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SponsorNews - April 2016

IRS Significantly Liberalizes Permitted Mid-Year Changes to Safe Harbor Plans

By Steven Weinstein and Tzvia Feiertag on February 1st, 2016Posted in 401(k) Plans, 403(b) Plans, IRS

On January 29, 2016, the IRS issued Notice 2016-16 that provides guidance on mid-year changes to a safe harbor plan under sections 401(k) and 401(m) of the Internal Revenue Code. The guidance provides that a mid-year change either to a safe harbor plan or to a plan’s safe harbor notice does not violate the safe harbor rules, provided that applicable notice and election opportunity conditions are satisfied and the mid-year change is not a prohibited mid-year change, as described in the IRS Notice.

The IRS Notice doesn’t require any additional notice or election conditions for changes to information that is not required safe harbor notice content, even if that information is provided in a plan’s safe harbor notice. For purposes of the guidance, a mid-year change is a change that is first effective during the plan year, but not effective as of the beginning of the plan year, or a change that is effective as of the beginning of the plan year, but adopted after the beginning of the plan year.

Notice Conditions

The notice conditions require that an updated safe harbor notice describing the mid-year change and its effective date be delivered to each employee otherwise required to be provided the safe harbor notice, within a reasonable period before the effective date of the change.  Whether the timing requirement is met is based on all of the relevant facts and circumstances, but is deemed to be satisfied if the updated safe harbor notice is provided at least 30 days (and not more than 90 days) before the effective date of the change.

If it is not practicable for the updated safe harbor notice to be provided before the effective date of the change (for example, in the case of a mid-year change to increase matching contributions retroactively to the beginning of the plan year), the guidance provides that the notice is treated as timely if it is provided as soon as practicable, but not more than 30 days after the date the change is adopted.

If the required information about the mid-year change and its effective date was provided with the pre-plan year annual safe harbor notice, an updated safe harbor notice is not required.

Election Opportunity Conditions

Each employee required to be provided an updated safe harbor notice must be given a reasonable opportunity (including a reasonable period after receipt of the updated notice) before the effective date of the mid-year change to change the employee’s cash or deferred election (and/or any after-tax employee contribution election). The guidance provides that a 30-day election period is deemed to be a reasonable period for this purpose.

If it is not practicable for the election opportunity to be provided before the effective date of the change (for example, in the case of a mid-year change to increase matching contributions retroactively for the entire plan year), the guidance provides that an employee is treated as having a reasonable opportunity to make or change an election if the election opportunity begins as soon as practicable after the date the updated notice is provided to the employee, but not later than 30 days after the date the change is adopted.

The following mid-year changes are not subject to the relief provided by the IRS Notice and would violate the safe harbor plan requirements under sections 401(k) and 401(m), unless the applicable regulatory conditions corresponding to each specified change are satisfied:

  1. adoption of a short plan year or any change to the plan year;
  2. adoption of a safe harbor plan status on or after the beginning of the plan year; and
  3. reduction or suspension of safe harbor contributions or changes from safe harbor plan status to non-safe harbor plan status.

Prohibited Mid-Year Changes

In the guidance, the IRS listed the following four mid-year changes that safe harbor plans are prohibited from making unless they are specifically required by applicable law to be made mid-year (e.g., a change required by a change in statute or a court decision):

  1. increases in the number of completed years of service that are required for an employee to have a nonforfeitable right to the employee’s account balance attributable to safe harbor contributions under a qualified automatic contribution arrangement (QACA);
  2. reductions in or other narrowing of the number of a group of employees who are eligible to get safe harbor contributions (excluding certain changes for employees not already eligible to receive safe harbor contributions);
  3.  in type of safe harbor plan (for example, from a traditional safe harbor plan to a QACA safe harbor plan); and
  4.  a modification to the formula used to determine matching contributions if it increases the amount of matching contributions, or one that permits discretionary matching contributions (with a limited exception where the change is adopted at least 3 months prior to the end of the plan year, the updated safe harbor notice and election opportunity are provided, and if the change is made retroactively effective for the entire plan year).

Application to 403(b) Plans

The IRS Notice also provides that the guidance on mid-year changes to safe harbor plans and notices also applies on similar terms to Section 403(b) plans that apply the Section 401(m) safe harbor rules pursuant to Section 403(b)(12).

Effective Date

The IRS Notice is effective for mid-year changes made on or after January 29, 2016.

It revokes prior IRS guidance in Announcement 2007-59, which limited permissible mid-year changes to a safe harbor plan to certain hardship withdrawal changes and designated Roth contribution changes.









Apples or oranges in your 401(k)?

The ideal 401(k) recordkeeper will let you pick either

By Rich Brindisi

August 27, 2014 • Reprints


The ideal 401(k) recordkeeping platforms let advisors and clients pick their own investment, plan design, and method of payment approach, and they provide the widest range of choices to allow for the most effective execution.

