Spring 2021 – Benefit Insights Newsletter

Retirement Planning is a Team Sport, Congratulations! It’s a Retirement Plan!, Department of Labor Issues Cybersecurity Guidance, Upcoming Compliance Deadlines for Calendar-Year Plans

Retirement Planning is a Team Sport

Some would say that retirement plan administration is a team sport! Putting together technical and compliance competence with ongoing investment and fiduciary expertise is key to keeping your plan healthy and participants happy. So, what roles and responsibilities should you look to fill for your firm to have a successful and compliant plan?

The first and most important role is you, the Plan Sponsor. Plan Sponsors elect to establish the plan and offer it to their employees. Though many employers act as the named Plan Administrator of the plan, to ensure a successful outcome, they assemble a team of professionals to fulfill the key roles that keep a plan on track. The team’s goal, following the direction of the Plan Sponsor, is to deliver a program that provides retirement security for the plan participants.

Key Team Players

Beyond the sponsorship and ultimate oversight of the plan, the following are key roles which are vital to a well-run plan.

Third Party Administrator (TPA) – Not to be confused with the named Plan Administrator, the TPA plays a critical role in the maintenance of the plan and the coordination of the team. The TPA is typically the “go-to” resource for HR personnel for questions regarding the day-to-day operation of the plan and the coordinator among other service providers in the plan’s ecosystem. More than reliable customer service, TPAs are trained professionals that provide technical expertise to ensure the plan complies with current regulations governing retirement plans. ERISA, DOL regulations, and case law are complex and frequently change. Compliance is daunting, and penalties and back taxes can be significant. So, it is important that a dedicated TPA is engaged. Common duties include:

• Providing guidance on plan design.
• Preparing and maintaining legal plan documents.
• Performing compliance testing.
• Preparing annual valuations and benefit statements.
• Completing and filing all forms with the government.
• Performing non-discrimination testing.

Financial Advisor – An equally important counterpart to the TPA role is the plan’s financial advisor. In tandem with the TPA, advisors help Plan Sponsors decide the goals for the retirement plan. These goals are then translated, with the TPA, into a plan design and ultimately a written plan document that guides the operations of the plan from year to year. The financial advisor also helps the Plan Sponsor select and monitor the investments in the retirement plan. In a 401(k) plan, where participants may direct their account balances, the advisor will assist the Plan Sponsor in selecting a recordkeeping platform and a line-up of investment options from which the plan’s participants will choose. The advisor may also:

• Oversee investment meetings.
• Act as a guide and educator to the plan’s participants through the initial enrollment process and subsequent enrollment meetings.
• Act as a co-fiduciary to the plan.

Recordkeeper/Custodian – The recordkeeping platform in a participant directed 401(k) plan keeps track of the participant’s investment selections and account balances. The plan’s custodian holds the plan’s assets and handles buying and selling of investments for contributions, investment exchanges, and distributions. These services can be provided as a bundle or independently offered.

Other important members of the team:

• Payroll Providers – Payroll providers play a key role in 401(k) plans by recording participant salary deferral percentages and calculating the deductions and appropriate taxes on the contributions to the plan.
• Plan Auditor – For plans over 100 participants, a financial statement audit is performed by a certified public accountant.
• Retirement Plan Fiduciary – Though not a requirement, many advisors have migrated to taking on a fiduciary role in retirement plans by acting in a 3(21) or 3(38) capacity.
• ERISA Attorney – Many Plan Sponsors and TPAs may need the assistance of an ERISA attorney in certain areas of retirement plan administration such as QDROs, voluntary compliance programs, or in the event of a legal action against the plan.
• 3(16) Fiduciary – A Plan Sponsor may hire a firm to fill the role of the Plan Administrator as stated in the plan document.

