subsequent year form will have a box checked to indicate it is a retroactively adopted plan permitted by SECURE Act Section 201.

Clarification:

• In the last edition, the example of Required Minimum Distribution (RMD) age increases from 72 to 73 should have read as follows:
  • For participants who turn 73 in 2023, they were 72 in 2022 and subject to the age 72 RMD rule in effect for 2022.
  • For those who turn 72 in 2023, their 1st RMD will be due by December 31, 2024 or they may opt to delay it until April 1, 2025. If they choose the latter, they will take both their 1st and 2nd payment in 2025.

Upcoming Compliance Deadlines for Calendar – Year Plans

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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© 2023 Benefit Insights, LLC. All Rights Reserved.

Winter 2023 – Benefit Insights Newsletter

SECURE 2.0 is a GO!, Is it already time to complete another year-end data request?, Stay tuned! Secure 2.0 Act of 2022 includes some action items that may produce beneficial changes in the future, Upcoming Compliance Deadlines for Calendar-Year Plans

SECURE 2.0 is a GO!

In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act increased the Required Minimum Distribution (RMD) age for retirement plan participants from age 70 1/2 to 72. Additionally, it introduced opportunities for Long Term Part Time (LTPT) employees to make deferral contributions to retirement plans in situations where they have not yet met the plan’s eligibility requirements. An updated version of the SECURE Act—the SECURE 2.0 Act of 2022—was signed by President Biden on December 29, 2022, as part of the Consolidated Appropriations Act of 2023. While this omnibus spending bill covers a variety of topics, changes to qualified retirement plans were included to encourage earlier plan participation and a better retirement outcome. SECURE 2.0 modifies the original RMD and LTPT provisions while introducing new rules. Here is what lies ahead:Effective as of the date of enactment:

• Distributions to terminally ill participants will be exempt from the 10% early withdrawal penalty tax.
• Plan sponsors of a 401(k), 403(b) or 457(b) plan may permit participants to elect their company matching and non-elective contributions be treated as Roth contributions.

Effective for Plan years beginning on or after 1/1/23:

• Required Minimum Distribution (RMD) age increases from 72 to 73.
  • If a participant turned 72 prior to 1/1/23 and they have begun receiving their RMD, they will continue to receive their RMD in 2023.
  • For participants who turn 73 in 2023, their 1st RMD is due by 12/31/23 or they may opt to delay it until 4/1/24. If they choose the latter, they will take both their 1st and 2nd payment in 2024.
  • The penalty assessed to the participant for not taking an RMD timely is reduced from 50% of the amount not distributed to 25%.
  • The age increases further to 75 in 2033.

Effective for Plan years beginning on or after 1/1/24:

• RMDs will not be required from Roth 401k or Roth 403(b) balances.
  • Currently Roth IRAs are exempt from RMDs but Roth balances in qualified plans are included in the calculation of the required amount to be distributed. Calculations for 2023 RMDs will include Roth 401(k) balances but they will be excluded from future calculations.
• Catch-up contributions to qualified retirement plans must be Roth deferrals.
  • This does not apply to participants with compensation under $145,000 in the prior year.
• Matching contributions on student loan repayments.
  • Sponsors of a 401(k) Plan, 403(b) Plan or SIMPLE IRA will be able to match student loan repayments made by employees. This also applies to governmental employers who sponsor a 457(b) Plan.
  • The employee will make student loan payments on the loan that was taken to pay for qualified higher education expenses and the employer will be permitted to deposit a matching contribution into the qualified plan on their behalf.
• Hardship rules for 403(b) plans will conform to the rules that apply to 401(k) Plans.
  • In addition to employee contributions being available as a hardship distribution, earnings on those contributions will be available as well.
• Distributions will be available for domestic abuse survivors.
  • The available amount will be the lesser of $10,000 or 50% of the participant’s account and will be exempt from the 10% early withdrawal penalty tax.
  • The amount will be eligible to be repaid to the plan over 3 years.
• Emergency distributions up to $1,000 will be available.
  • One distribution per year for unforeseeable or immediate financial needs relating to personal or family emergency expenses.
  • The distribution will be exempt from the 10% early withdrawal penalty tax.
  • The amount will be eligible to be repaid within 3 years.
  • No additional emergency distribution during the 3-year period will be available unless repayment has occurred.
• Long Term Part Time (LTPT) Employees will be eligible to contribute elective deferrals to their employers’ 401(k) Plans.
  • LTPT Employees are those who have worked at least 500 hours a year for three consecutive years.
  • Plan Sponsors may opt to offer matching contributions (subject to vesting schedule).
  • Hours of service prior to 2021 are disregarded for both eligibility and vesting.
  • This provision does not apply to collectively bargained plans.