Active management vs. passive management? That question has been debated in asset management circles for years with no philosophy clearly beating out the other.

A Google search of “active management vs. passive management” turns up 46 pages of articles with the search term in the title. Each article is thoughtful and well-written, but this is clearly not a new concept. The debate about whether active or passive management is best applies to all forms of mutual fund investments, including individual accounts, 401(k)s, annuities, life insurance policies, or IRAs.

Spotting an active or passive management proponent is a matter of examining the investment vehicles they use.

Active money managers look to outperform an appropriate benchmark through decisions which could include economic sector positioning and weighting, security selection and weighting, tactical trading, and other subjective criteria.

Variations in investment approaches and styles vary greatly in the financial industry. Nevertheless, the objective of all active approaches is to generate better returns for a comparable investment. You generally pay active managers higher management fees to compensate them for their resources, time, and effort involved in getting you, the investor, returns that beat the benchmark.

When this type of management is used in the 401(k) market, a portion of these fees are usually passed through to service providers to cover the costs associated with the plan. This is also sometimes referred to as “revenue sharing,” which is more accurately a reimbursement for expenses for services the recordkeeper performs on behalf of the mutual fund company.

On the other hand, passive management, at the fund level, doesn’t forecast the stock market or the economy, and makes no effort to distinguish “attractive” from “unattractive” securities.

Passive managers often construct their portfolios to mirror the performance of well-recognized market benchmarks such as the Standard & Poor’s 500 Composite Index (500 large U.S. companies), Russell 2000 Index (2,000 small U.S. companies), or Morgan Stanley Capital International EAFE index (large international companies).

Passively managed funds typically have a lower cost than actively managed funds and, in exchange, the investor loses the ability to take any action in response to market conditions.

Additionally, the investments used in a passive management approach must be allocated by asset class (stocks vs. bonds), market (domestic vs. international), and various sub-classifications. The advisor who makes these allocation decisions will charge a fee for these services that generally represents a percentage of the assets.

In the context of a 401(k), since fees are separated out more distinctly, the revenue sharing that happens in an active management philosophy can be returned to the 401(k) plan itself, sometime referred to as return of mutual fund concessions.

Financial advisors generally fall into one of these two philosophical camps, although some take a hybrid approach of the two.

In the 401(k) market, financial advisors should expect a recordkeeper to be able to offer platforms that compliment either investment philosophy.

The decision should be based on what best suits the needs of their client, the plan sponsor.

For example, one industry recordkeeper has three separate platforms to choose from.

Two of the platforms are completely open-architecture, with an offering that supports both commission-based advisors and fee-based advisors, whether they choose to use an active or passive investment style.

In addition, there is also an option to pass mutual fund revenue sharing through to the 401(k) plan participants.

Special care should be taken by a plan sponsor or anyone charged with evaluating and comparing retirement plans, when a 401(k) recordkeeper, TPA, or other service provider strongly advocates for one type of investment philosophy over another.

It simply isn’t their debate to wade into.










Finding the Right 401(k) Match

Look at the bottom line to determine a match that can be sustained

By Joanne Sammer 9/8/2014

Matching employee contributions to a 401(k) plan can yield a number of benefits for employers—higher plan participation, employee good will and engagement, and an easier time when it comes to regulatory compliance. However, matching contributions can also be a significant cost to the employer.

For many organizations, the decision is not whether to match but how much to match if they want to keep up with their peers. Nearly three-quarters (74 percent) of employers provide some level of matching contribution, according to the Society for Human Resource Management’s (SHRM’s) 2014 Employee Benefits survey of 510 employers. However, whether they are establishing, changing or evaluating matching contributions, it is important for employers to do so carefully to avoid unnecessary disruption for employees.

How Much to Match?

At its most basic, the decision of how much to match is a financial one. When employers offer a matching contribution, particularly when they couple it with automatic enrollment into the 401(k) plan, many employees will contribute at least enough to maximize the match. That is important to keep in mind when calculating the cost of any potential matching formula.

Beyond that, “employers should look at the revenue base line on their balance sheets over a historical time frame, such as the past four to six years,” said Deborah A. Castellani, principal and senior strategist at OTB Strategic Consulting, Inc. in Austin, Texas.

By identifying both the percentage of pay that will be eligible for the match (for example, 3 percent or 6 percent of pay) and the amount of the match itself (for example, a 100 percent dollar-for-dollar match, a 25 percent match or something in between), employers can calculate how much the match might cost under various scenarios. “This number will let the employer know what impact the match will have on its bottom line and if that level of match is sustainable,” said Castellani. (For a sampling of the wide variety of matching formulas, see the SHRM Online article 401(k) Match: Thresholds Drive Participation More than Rates.)