Bundled vs Unbundled Servicing Options

As with most things in life, there is no perfect answer that fits everyone in every situation. Many of the services mentioned in this article can be linked together and offered in “bundles.” On the surface, this may seem the easier route, but bundled does not give the Plan Sponsor the ability to evaluate each component on its own, so many trade-offs in services and expertise may occur.

An unbundled approach strives to offer the Plan Sponsor a more a la carte approach to the services they use to design their plan. With a good TPA and advisor relationship, the Plan Sponsor can be easily guided through the selection process by relying on the experience of these professionals. Many believe this approach ultimately ends up with the design and structure that works best for their employees. Be aware that, though cheaper fees and overall costs may be offered through bundled providers, it is possible that recordkeeping or compliance costs are being offset in other areas like investment management fees.

Ultimate Oversight

Ultimately, the Plan Administrator and Plan Sponsor must ensure that the service providers are fulfilling their duties. By relying on a close relationship with their TPA and Financial Advisor, Plan Sponsors can feel confident that they are creating a plan that will serve the retirement needs of their employees and steer clear of any issues with governing entities. ■

Congratulations! It’s a Retirement Plan!

So, you’ve sold your business and now you’re asking the question “What happens to the retirement plan?” You are not alone. In the world of mergers and acquisitions, it is not uncommon for retirement plans to be overlooked in the process. The options available depend upon the type of transaction taking place and the timing, that is — has the transaction already occurred, or is it set for a prospective date? The transaction that takes place is typically classified under one of two categories, an asset sale or a stock sale. We will explore each of these transaction types along with the options available under each below.

Asset Sale

In an asset sale, the assets of an entity are purchased by another company. Some examples of assets include equipment, licenses, goodwill, customer lists, and inventory. While the seller’s assets have been purchased, their entity will continue to exist until properly closed down. The buyer generally does not acquire the liabilities of the seller in this scenario. This includes the retirement plan. Once the sale takes place, the seller can terminate the retirement plan and distribute all assets, or they can continue operating the plan as long as the sponsoring entity continues to exist. Employees who transition to the buyer will be considered new hires and terminated under the seller’s firm. In most cases, the terminated employees will have the option to roll over their account balances to the retirement plan of the buyer. It is common for the buyer’s plan to be amended, allowing for immediate eligibility for these new employees. If it is not amended, the new employees will need to satisfy the eligibility requirements defined under the buyer’s plan.

Stock Sale

In a stock sale, the buyer purchases the stock of the seller’s company. The company is absorbed by the buyer, becoming part of the buyer’s firm. The buyer becomes the employer and assumes all liabilities tied to the seller. This includes the retirement plan unless specifically addressed in the purchase agreement. Under this scenario, there are generally three options available with regard to the seller’s retirement plan. First, the buyer could require the seller’s plan be terminated prior to the effective date of the sale set forth in the purchase agreement. In this case, with the proper board resolution, the seller would be responsible for completing the termination of the plan. It is important that the termination process set forth by the IRS be followed in order to avoid violating successor plan rules.

Another option is to maintain both plans. As long as both plans satisfy coverage rules immediately before the transaction and there are no significant changes in the terms or coverage of the plan, the sponsor may rely on the transition rule where coverage requirements are considered satisfied. This means the plans can be separately maintained through the end of the transition period. This period runs through the end of the year following the year in which the transaction took place. After the transition period has expired, if the sponsor continues to maintain both plans, they must be tested together.

The third option available is to merge the plans. This is typically the option most plan sponsors choose. In this case, the seller’s plan is usually merged into the plan of the buyer. This is accomplished through a resolution and amendment to the surviving plan. It is important the seller’s plan be reviewed for any protected benefits. These benefits, such as vesting and certain distributable events, cannot be eliminated. It is also important to note that with the merging of the two plans, the surviving plan inherits any compliance issues or failures that exist. The buyer should complete their due diligence with regard to review of the seller’s plan before going this route. Any deficiencies will need to be addressed and corrected accordingly. This review and the subsequent documentation will prove beneficial should the seller’s plan be selected for audit, as the IRS can audit a plan up to three years from the date the final Form 5500 was filed.