Effective for Plan years beginning on or after 1/1/25:

• Long Term Part Time (LTPT) Employees will be eligible to contribute elective deferrals after TWO consecutive years of working 500 hours instead of three years.
  • This provision will now apply to both 401(k) Plans and ERISA 403(b) Plans.
  • Hours of service prior to 2023 are disregarded for 403(b) Plans.
• Increased Catch-Up Contributions.
  • Participants aged 60 to 63 will be eligible to defer larger catch-up contributions.
• Required automatic enrollment provisions.
  • New 401(k) and 403(b) plans must include automatic enrollment provisions where the default employee contribution rate is at least 3% but not more than 10%. Each following year, the amount is increased by 1% until it reaches at least 10% but not more than 15%.
  • This provision does not apply to businesses with 10 or fewer employees or new companies in business less than 3 years.
  • Plans that exist as of December 29, 2022 (date of enactment) are grandfathered and, therefore, are not required to include automatic enrollment provisions.
  • Plans that are established in 2023 and 2024 should pay attention to this provision, though, since the provision may apply to them for 2025.

Is it already time to complete another year-end data request?

When Plan Sponsors are asked to provide company and employee census information for a recent plan year, the details being collected affect the contributions that must be calculated and funded as well as which compliance tests the plan must satisfy. The same questions are asked year after year because changes in the company affect the plan a great deal. Information collected may include:

Employee census: Details about all employees on payroll must be provided, whether they are full time, part time or only worked a few weeks.

• Employee information allows your retirement plan professional to determine who met the plan eligibility requirements, who is required to be included in compliance testing and who is eligible to receive employer contributions being funded for the plan year.
• If your payroll information is collected per payroll, you may be asked to confirm its accuracy at year end to be sure that no payrolls were missed and that, for calendar year compensation years, the amounts tie to the Form W-3.
• With the new rules for Long Term Part Time (LTPT) employees, it is very important to track hours worked for part time employees to determine who falls into this category.
• If you are an owner only plan (sole proprietor and spouse, or partnership and spouses of partners), be sure to reach out to your retirement plan professional if you are considering hiring employees. Depending on the plan provisions, even seasonal or short-term hires could have an unexpected impact.

Ownership % and other businesses owned by those owners: Not only does it matter who owns a part of your business, how much they own makes a difference as well.

• Ownership of more than 5% means they are a Highly Compensated Employee (HCE) for compliance testing purposes, and this may affect the contribution amount they are able to receive. If the spouse of the owner is also employed, the ownership attribution applies to them as well. This applies to parents, children, and grandparents of 5% owners.
• If the owners of your company have ownership in another company, it could be a controlled group or affiliated service group situation and the employees of that other company may need to be included in the compliance testing for your qualified plan.
• Changes in ownership should be communicated as they are being planned, rather than after the change takes effect. For example, if the owners plan to retire at year end with their children taking over, the compliance testing for the plan could be affected by the change in ages of the HCEs. There are ways to make this a smooth transition with plan provision changes if discussed in advance.

ERISA fidelity bond: The amount in place for your plan at year end is requested to determine if it is sufficient or needs to be increased.

• The amount of the bond is reported on the Form 5500 filed for the plan year and the required amount is 10% of plan assets. Certain exceptions apply.
• For the 1st year of the plan, the amount of coverage is to be based on 10% of the expected contribution amount for the year.