Sustainability is a key question for employers. Even if they can manage the match now, what will happen if the organization does not meet its revenue, growth or profitability projections in the future? “You should calculate forward carefully based on your growth rate and profitability to be sure you can afford to continue the match once you implement it,” said Kathy Boyle, president of Chapin Hill Advisors Inc. in New York City.

Other Variables to Consider

Obviously, the question of how much an organization can afford is a critical one but it is not the only question employers should be asking. A number of other variables can affect both the cost of a match and its effectiveness, including the following:

Nondiscrimination testing. If keeping key employees happy is an issue, employers should consider how much a given match formula will allow highly compensated employees to contribute to the plan under nondiscrimination testing requirements. The right match could increase plan participation enough among non-highly compensated employees and allow the highly compensated to contribute more to the plan. “You want to look at how much of the match will go towards owners and key employees and the after-tax cost,” said Boyle. (For a further look at matching formulas and nondiscrimination testing, see the SHRM Online article 10 Steps If Your 401(k) Plan Fails Nondiscrimination Testing.)

Frequency. The cost of the match can also be influenced by how frequently the employer deposits those matching contributions in employees’ accounts—each pay period, monthly, quarterly, annually or some other frequency. Lately, any changes that delay the frequency of matching contributions, such as monthly to annually, have drawn more negative headlines than cutting or eliminating matching contributions, as companies like IBM and AOL learned when they moved to a year-end match (see the SHRM Online article Learn from AOL’s 401(k) Missteps).

Eligibility limits. Vesting periods and other limits on eligibility can lower the cost of a match. Beware, however, of federal regulations that set limits on the maximum length of vesting for employer contributions—100 percent vesting after three years, or graduated vesting at 20 percent a year starting at two years until the employee is fully vested after six years.

Employers can also opt for faster vesting to take advantage of the safe harbor 401(k) plan design, which allows employers to forgo nondiscrimination testing. The safe harbor requires employers to make a minimum contribution to employees’ accounts or to match employee contributions at a certain level with all of these contributions vesting immediately (see the SHRM Online article Automatic Enrollment 'Safe Harbor' 401(k)s: An Exemption from Compliance Testing).

Industry-wide and organization-specific issues can also impact the decisions employers make when it comes to 401(k) plan vesting and eligibility. For example, an employer that operates in an industry with low tenure and high employee turnover, such as those in the restaurant and hospitality industries, might have good reason to delay employer contributions. If their employees were immediately eligible for plan participation and fully vested in employer contributions right away, that type of design could cost the employer a lot of money without generating much benefit.

This is also “one reason you don’t tend to see automatic enrollment as prevalent in the hospitality industries as they have low voluntary participation rates and automatic enrollment would have a dramatic cost impact,” said Alan H. Vorchheimer, principal in the retirement wealth practice at Buck Consultants LLC.

However, retirement consultant Rob McCracken, in an article for Pension Consultants Inc. (summarized online at the BenefitsPro website), observes that the overall trend is to scale back or reduce any barriers to retirement plan entry for employees. Citing SHRM research, he notes that plans offering immediate eligibility have increased from 45 percent of defined contribution plans in 2001 to 76 percent in 2013.

McCracken also points to data that indicates most employees switch jobs every 4.6 years. “Given these averages, over a 30-year period an individual would be losing out on seven-plus years of contributions into various employer-sponsored retirement plans if each employer had an eligibility waiting period of one year,” he writes.

In other words, using longer vesting periods to reduce employer costs might undercut the ability of the defined contribution plan to help typical workers save sufficiently for a secure retirement.

Engagement factors. Less easily quantified variables affecting the size and design of 401(k) matches include the employee goodwill the match generates, and reduced turnover that results from a match perceived as generous.

Making a Change

If an employer decides to reduce or change its matching contributions, it needs to handle that change with care. From a legal and fiduciary standpoint, changing the match is a straightforward matter of revising the plan document. “You would have to have your plan document amended, then communicate the change clearly to employees,” said Boyle.

However, managing the reaction to the change is not always so easy and straightforward. “The match is incredibly visible and easily understood by the average employee, especially when compared to something like medical plan caps on out-of-pocket costs,” said Vorchheimer. “The latter may change every year and may actually have a bigger impact on employees, but the match formula is just so simple.”

For that reason, “it is best for employers to look at their bottom line and find a match they can sustain and stay with it,” said Castellani. “Changing it may be easy, but it is also difficult both when it comes to the reactions of both participants and the public.”

If an employer has concerns that the organization’s financials will not support ongoing matching contributions, there are alternatives. Employers can choose to make discretionary contributions to the plan that do not have be repeated every year or to add a profit-sharing component. Although these types of contributions are unlikely to spur greater employee participation and deferrals, they allow employers that are unwilling or unable to commit to a regular match to contribute to the plan on employees’ behalf whenever they can.