While every transaction is unique, some advance planning with regard to retirement plans can save you from quite a few headaches down the road. Take the time to consult with your advisors, including your CPA, attorney, etc., when considering buying or selling a business. As a buyer, if you don’t, you could suddenly find you are the proud sponsor of a retirement plan! ■

Upcoming Compliance Deadlines for Calendar-Year Plans

Department of Labor Issues Cybersecurity Guidance

On April 14, 2021, the DOL’s Employee Benefits Security Administration (EBSA) issued long-awaited guidance designed to protect participants from both internal and external cybersecurity threats. The guidance is far-reaching and is directed at plan sponsors, plan fiduciaries, recordkeepers, and plan participants. This is the first time the DOL has issued guidance on cybersecurity for employee benefit plans and is a welcome step forward as it provides best practices and tips to help mitigate cybersecurity risks.

The guidance is set forth in three parts:

Tips for Hiring a Service Provider: Provides practical steps plan sponsors and fiduciaries can take when selecting retirement plan service providers.

• Ask about the service provider’s information security standards, practices, and policies, as well as audit results, and compare them to the industry standards adopted by other financial institutions.
• Ask the service provider how it validates its practices, and what levels of security standards it has met and implemented. Look for contract provisions that give you the right to review audit results demonstrating compliance with the standard.
• Evaluate the service provider’s track record in the industry, including public information regarding information security incidents, other litigation, and legal proceedings related to vendors’ services.
• Ask whether the service provider has experienced past security breaches, what happened, and how the service provider responded.
• Find out if the service provider has any insurance policies that would cover losses caused by cybersecurity and identity theft breaches (including breaches caused by internal threats, such as misconduct by the service provider’s own employees or contractors, and breaches caused by external threats, such as a third-party hijacking a plan participant’s account).
• When you contract with a service provider, make sure that the contract requires ongoing compliance with cybersecurity and information security standards – and beware of contract provisions that limit the service provider’s responsibility for IT security breaches. Also, try to include terms in the contract that would enhance cybersecurity protection for the Plan and its participants.

Cybersecurity Program Best Practices: Includes best practices designed to assist plan fiduciaries and recordkeepers in managing cybersecurity risks.

• Have a formal, well documented cybersecurity program.
• Conduct prudent annual risk assessments.
• Have a reliable annual third-party audit of security controls.
• Have clearly defined and assigned information security roles and responsibilities.
• Have strong access control procedures.
• Ensure that assets or data stored in the cloud or managed by a third-party service provider are subject to appropriate security reviews and independent security assessments.
• Conduct cybersecurity awareness training at least annually for all personnel and update to reflect risks identified by most recent risk assessment.
• Implement a Secure System Development Life Cycle Program (SDLC).
• Have a business resiliency program that addresses business continuity, disaster recovery, and incident response.
• Encrypt sensitive data stored and in transit.
• Have strong technical controls implementing best practices.
• Take appropriate action to respond to cybersecurity incidents and breaches.

Online Security Tips: Directed at plan participants and beneficiaries who check their retirement accounts online. It provides basic rules to reduce the risk of fraud and loss.

• Register, set up, and routinely monitor your online account.
• Use strong and unique passwords.
• Use multi-factor authentication.
• Keep personal contact information current.
• Close or delete unused accounts.
• Be wary of free Wi-Fi.
• Beware of phishing attacks.
• Use anti-virus software and keep apps and software current.
• Know how to report identity theft and cybersecurity incidents.

Additional information on the tips and best practices summarized above can be found in three documents provided by the DOL.

• Tips for Hiring Service Providers with Strong Cybersecurity Practices
• Cybersecurity Program Best Practices
• Online Security Tips

If you have any questions about the guidance and how it may impact your plan, please contact your representative. ■

Did You Know?