Stay tuned! Secure 2.0 Act of 2022 includes some action items that may produce beneficial changes in the future.

Within 18 months:

• Effectiveness of notice provided for eligible rollover distributions: A 402(f) notice, often referred to as a Special Tax Notice, must be provided to the recipient of a distribution that is eligible for rollover. The notice must contain required language regarding rollover options and the tax implications that may apply. The Government Accountability Office must issue a report to Congress on the effectiveness of these notices.

No later than two (2) years after the date of enactment:

• Retirement Savings Lost and Found: A national online database will be created to help connect former participants who are trying to reach a prior employer with Plan Sponsors who are trying to reach them regarding a remaining account balance.
• Consolidation of defined contribution plan notices: Regulations are to be amended so that the individual notices currently provided to participants by the plan can be consolidated.

Within five (5) years:

• Report on pooled employer plans: The Department of Labor (DOL) Secretary must conduct a study on the new and growing pooled employer plan industry and issue a report within five years. Subsequent reports will be completed every five years after.

Upcoming Compliance Deadlines for Calendar-Year Plans

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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© 2023 Benefit Insights, LLC. All Rights Reserved.

Fall 2022 – Benefit Insights Newsletter

Cost of Living Adjustments for 2023, New Plan Year Checklist, Save or Toss? Proper Plan Record Storage a Must!, Deadline for CARES Act and SECURE Act Amendments Extended, Upcoming Compliance Deadlines for Calendar-Year Plans

Cost of Living Adjustments for 2023

Save even more for retirement in 2023 due to record breaking increases in limits. On October 21, 2022, the IRS announced the Cost of Living Adjustments (COLAs) affecting the dollar limitations for retirement plans for 2023. Retirement plan limits increased well over the 2022 limits, the largest increase in over 45 years. COLA increases are intended to allow participant contributions and benefits to keep up with the “cost of living” from year to year. Here are the highlights from the new 2023 limits:

• The calendar year elective deferral limit increased from $20,500 to $22,500.
• The elective deferral catch-up contribution increased from $6,500 to $7,500. This contribution is available to all participants aged 50 or older in 2023.
• The maximum available dollar amount that can be contributed to a participant’s retirement account in a defined contribution plan increased from $61,000 to $66,000. The limit includes both employee and employer contributions as well as any allocated forfeitures. For those over age 50, the annual addition limit increases by $7,500 to include catch-up contributions.
• The maximum amount of compensation that can be considered in retirement plan compliance has been raised from $305,000 to $330,000.
• Annual income subject to Social Security taxation has increased from $147,000 to $160,200.

New Plan Year Checklist

Each year, a great deal of attention is paid to the upcoming year end work: census gathering, compliance testing, 5500s, oh my! But the year-end also brings with it a host of items that may need attention before the year closes. Below are a few action items that may need to be considered.

• Changes were made for the current plan year or upcoming plan year that required an amendment. Example: As of January 1, 2023, in-service distributions are available to participants at age 59 ½.
  • Do you have a signed copy of the amendment on file?
  • Have you revised your processes to ensure you are following the new terms of the plan?
• Are there terminated participants with small balances?
  • If your plan is like most and permits force-out or mandatory distributions of terminated participant account balances, the distributions must be completed by the plan year end.
  • Check with your service provider to ensure the amounts will be paid out before the current plan year end.
• If your plan includes automatic enrollment provisions, the following may help you keep on track.
  • Identify participants who will be eligible at the start of the plan year and be sure that deferrals are scheduled to begin on time for those that do not opt out.
  • For plans that include auto-escalation of contributions, create a list of participants whose deferrals need to be increased in accordance with the plan’s schedule.
• With the significant increase in limits for 2023, it will be a great year for both participants and plan sponsors to take advantage of saving for retirement. It may make sense to review your current plan specifications to ensure that participants can take advantage of the higher limits. Some examples are raising your company match cap to a higher limit or letting employees enter the plan more quickly.
• The 2023 COLAs significantly raised the annual compensation limit from $305,000 to $330,000. If you fund employer contributions during the year, be sure to adjust your calculations for the upcoming plan year based upon the new limit.
• While some actions are needed ahead of the start of a plan year, the SECURE Act provided that a new plan can be added after the end of the year to which it applies. For example, if you maintain a 401(k) Plan and choose to add a Cash Balance Plan, the new plan can be implemented up to the due date of the company’s tax filing. This means that even if you choose to add a Cash Balance Plan for 2022, the plan document can be executed in 2023 if it’s adopted prior to filing the 2022 company tax return.

