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 Sponsor News - December 2014

7 services to expect from your 401(k) investment adviser

It's annual review time. That part of year when your 401(k) plan investment advisor visits to discuss what has happened in the markets and your plan during the prior year. As you consider the success of your annual review meeting, you may wish to evaluate the services you should be receiving from your investment adviser:

  1. Investment option performance review. This is the core set of services you are paying for. Quarterly performance reviews with reports you can understand are pretty standard. You don't have to meet quarterly, but it is reasonable to expect that you receive reports each quarter.
  2. New investment option searches. Every now and then it will be necessary to replace an investment option in your menu. Your investment adviser should provide you with alternatives and the reports necessary to help you make a replacement decision. He/she should also guide you through a sound, fiduciary compliant, decision-making process.
  3. Fiduciary compliance consulting - the IPS and more. Each year your investment adviser should take a look at your Investment Policy Statement (IPS) to ensure it is up-to-date. In addition, he/she should help you with 404(c) and QDIA compliance, plan document and records retention issues and vendor monitoring and oversight.
  4. Help with employee education and communication. Most investment advisers lead the annual employee education sessions for their clients. They also are able to review any employee communications for you that impact the retirement plan.
  5. Plan benchmarking assistance. Your investment advisor should be able to facilitate the production of a benchmarking report for your plan periodically - free of charge.
  6. Plan design consulting. It is reasonable to expect that your investment adviser be able to review with you the suitability of the plan design changes that leading edge 401(k) plans are adopting.
  7. Vendor management and evaluation. You are not familiar with the services/costs that your recordkeeper, trustee and custodian should be providing/charging. However, your investment adviser should be. He/she should be able to put your vendor services and fees into perspective for you.

Hopefully you will find that your investment adviser is checking all of these boxes for your plan.

2 ERISA requirements most employers fail to meet

By Melissa A. Winn

March 19, 2014

Nearly three-quarters (71%) of benefit advisers say their clients are not maintaining plan documents nor providing employees with summary plan documents — two major requirements under ERISA, according to an HR360 survey.

The top reasons brokers cited for employers not distributing SPDs to their employees or maintaining plan documents were:

  • Employers mistakenly thought they were compliant by distributing benefits booklets/summaries
  • Employers were not aware of the ERISA requirements
  • Too difficult and time consuming to develop the documents
  • Too expensive

Many companies mistakenly assume that insurance contracts, certificates of insurance and benefits summaries fulfill the ERISA requirements for an SPD and plan document — but they don’t include the required or recommended provisions that protect the plan and the employer.

And that could be costly. Failure to provide an SPD or plan document within 30 days of receiving a request from a plan participant or beneficiary can result in a penalty of up to $110/day per participant or beneficiary for each violation.

The lack of an SPD could also trigger a plan audit by the U.S. Department of Labor.

For more information about DOL audits read:

For advice on how to prepare for a DOL health plan audit read:

All ERISA-covered benefit plans, including group health plans and other welfare plans, must also, by law, be administered in accordance with a written plan document.

Benefit brokers can better position themselves as a trusted adviser by helping clients maintain compliance with these ERISA requirements.

401(k) contribution remittance: What’s an employer to do?

Posted March 19, 2014 by Kerri Norment at 03:09PM. Comments (0)

Over the past several years the U.S. Department of Labor’s Employee Benefits Security Administration has identified delinquent employee contributions as an ongoing national policy priority. With assets in 401(k)-type plans reaching $2.8 trillion on behalf of more than 50 million active participants, protecting employee contributions has become more important for the government, particularly since employees have been forced to take more responsibility for their retirement savings.

On the other hand, employers and sponsors of 401(k) plans are responsible for ensuring plans comply with federal law. But ever-changing interpretations of government regulations have resulted in employers being out of compliance with certain rules and not even knowing it.
One particular regulation that has been a source of confusion for employers — and in some cases, has landed them in hot water with the DOL — is the timely deposit of employee contributions into 401(k) plans. The regulation states employers should remit employee contributions on the earliest date they can reasonably be segregated from the employer’s general assets, but no later than the 15th business day of the following month. While this has come to be known as the "15 day rule," the reality is that deposits — for small and large plans — are expected to be made much sooner.

In fact, the DOL issued an amendment to the regulation in January 2010 to create a safe harbor rule under which small plans — classified as plans with fewer than 100 participants — would be considered in compliance if employee contributions were deposited within seven business days. The DOL has not issued a similar safe harbor rule for large plans. However, most in the industry believe larger plans will be held to an equal, if not higher, standard, meaning deposits should be made within two to three business days.