As of 2018, the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) estimates that there are 34 million defined benefit plan participants in private pension plans and 106 million defined contribution plan participants covering estimated assets of $9.3 trillion.

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 2021 – Benefit Insights Newsletter

The MEP/PEP Debate: Are We Better Together? Terminated Employees? Important Relief is Here. Is There Pandemic Relief For Late Deposits?Upcoming Compliance Deadlines for Calendar-Year Plans

The MEP/PEP Debate: Are We Better Together?

When we talk about retirement plans, many employers think of single employer retirement plans. A single employer retirement plan is simply a plan sponsored by one employer (or a related group of employers) for the benefit of its employees. In contrast, a multiple employer plan (MEP) is a retirement plan that is sponsored by two or more unrelated employers. Historically, MEPs have allowed employers, who may not have the resources to handle a retirement plan independently, to pool together to share the administrative burden of offering a retirement plan to their employees. Although they may sound similar, MEPs are not the same as multi-employer plans. A multi-employer plan is a collectively bargained plan maintained by more than one employer, usually within the same or related industries, and a labor union.

Prior to the enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act on December 20, 2019, all employers participating in the MEP had to share a nexus or common interest other than the retirement plan. The DOL had previously taken the position that if adopting employers did not share a common interest, the MEP was not considered to be a single plan for ERISA and Form 5500 purposes. The SECURE Act essentially reversed the DOL position by creating a new type of MEP, the Pooled Employer Plan (PEP). PEPs allow two or more unrelated employers who do not meet the regulatory commonality requirements to come together under one retirement plan.

Another welcome change provided under the SECURE Act is the elimination of the IRS’ “one bad apple” rule. In the past, the IRS took the position that if one employer ran afoul of the IRS qualification requirements, the entire MEP could be disqualified. Eliminating the one bad apple rule shields participating employers from liability from failures of the actions of a non-compliant MEP member.

While there are similarities between MEPs and PEPs, there are also many fundamental differences. A few of the key features are contrasted below.

Similarities

• Participating employers are treated as a single employer for certain purposes, such as crediting of eligibility and vesting service and plan qualification purposes.
• Participating employers are treated as separate employers for coverage, non-discrimination, and top-heavy testing purposes, and employer deduction limitations.
• In most cases, only a single Form 5500 needs to be filed. The 5500 must include an attachment that lists all participating employers along with an approximate percentage of total contributions for the year and the account balances attributable to each.

Differences

• MEPs are adopted by two or more unrelated employers that share a nexus or interest other than the retirement plan, while a PEP is adopted by unrelated employers that do not share a common interest.
• A MEP is made up of the MEP sponsor, or lead employer, and one or more participating employers, while PEPs must be operated by pooled plan providers (PPP), likely to be a financial services company, third-party administrator, insurance company, recordkeeper, or similar entity.
• The MEP sponsor generally serves as the primary administrative fiduciary for the plan, while with a PEP, the PPP is responsible for performing most administrative and fiduciary functions for the plan. In a PEP, employers retain only limited responsibility, such as selecting and monitoring the pooled plan provider, any other named fiduciaries, and investment managers. The SECURE Act requires pooled plan providers to register with both the DOL and the Treasury Department.

Proponents of MEPs are encouraged by recent changes and are hopeful that the availability of PEPs will greatly increase the number of employees covered by employer sponsored retirement plans. However, it is unclear whether they will have a significant impact on the MEP landscape. While MEPs can be attractive to employers that want to provide a retirement plan to their employees but lack the financial and administrative capacity to do so, there are potential disadvantages of which employers should be mindful. Examples of some disadvantages include the potential for increased costs due to the involvement of multiple service providers and conflicting participating employer priorities. It is important for employers to be well informed of the potential benefits and pitfalls related to participating in a MEP. It is also important to work with an experienced service provider who can provide guidance on this complex issue. ■

Upcoming Compliance Deadlines for Calendar-Year Plans

Terminated Employees? Important Relief is Here.