Be sure to speak with your TPA or service provider about any additional steps that need to be taken in order to be ready for a new plan year.

Save or Toss? Proper Plan Record Storage a Must!

As the year comes to a close, you may wonder what plan records must be kept and what items can be tossed. Historical plan records may need to be produced for many reasons: an IRS audit, a DOL investigation or simply questions from participants about their benefits or accounts to name a few.

The Internal Revenue Service (IRS) takes the position that plan records should be kept until all benefits have been paid from the plan and the audit period for the final plan year has passed. This additional audit period is important to note. It may seem that with the final payout the plan is gone, but the reality is that the plan can be selected for audit for 6 years after the plan assets are paid out and your final Form 5500 is filed. The items that are typically needed in the event of an audit are:

• Plan documents and amendments (all since the start of the plan, not just the most recent)
• Trust Records: investment statements, balance sheets and income statements
• Participant records: Census data, account balances, contributions, earnings, loan records, compensation data, participant statements and notices

Under the Employee Retirement Income Security Act (ERISA), the following documentation should be retained at least six years after the Form 5500 filing date, including, but not limited to:

• Copies of the Form 5500 (including all required schedules and attachments)
• Nondiscrimination and coverage test results
• Required employee communications
• Financial reports and supporting documentation
• Evidence of the plan’s fidelity bond
• Corporate income

In addition, ERISA states that an employer must maintain benefit records, in accordance with such regulations as required by the Department of Labor (DOL), with respect to each of its employees that are sufficient to determine the benefits that are due or may become due to such employees. These items don’t necessarily have a set time frame, so you may want to consider keeping these items indefinitely. Documentation needed may include the following:

• Plan documents, amendments, SPD, etc.
• Census data and supporting information to determine eligibility, vesting and calculated benefits
• Participant account records, contribution election forms and beneficiary forms Documentation related to loans and withdrawals

It is the plan sponsor’s responsibility to ensure documentation is kept regardless of which service providers are used during the life of the plan. Establishing a written process regarding how long to keep documentation is important as well as giving careful thought to whether the records will be electronic or paper. This ensures that, as staff members change over time, your processes will remain consistent and all necessary information will be handled appropriately. When storing plan records electronically, consider a naming convention that will make documents accessible to the proper personnel and easy to locate.

Security of the information should be considered as well to protect the confidentiality of personally identifiable information or PII. Many types of plan records include items considered PII, like social security numbers, dates of birth or account numbers. This information should be kept in a secure manner to avoid the possibility of identity theft and fraud. Take the necessary steps to ensure that the plan’s service providers also have adequate policies in place to protect participant’s PII as well.

Deadline for CARES Act and SECURE Act Amendments Extended

The original due date of the CARES Act and SECURE Act amendments for qualified plans, other than governmental plans, was the last day of the first plan year beginning on or after January 1, 2022, which means December 31, 2022, for calendar year plans. This has been extended to December 31, 2025, regardless of plan year end. However, the deadline for governmental plans (414(d) plans, 403(b) plans maintained by public schools or 457(b) plans) is 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2023.

This does not restore the availability of Coronavirus Related Distributions or larger loan limits but refers to the amendments that document the provisions used to operate the plan. Check with your TPA or document provider to confirm if the amendments for your plan were already filed or if the extended deadline will apply to you.

Upcoming Compliance Deadlines for Calendar-Year Plans

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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© 2023 Benefit Insights, LLC. All Rights Reserved.