If you are scratching your head on this one, you’re not alone. When the regulation was implemented, there were no automated payroll processing systems that allowed for contributions to be easily segregated from general assets. With advancements in technology, this process is essentially instantaneous. And because of it, the DOL has changed its expectations on remittance, despite not rewriting the rule.
So what’s an employer to do? The best advice is to be consistent. If an employer demonstrates the ability to remit contributions within one business day, the employer better make sure all remittances happen within one business day each pay period — no exceptions! The second best advice, don’t rely on safe harbor rules to protect you.

If you find your plan is not in compliance with the new interpretation of the regulation, it is recommended you self-correct the plan. The DOL website provides a guide for correcting under the Voluntary Fiduciary Correction Program that even includes a user-friendly online calculator for lost earnings.

As in most cases, knowledge is power. Whether that knowledge is obtained through the use of a reputable service provider, consultant, or HR expert, employers and plan sponsors must stay on top of changes in government regulations and rules.

What Triggers a Form 5500 Audit?

As Form 5500 preparers, reviewers and plan sponsors, you always want to provide accurate and high quality filings to our clients and for our own company. Here are a few areas that could trigger an IRS or DOL audit to be aware of.

Audit Triggers for the IRS and DOL from Form 5500 Filings

  • Incompleteness
  • Inconsistencies
  • Disappearing participants
  • "Other" assets
  • Late deposits of deferrals
  • No fidelity bond
  • Not filing a H&W plan Form 5500 when a retirement plan filing reports 100 or more participants

Listed below are some of the items of interest noted by the EBSA regional director in Philadelphia as well as the EBSA's Assistant Secretary, Phyllis Borzi. Keep in mind, while the DOL may begin an investigation on one issue, they could expand to others as they review plan documentation.

  • Excessive participant fees - to determine who is at fault.
  • Failure to allocate contributions timely (as soon as possible - consistently following each pay period).
  • Protecting plan assets in distressed companies.
  • Elimination of improper and undisclosed compensation to advisors.
  • Discovering advisors who give poor ERISA advice.

Plan sponsors and preparers should realize that the Form 5500 does have enforcement significance. The best way to avoid problems is to always do the right thing and to correct mistakes as soon as they are found.

The Continuing Evolution of the Safe Harbor 401(k) Plan


In general, 401(k) plans are subject to annual testing designed to make sure highly compensated employees, or HCEs (those who own more than 5% of the company or earn more than $115,000, indexed for inflation), do not benefit too much more than non-HCEs. If there is too much of a spread between the groups, HCEs must either be refunded a portion of their contributions or the company must contribute additional amounts for non-HCEs. This test is referred to as the actual deferral percentage (ADP) test.

There is also the so-called top-heavy determination that requires the company to make a minimum contribution of up to 3% of pay to employees if certain owners and officers hold more than 60% of the total plan account balances.

Safe harbor 401(k) plans are exempt from the ADP test as long as they meet additional requirements which include agreeing to make a minimum company contribution and providing employees a notice each year that explains the safe harbor provisions. Safe harbor plans are also automatically considered not top heavy as long as the only allocations to participant accounts are employee deferrals and safe harbor contributions.

The company contribution must generally be immediately vested, although plans that also include automatic enrollment for deferrals may be able to apply a two year vesting schedule. The contributions can be either a fixed matching contribution (safe harbor match) on behalf of only those who defer or a fixed profit-sharing-type contribution (safe harbor nonelective) that is made on behalf of all eligible participants.
Tried it but didn’t like it

What happens when a plan sponsor has a safe harbor 401(k) plan but no longer wants it? The general rule is that safe harbor features must remain in effect for a full 12-month plan year, so a calendar year plan could amend to remove those features any January 1st. One exception is for plans that are being completely terminated and allows for the elimination of the safe harbor provisions concurrent with that termination.

There was also a provision that allowed for the mid-year elimination of a safe harbor matching contribution as long as the match was funded through the date of elimination and the plan passed the normal tests for the year; however, there was no corresponding “out” for those that used the safe harbor nonelective contribution…until the recent recession.

The IRS recognized that the economic downturn meant that some companies could no longer afford the mandatory contribution, so they proposed new rules in 2009 allowing for the mid-year elimination of a safe harbor nonelective contribution. But, unlike the match, the new rules were only available for companies that could demonstrate a substantial business hardship as defined by IRS rules.