On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law. The Act combines the $1.4 trillion omnibus federal spending package for the 2021 fiscal year and a $900 billion COVID-19 stimulus package that enhances and expands certain provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. In addition to direct stimulus payments, extending unemployment benefits to many workers, and another round of Paycheck Protection Program (PPP) loans, the COVID stimulus package includes important retirement plan relief.

Partial Plan Termination

Perhaps the most significant element of the stimulus package for plan sponsors impacted by the COVID-19 pandemic is the temporary rule preventing partial plan terminations. In general, a plan may experience a partial plan termination when turnover among plan participants exceeds 20% in a particular year, resulting in full vesting of all accounts of participants affected by the partial plan termination. Whether a partial termination has occurred is not always an easy call. The IRS makes it clear that the determination is based on the facts and circumstances of the particular scenario.

The IRS previously provided guidance to clarify that generally, employees who had been furloughed or laid off due to COVID-19 but were rehired by the end of 2020 would likely not be treated as having an employer-initiated severance for the purposes of determining a partial plan termination. However, the Consolidated Appropriations Act includes the following temporary rule regarding partial plan terminations:

“A plan shall not be treated as having a partial termination during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021 is at least 80% of the number of active participants covered by the plan on March 13, 2020.”

It is important to note that the 80% count does not have to be comprised of the same participants that were initially terminated. However, the plan’s eligibility requirements should be taken into consideration.

The new relief is based on 80% of the “active participants.” If the employees include new hires (e.g., the laid-off employees found other jobs), whether they count towards the 80% depends on the eligibility conditions of the plan. If the new hires do not satisfy the plan’s eligibility conditions by March 31, 2021, they cannot be included in the active participant count.

Active participants were not defined in the bill. Presumably, active participants include employees eligible to defer, even if they choose not to do so.

Qualified Disaster Distributions Extended

The Act includes a temporary extension for individuals to take a retirement plan distribution or loan if they reside in a presidentially declared disaster area. The extension is effective for 60 days after the date of enactment and applies to individuals residing in presidentially declared disaster areas (other than COVID-19) declared after Dec. 31, 2019. Participants in 401(k), 403(b), money purchase, and government 457(b) plans may take an aggregate distribution up to $100,000 without incurring the 10-percent additional tax on early distributions. Income tax on these distributions may be spread ratably over a three-year period, and participants may repay the distribution into a plan that accepts rollovers within three years.

Note that qualified disaster areas are areas where a qualified disaster was declared, but do not include areas that are disaster areas solely due to the COVID-19 pandemic.

Qualified Disaster Loans

The Act also enables qualified individuals to receive plan loans up to $100,000 or 100% of the participant’s vested account balance. Additionally, the repayment period is extended for up to one year (or up to 180 days after enactment of the Act, if longer) if repayment of the loan normally would be due during the period beginning on the first day of the disaster period and ending 180 days from the last day of the incident period.

Paycheck Protection Program (PPP) Round 2

The Act provides increased PPP funding and eligibility to those small businesses that have been hit hard by the COVID-19 pandemic. The Act extends the PPP through March 31, 2021 and allocates additional funds for forgivable loans. Among other important changes, the law allows eligible borrowers a second PPP forgivable loan for small businesses and non-profits with 300 or fewer employees that can demonstrate a 25% loss of gross receipts in any quarter during 2020 when compared to the same quarter in 2019. ■

Is there Pandemic Relief for Late Deposits?

Proper handling of employee 401(k) deferral contributions and loan repayments is one of the most important responsibilities a plan sponsor undertakes. Failure to timely deposit employee deferrals and participant loan repayments is considered by many service providers to be one of the most commonly made retirement plan errors. Although it may be a common error, the IRS and DOL consider timely deposits a top priority. If loan repayments and/or salary deferrals are deposited outside of the timeframe described below, the company is considered to have committed a “prohibited transaction” by being in possession of plan assets. The DOL treats this as a loan from the plan to the employer which is prohibited by law and requires a documented correction process.