Summer 2021 – Benefit Insights Newsletter

Missing Participants: Ready or Not Here I Come!, Safe Harbor: A Cure For Your Testing Headaches, Looking to Maximize Savings? Cash Balance Could Be the Answer!, Upcoming Compliance Deadlines for Calendar-Year Plans

Missing Participants: Ready or Not, Here I Come!

Most plan sponsors can relate to the trials and tribulations of having missing participants in their retirement plan. At times, it may feel like you are on the losing end of an intense game of hide-and-seek. Your opponents, the missing participants, may not have intended to pick the best hiding spots, but in many cases, they have surely succeeded. Now you are tasked with tracking them down and upping your game to avoid this scenario in the future.

So, what are missing participants, exactly? Missing participants are former employees who left an account balance in a retirement plan and did not keep their contact information up to date. In addition, they may no longer actively manage their accounts. There are a few factors that have led to an increase in the number of missing participants in retirement plans over the years. Unlike the generations of our parents and/or grandparents, employees do not typically work their entire career with one firm anymore. Another contributing factor is the mobilization of the workforce. The ability to work remotely has mobilized employees even more these days. Some have chosen to relocate across the country while others find themselves living in a new locale every few months. Many of us can relate to this, especially over the past 18 months. With these two factors alone, it can be difficult to keep track of plan participants once they leave your firm.

It is important to develop procedures to ensure contact information is up to date and to illustrate the proactive measures employed in this effort. Whatever steps you implement, you should relay to employees and participants why keeping these details current is important and how it can affect them. Ask any employee if they would be okay with losing track of their retirement account – the answer would probably be a resounding no. A few ideas based on the Department of Labor’s (DOL’s) Best Practices are included below.

• Annual Review: Have plan participants verify their contact information on file at least annually. This includes addresses, phone numbers, and email addresses. You can also include a review of beneficiaries at this time. Keep in mind this does not only include current employees but terminated or retired participants as well. Also consider making the review part of your company’s exit interview.
• Mailings: When completing a mailing, provide a form where recipients can update their contact information.
• Returned Mail: Initiate searches for participants as soon as mail has been returned as undeliverable. This includes mail marked as “return to sender,” “wrong address,” “addressee unknown,” or otherwise.
• System Log In: If participants regularly log into a system, set a reminder or pop-up directing users to verify their contact information.

Unfortunately, even with the best of plans in place, plan sponsors may still have participants who go missing. So, not only do you need to incorporate procedures for ensuring contact information is up-to-date, but you also need to document procedures for locating participants once they go missing. The DOL provides a list of search methods that should be used to locate missing participants. Some of these methods are included below.

• Send a notice using certified mail through USPS or a private delivery service with similar tracking features.
• Check the records of the employer or any related plans of the employer.
• Send an inquiry to the designated beneficiary or emergency contact of the missing participant.
• Use free electronic search tools or public record databases.

At some point, most plan sponsors will find themselves with participants who have gone missing. It’s important to remember plan sponsors have a fiduciary responsibility to follow the terms of the plan document and ensure participants are paid out timely. Having a well-documented, organized process which addresses missing participants, along with proof the process is followed, will prove worthwhile.

More information regarding the Department of Labor’s Best Practices can be located on their website.

https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/retirement/missing-participants-guidance/best-practices-for-pension-plans ■

Safe Harbor: A Cure For Your Testing Headaches

A crucial requirement for 401(k) plans is that the plan must be designed so it does not unfairly favor highly compensated employees (HCEs) or key employees (such as owners) over non-highly compensated employees (NHCEs). To satisfy this requirement, the IRS requires that plans pass certain nondiscrimination tests each plan year. These tests analyze the rate at which HCE and key employees benefit from the plan in comparison to NHCEs. Failed tests can result in costly corrections, such as refunds to HCEs and key employees or additional company contributions. Luckily for plan sponsors, there is a plan design option – a safe harbor feature, that allows companies to avoid most of these nondiscrimination tests.

To be considered safe harbor and take advantage of the benefits afforded to safe harbor plans, there are several requirements that must be satisfied. Below we will take a look at the key characteristics of a safe harbor plan.

