Qualified retirement plans are regulated by Congress, the Department of Labor (“DOL”), and the Internal Revenue Service (“IRS”). These federal agencies set standards to improve and monitor company-sponsored plans, which are an essential part of the financial security of U.S. employees. With the many recent law changes and options available to plan sponsors, retirement plan administration has become complicated. Paragon staff members are your resource for questions concerning the intricacies of your retirement plan. We have put together a few tips to aid in every day plan administration and operation. Do not hesitate to call us at anytime throughout the year if you have any questions.
Always follow the terms of the plan document
The plan document describes your plan’s administrative rules and contains detailed definitions and procedures that govern your plan’s operation. A few of the basics that you may deal with every day include eligibility requirements, participant entry dates, employer contribution formulas and allocation requirements, and vesting rules. The Summary Plan Description (“SPD”) is a user friendly guide explaining the plan’s features that serves as a useful reference for plan sponsors and must be distributed to plan participants so they have a clear understanding of the plan’s terms. If you do find that your plan operation differs from the plan document, contact your Retirement Plan Consultant to determine an action plan on how to correct the error.
As government related changes are implemented, Paragon is here to assist you by preparing the required amendments and updates to the SPD. If you haven’t had your Plan Document restated for the Pension Protection Act, please contact your Retirement Plan Consultant at your earliest convenience to arrange for timely completion of this IRS-mandated restatement.
Offer Plan to employees at the correct time
Before providing employees the opportunity to join the plan, please check the plan document’s eligibility and entry date provisions to verify that new participants are added timely. Also keep in mind how often an employee can commence or change salary deferral elections, as this may be different than the actual initial entry dates.
Give employees the required information when eligible
If you have a participant directed 401(k) Plan, the newly eligible employee will need an Enrollment Kit with an enrollment application, a beneficiary form, a current fee disclosure, a summary of the plan features, a list of investment options, and educational information about the investments. You can obtain this enrollment information from your plan’s investment provider (recordkeeper) and/or Financial Advisor. Please also be sure to provide the newly employee employee with an SPD (Summary Plan Description). Additionally employee notices, such as a Safe Harbor Notice or an Auto Enrollment Notice, may be required depending on your plan design. Please make sure the employee understands when the enrollment form is due so that it can be submitted to both your payroll vendor and the record keeper on a timely basis. Payroll will need to know the deduction amount/percentage and the start date so that they can begin the proper deductions from the employee’s paycheck. The recordkeeper will need a copy of the enrollment form to establish an account for the employee, unless online enrollment is available or the recordkeeper requires you to enter the enrollment information onto their recordkeeping system. We strongly recommend, if you are using hardcopy forms, that you obtain an enrollment application from every newly eligible participant. Even if an employee declines the opportunity to participate, you will need to retain the original with your permanent plan records.
Provide employees with current forms
When a person becomes eligible for the Plan, always be sure you provide a current enrollment kit, in addition to any other information mentioned previously. If you are not sure whether the enrollment kit is current, simply look inside the kit at the investment returns for a date. If the kit is outdated (older than 6 months), contact your Financial Advisor or The Paragon Alliance Group to order current enrollment kits.
If a participant is requesting a distribution or loan from the Plan and your Plan processes these types of transactions via paper, always be sure you are obtaining the most current forms from your record keeper’s website.
Using outdated forms will delay the processing of enrollments and/or distributions and loans and may even result in the recordkeeper refusing to process a form.
Obtain beneficiary information
Plan related beneficiary forms and pension plan laws, not an employee’s will, govern how account balances are distributed in the event of a participant’s death. As Plan Sponsor, you will be required to supply the current beneficiary designation(s) before the deceased participant’s account is distributed. Your plan document, federal and/or state law could apply in instances where beneficiary designations are missing, conflicting or inaccurate, causing assets to be distributed in a way other than the decedent intended. Should any discrepancies occur because the beneficiary form is outdated, it will be your responsibility to determine the correct way to distribute the deceased participant’s account balance. These discrepancies occur commonly due to life changes such as birth, death, marriage, remarriage, and divorce.
It is good practice to collect and maintain current and compliant beneficiary information with every enrollment form as well as to request updates from employees every year or two or, at a minimum, remind them annually of the importance of updating their beneficiary information. Your advisor can also assist by stressing the importance of maintaining accurate beneficiary forms to your employees. The circumstance that creates the need to determine the correct beneficiary is bound to be a difficult time for both you and the deceased participant’s family. Having current information makes a tough time a little bit easier to handle and less expensive as well.
For married participants, the law requires that the spouse be named as the sole primary beneficiary. Should a participant wish to name someone other than his or her spouse, a Spousal Consent form must be signed by the spouse, notarized and kept with your plan records. If a participant gets married and fails to update his or her beneficiary form, this spousal consent rule supersedes the beneficiary designation on file. In today’s culture of increased divorce and remarriage, it is important for participants to be aware of these rules and keep beneficiary forms updated as needed.
Deposit employee deferrals timely
The IRS/DOL has strict guidance regarding the timeframe during which employee contributions such as elective deferrals and loan repayments must be submitted by an employer to a qualified plan. In our recent experience assisting clients through IRS/DOL examinations, agents have deemed employee contributions not segregated within 3-5 business days after each payroll as late. If your payroll frequency is more often then monthly, it is no longer acceptable, according to these standards, to submit contributions on a monthly basis. Employee contributions not remitted timely require the allocation of lost earnings and excise taxes to be calculated, funded, and reported.
Note that in January, 2010, the DOL issued final Regulations regarding the timing of deposits that indicated 7 business days is acceptable for plans with less than 100 participants. A participant is defined as an employee or former employee who is covered by the plan. This includes active employees regardless of whether they are actively contributing to the plan and terminated employees with account balances.
Limit employee contributions
It is important to impose the annual deferral limit each year when deducting deferral contributions from participant pay checks. The deferral limit for 2019 is $19,000 with an additional catch up amount of $6,000 available to employees who have attained age 50 or more during the year. Additionally, depending on your plan’s deferral patterns, you may need to limit the contributions made by highly compensated employees. Helpful hint: The deferral and catch up limits are your employee’s individual deferral limit per calendar year. If newly hired employees deferred in their previous employer’s plan in the same year, they will need to take those deferrals into consideration if they are trying to maximize deferrals in your plan.
It is also important to correctly apply any Employer Matching Contribution formula funded to the plan throughout the year. This formula needs to be considered in a few different ways. First, the formula needs to factor in the annual compensation limit ($280,000 for 2019) when determining the maximum matching contribution that can be received by a participant over the course of the plan year. Also, it is important to apply the percentage cap in your formula to each pay period. Additionally, if you fund throughout the year, but your matching contribution is based on the full plan year, The Paragon Alliance Group can assist you with a “true-up” calculation.
Suspension of deferral contributions if a hardship withdrawal is taken
If your plan allows hardship withdrawals, aside from the application review process, one of the steps in the administrative process is to suspend the participant’s 401(k) deferral. Typically this is the last step and is commonly overlooked. The participant’s 401(k) deferral must be suspended for 6 months, unless a longer time frame is specified in your plan’s document. Please be sure to inform the participant of this suspension period, as well as the date he/she can elect to commence participation once the suspension period has expired. We recommend setting up an internal system to remind suspended employees after the 6 month period (or longer if applicable) has expired that they are again eligible to defer into the plan. In fact, some plans require that deferrals start after the suspension period expires.
Paragon staff members are here to assist you in the administration of your plan. We look forward to hearing from you.