What is the deadline to deposit employee deferrals and loan repayments?

Once withheld from the participant’s pay, deferrals and loan payments become plan assets as soon they can be “reasonably segregated” from the employer’s general accounts. As a result, employee deferrals must be deposited by the earlier of the date that the contributions can be reasonably segregated from the company’s general assets, or the 15th business day of the month following the month in which the pay date occurs.

For plans with fewer than 100 participants on the first day of the year, the DOL created a safe harbor standard that states that any deposits made within seven business days of a pay date are considered timely even if the deposits could have been made earlier. Unlike small plans, large plans cannot rely on the safe harbor deadline. For large plans, the DOL states that elective deferrals must be deposited “as soon as administratively feasible.” It is important to note that the DOL will often look at the actual deposit history when determining the deposit deadline and, if the company made deposits more quickly, will set that as the deadline for all other deposits. For example, if a company ever made a deposit within one or two days following a pay date, the DOL may take the position that all of the deposits should have been made within one or two days.

Was relief provided due to the COVID-19 pandemic?

On April 29, 2020, the DOL issued EBSA Disaster Relief Notice 2020-01 in response to the COVID-19 pandemic. The Notice provided guidance intended to relax the rules related to the required timeframe to deposit employee salary deferral contributions and loan repayments.

The Notice states that “the Department recognizes that some employers and service providers may not be able to forward participant payments and withholdings to employee pension benefit plans within prescribed timeframes during the period beginning on March 1, 2020 and ending on the 60th day following the announced end of the National Emergency. In such instances, the Department will not – solely on the basis of a failure attributable to the COVID-19 outbreak – take enforcement action with respect to a temporary delay in forwarding such payments or contributions to the plan. Employers and service providers must act reasonably, prudently, and in the interest of employees to comply as soon as administratively practicable under the circumstances.”

If an employer was unable to deposit elective deferral contributions timely “solely on the basis of a failure attributable to the COVID-19 outbreak,” it is important that documentation related to the late deposits (e.g., dates and amounts of each late deposit, names of affected participants, record of the specific situation(s) that resulted in the late deposits, etc.) is retained with the plan records in the event of an IRS or DOL plan audit.

What happens if deferrals were not deposited timely?

When employee deferrals are not deposited timely, there are two available correction methods. The error can be corrected under the IRS’ self-correction program, which allows plan sponsors to correct certain plan failures without contacting the IRS or paying a user fee, or by completing a filing through the DOL’s Voluntary Fiduciary Correction Program (VFCP). It is important to note that the DOL does not recognize self-correction for late deposits. However, in certain circumstances, the DOL may accept self-correction if the following steps have been completed.

• Determine which deposits were late and calculate lost investment earnings.
• Deposit any missed elective deferrals, along with lost earnings, into the trust.
• File Form 5330 with the IRS to pay an excise tax.
• Report the late deposits on the Form 5500.
• Review procedures and correct deficiencies that led to the late deposits.

What can be done to avoid late deposits in the future?

Plan sponsors can implement the following internal procedures to ensure that deferrals are deposited consistently.

• Establish a procedure requiring that elective deferrals be deposited with or after each payroll, subject to the terms of the plan document. If deferral deposits are late because of vacations or other disruptions, keep a record of why those deposits were late.
• Coordinate with your payroll provider to determine the earliest date you can reasonably make deferral deposits.
• Implement practices and procedures that you explain to new personnel to ensure that they know when deposits must be made.

As with many retirement plan compliance matters, the rules related to depositing employee deferrals and the related corrections are complex topics. If you have questions regarding the general rules or plan corrections outlined above or would like to discuss how these rules impact your plan, please contact your plan representative. ■

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.