The plan must include one of the following types of contributions. The chosen formula is written in the plan document, and with the exception of HCEs, must be provided to all eligible employees each plan year. Please note that additional options, not covered here, are provided for plans that include certain automatic enrollment features.

• Safe Harbor Match: With this option, the company makes a matching contribution only to those employees who choose to make salary deferral contributions. There are two types of safe harbor matching contributions:
  • Basic Safe Harbor Match: The company matches 100% of the first 3% of each employee’s contribution, plus 50% of the next 2%.
  • Enhanced Safe Harbor Match: Must be at least as favorable as the basic match. A common formula is a 100% match on the first 4% of deferred compensation.
• Safe Harbor Nonelective: With this option, the company contributes at least 3% of pay for all eligible employees, regardless of whether the employee chooses to contribute to the plan.

Unlike company profit sharing or discretionary match contributions, safe harbor contributions must be 100% vested immediately. In addition, the contribution must be provided to all eligible employees, even those who did not work a minimum number of hours during the plan year or who are not employed on the last day of the plan year.

In most cases, an annual safe harbor notice must be distributed to plan participants within a reasonable period before the start of each plan year. This is generally considered to be at least 30 days (and no more than 90 days) before the beginning of each plan year. For new participants, the notice should be provided no more than 90 days before the employee becomes eligible and no later than the employee’s date of eligibility. The safe harbor notice informs eligible employees of certain plan features, including the type of safe harbor contribution provided under the plan.

If all safe harbor requirements have been satisfied for a plan year, the following nondiscrimination tests can be avoided.

• Actual Deferral Percentage (ADP): The ADP test compares the elective deferrals (both pre-tax and Roth deferrals, but not catch-up contributions) of the HCEs and NHCEs. A failed ADP must be corrected by refunding HCE contributions and/or making additional company contributions to NHCEs.
• Actual Contribution Percentage (ACP): The ACP test compares the matching and after-tax contributions of the HCEs and NHCEs. A failed ACP must be corrected by refunding HCE contributions and/or making additional company contributions to NHCEs.
• Top Heavy Test: The top heavy test compares the total account balances of key employees and non-key employees. If the total key employee balance exceeds 60% of total plan assets, an additional company contribution of at least 3% of pay may be required for all non-key employees. It is important to note that a plan will lose its top heavy exemption if company contributions, in addition to the safe harbor contribution, are made for a plan year (e.g., profit sharing or discretionary matching contributions).

So, how do you know if a safe harbor plan is a good fit for your company? As discussed above, the primary benefit of a safe harbor plan is automatic passage of certain annual nondiscrimination tests. If your plan typically fails these tests, resulting in refunds or reduced contributions to HCEs and key employees, your company may benefit from a safe harbor feature. Predictable annual contributions also provide a great incentive for employees to save for their retirement. However, if you do not currently offer an annual match or profit sharing contribution to your employees, a safe harbor formula may significantly impact your company’s budget. Except for a few limited exceptions, safe harbor contributions cannot be removed during the plan year, so it’s important that a company is able to fund these required contributions. As with all things qualified plan related, the key is working with an experienced service provider who can design a plan to suit your company’s needs! ■

Upcoming Compliance Deadlines for Calendar-Year Plans

Looking to Maximize Savings? Cash Balance Could Be the Answer!

So, you established a 401(k) plan for your company and have been contributing consistently for years. The plan has likely afforded your company significant tax savings and has allowed you to attract and retain quality employees. While a 401(k) plan is a great savings vehicle, did you know there is a type of qualified retirement plan that will allow you to contribute significantly more than the maximum allowed in a stand-alone 401(k) profit sharing plan?

We are all familiar with defined contribution plans (e.g., 401(k) and profit sharing plans). You are probably also familiar with traditional defined benefit plans, or pension plans, historically sponsored by large companies to provide monthly retirement benefits to their retirees. For business owners that are looking for large tax deductions, accelerated retirement savings, and additional flexibility, another type of defined benefit plan, a cash balance plan, may be the perfect solution.