Where Oh Where Could They Be? Finding Missing Participants Under the New DOL Guidance

Client Alert

By Summer Conley and Adrienne Robertson

The U.S. Department of Labor (DOL) has issued updated guidance on locating missing participants in a terminated defined contribution plan. The guidance reflects the discontinuance of the IRS and SSA letter forwarding services and the proliferation of free internet search tools. Field Assistance Bulletin (FAB) 2014-01 lays out specific steps that must be taken, additional steps that plan fiduciaries must consider taking, and acceptable distribution options when a participant still cannot be located. It replaces FAB 2004-02.

DBR Note: The FAB specifically refers to locating participants in connection with a defined contribution plan termination. It does not address defined benefit plans or other distribution issues, but may provide useful guidance in such other situations.

Search Efforts

While the decision to terminate a plan is an employer function, distributing benefits to the participants is a fiduciary obligation. This includes finding participants who may be missing. (The FAB notes that once a complete distribution of a participant’s account has been made, the individual ceases to be a participant and the distributed assets are no longer plan assets subject to fiduciary duties.) When a participant cannot be located through routine delivery methods, such as first class mail or electronic notice (don’t forget that the electronic delivery rules must be satisfied), FAB 2014-01 indicates that the plan fiduciaries must take the following steps (in no particular order):

  • Send notices by certified mail;
  • Check related plan and employer records;
  • Check with the participant’s designated plan beneficiary;
  • Use free electronic search tools (g., internet searches, public record data bases, etc.).

The DOL considers the failure to take these steps to be a breach of fiduciary duty. If all four required search methods are unsuccessful, fiduciaries must then consider whether other search methods are appropriate. The DOL notes that the failure to consider additional steps is also a breach of fiduciary duty. This will involve a cost-benefit analysis that takes into consideration the size of the participant’s account relative to the cost of the search method. Other search options may include internet searches that charge a fee, commercial locator services, credit reporting agencies, information brokers, investigation services, and analogous services. So long as the terms of the plan allow it, the cost for such additional searches can be charged to the participant’s account.

Note that no similar cost-benefit analysis is used for the four steps listed above. Rather, all four steps must be exhausted before using alternative distribution options.

DBR Note: Checking other employer records may seem obvious but is often overlooked. A participant who hasn’t kept the plan administrator of the 401(k) plan informed of her current location may very well have made certain that she was still able to get other current benefits to which she is entitled. But remember: when checking with other plan or employer records, fiduciaries also need to take privacy rules into consideration, such as HIPAA.

Distribution Options

If a participant cannot be located after exhausting the four required search methods and, when appropriate, any additional methods, then the plan fiduciary must decide how to distribute the participant’s account. The preferred method is to make a distribution to an individual retirement account (IRA) for the benefit of the missing participant in order to preserve beneficial tax treatment. An existing DOL safe harbor for selecting an IRA provider (ERISA Regulation Section 2550.404a-3) may be used for this purpose.

If the plan sponsor cannot find an IRA provider to accept the distribution, or if there is a compelling reason why a distribution to a rollover IRA cannot be made, the plan fiduciary may consider establishing an interest-bearing bank account in the participant’s name or transferring the assets to a state unclaimed property fund. In deciding between these two options, the plan fiduciary should consider the applicable facts and circumstances, including bank charges, interest rates and the process for searching the state’s unclaimed property fund. The DOL made it clear that applying 100% income tax withholding to the distribution is not an acceptable option under any circumstances.


In the void left by the discontinuance of the IRS and SSA letter forwarding services and with the advent of numerous free internet search tools, it is important that plan fiduciaries understand what steps must be taken when distributing accounts for missing participants in connection with defined contribution plan terminations.

DBR Note: While other similar circumstances involving missing participants, such as un-cashed checks and required minimum distributions, are not addressed in the FAB, fiduciaries should consider updating their procedures in those contexts to reflect the guidance provided in the FAB.









Employee vs. Independent Contractor – Seven Tips for Business Owners

IRS Summertime Tax Tip 2010-20

As a small business owner you may hire people as independent contractors or as employees. There are rules that will help you determine how to classify the people you hire. This will affect how much you pay in taxes, whether you need to withhold from your workers paychecks and what tax documents you need to file.

Here are seven things every business owner should know about hiring people as independent contractors versus hiring them as employees.

  1. The IRS uses three characteristics to determine the relationship between businesses and workers:
  • Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
  • Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.
  • Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
  1. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
  2. If you can direct or control only the result of the work done -- and not the means and methods of accomplishing the result -- then your workers are probably independent contractors.
  3. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.
  4. Workers can avoid higher tax bills and lost benefits if they know their proper status.
  5. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.
  6. You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS website or by calling the IRS at 800-829-3676 (800-TAX-FORM).