How does a cash balance plan work?

As mentioned above, a cash balance plan is a type of defined benefit plan. In general, defined benefit plans provide a specific benefit at retirement to participants. While traditional defined benefit plans define an employee’s benefit as a series of monthly payments for life to begin at retirement, cash balance plans state the benefit as a hypothetical account balance. Each year, this hypothetical account is credited with following:

• A pay credit, such as a percentage of annual pay or a fixed dollar amount that is specified in the plan document.
• A guaranteed interest credit (either a fixed rate or a variable rate that is linked to an index such as the one-year treasury bill rate).

The accounts in a cash balance plan are referred to as hypothetical because, unlike defined contribution plans, the plan assets are held in a pooled account managed by the employer, or an investment manager appointed by the employer. The hypothetical account balances are an attractive feature of cash balance plans because these accounts tend to be easier for participants to understand, as the annual benefit statements reflect the value of their account, similar to 401(k) profit sharing plan account statements.

Unlike a 401(k) profit sharing plan, a defined benefit plan guarantees the benefit each participant will ultimately receive. The plan’s actuary calculates the benefits earned each year based on the terms of the plan document, which in turn determines the required employer contribution due to the plan.

When a participant becomes entitled to receive their benefit from a cash balance plan, the benefits are defined in terms of an account balance and can be paid as an annuity based on that account balance. In many cash balance plans, the participant also has the option (with consent from his or her spouse) to take a lump sum benefit that can be rolled over into an IRA or to another employer’s plan.

What if I already sponsor a 401(k) profit sharing plan?

In most cases, cash balance plans work best when paired with a 401(k) profit sharing plan. To optimize the combined plan design, it’s possible that certain provisions in your current plan may need to be amended. This is especially true if the cash balance plan covers non-owner employees. Due to the large benefits that are typically earned by the owner and/or other key employees, the combined plans must pass certain nondiscrimination tests. These tests are more easily passed when employer contributions are provided to the staff under the 401(k) profit sharing plan as safe harbor nonelective and profit sharing contributions. While company contributions in a stand-alone 401(k) profit sharing plan may be discretionary, when combined with a cash balance plan, these contributions become required as well, since without them, the combined plans will likely not pass all required nondiscrimination tests.

Are cash balance plans a good fit for everyone?

Unfortunately, the answer to this question is no. The first question to ask yourself is if you wish to make contributions in excess of the defined contribution limit ($58,000 or $64,500 for participants over age 50 for 2021). If the answer to this is yes, then the demographics of the employer must be considered. Since the maximum contributions are age dependent, cash balance plans typically work best when targeted employees are older than the average age of other staff members. And maybe most importantly – do you anticipate consistent profits that will allow you to fund all required contributions for the foreseeable future?

Cash balance plans sound too good to be true. What’s the catch?

If you’ve decided setting up a cash balance plan sounds like the perfect way to meet your retirement goals and attract and retain quality employees, you may be right! However, as good as this sounds, there are many important factors to consider before jumping in. Here are a few key considerations:

• Cash balance plans can be designed with some flexibility, such as setting up pay credits using a percentage of annual pay, but the annual contribution calculated by the actuary is required. When paired with a 401(k) profit sharing plan to pass nondiscrimination testing, the employer contributions to that plan become required as well.
• Because the annual interest credit is guaranteed, the employer bears the investment risk for the plan. If the rate of return on investments is less than expected, the required contribution may increase to make up for the shortfall.
• Qualified retirement plans must be established with the intent of being permanent. Many service providers recommend maintaining the plan for at least three to five years to satisfy this requirement.
• Cash balance plans are often more complex, and as a result, more costly to establish and maintain than defined contribution plans.

For employers that desire increased retirement savings and tax deductions, cash balance plans may be the perfect addition to their employee benefit program. However, as previously mentioned, they are not a good fit for everyone. It’s important to work with an experienced service provider to determine if a cash balance plan is right for you. ■

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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© 2023 Benefit Insights, LLC. All Rights Reserved.