While this was welcome relief, the IRS received feedback that the rules should be the same for both types of safe harbor contributions. In late 2013, the Service finalized the regulations to provide the requested consistency. Under these new rules, a company can eliminate either a safe harbor matching or safe harbor nonelective contribution mid-year, if:

  • They are operating at an economic loss (an easier standard to meet than the “substantial business hardship” standard from the 2009 regulations); or
  • The safe harbor notice provided to employees before the start of the year specifically notes the possibility that the contribution might be suspended during the year.

In both scenarios, the plan must still pass the ADP test and comply with the top-heavy requirements, but at least there is now a uniform set of requirements that is easy to understand.

What is the moral to this story? Sponsors of safe harbor plans should consider whether it makes sense to include the “possibility of suspension” language in all safe harbor notices going forward, even if there are no current discussions of eliminating the contribution. Even if never used, including that language preserves the ability to amend the plan to reduce or eliminate the safe harbor contribution should unforeseen circumstances arise.

Tried it, like it, but want to make a few changes
There are many reasons an employer might want to tweak its plan. Maybe the goal is to make it easier for new employees to join; maybe it is to allow plan loans; or maybe the company wants to change the way it allocates profit sharing contributions. These changes can usually be easily accomplished by simply amending the plan. While safe harbor plans can be amended just like any other, there are restrictions on the timing.

Back in 2007, the IRS published an announcement saying that it is acceptable for safe harbor plans to adopt mid-year plan amendments to add a Roth deferral option or to permit hardship distributions, as long as the plan sponsor provided a supplemental safe harbor notice to describe the change.

It was initially thought that these were just examples of allowable amendments that made a plan more generous to employees. However, the IRS later clarified that because of the rule requiring safe harbor plans to remain in effect for a full 12-month plan year (described above), adding Roth and/or hardship provisions are the only changes that can be made to a safe harbor plan once the year has started. In other words, any other type of change can only be made at the beginning of the next plan year, no matter how much more generous the change might be to participants.

What is the moral to this story? Towards the end of each year, it is important to consider what changes might be warranted or preferred in the subsequent year so that amendments can be prepared and signed timely. In addition, since plan provisions must generally be incorporated in the annual safe harbor notice, confirming any plan changes prior to the December 1st notice deadline for calendar year plans (30 days before the start of the plan year) is strongly recommended.

Forfeitures…be careful when and how you use them
When a participant who is partially vested terminates employment and takes a distribution, the non-vested portion of his or her account that stays behind is called a forfeiture. Most plans specify that such amounts can be used in one of three ways:

  • Pay allowable plan expenses;
  • Offset any company contributions; or
  • Allocate to remaining participants as additional contributions.

Forfeited amounts must be used each year and cannot be carried from one year to the next. If the forfeitures are not used for one of the first two options listed above, then they must be allocated as additional contributions.

For a safe harbor plan, the option that probably comes to mind is to use the forfeitures to fund the safe harbor contributions. Although that would be an easy solution, unfortunately, the IRS does not permit the use of forfeitures for this purpose. The reason is that safe harbor contributions must be fully vested at the time they are deposited. Since forfeitures arise from non-vested contribution sources, such as non-safe-harbor match or profit sharing, they couldn’t possibly meet that requirement.

That leads to another challenge. If forfeitures cannot be used to pay for the safe harbor contribution and there are not enough plan expenses to absorb them, the only other choice is to allocate them as additional contributions.

However, if the accumulated forfeitures are not “discovered” until a future year, the only option is to allocate them as profit sharing contributions. This risks the loss of the plan’s exemption from the top-heavy rules since there would be an allocation to participant accounts other than deferrals and safe harbor contributions.

What is the moral to this story? If your plan has accumulated accounts that are subject to vesting, it is important to monitor forfeiture activity on an ongoing basis. That allows any forfeited amounts to be applied to fees as soon as possible.

Oops! Forgot to provide the safe harbor notice!
Retirement plans have many moving parts, and business owners and managers often have quite a few competing demands on their time beyond managing the company 401(k) plan. The result? Accidents will happen despite everyone’s best intentions.

The IRS does have a correction program for such accidents. It is called the Employee Plans Compliance Resolution System (EPCRS), and it includes sample corrections for some of the more common oversights that arise. One oversight it does not address is how to correct a situation when an employer either does not provide a safe harbor notice at all or provides it after the deadline.

In its recent e-newsletter, Retirement News for Employers, the IRS provided some rather pragmatic guidance on addressing this issue. The newsletter does indicate that if the lack of notice meant that a participant was deprived of his or her ability to defer, the employer likely needs to make corrective contributions to make up for the missed opportunity. However, if employees were otherwise provided with adequate information about the plan and were given ample opportunity to take advantage of all its features, the IRS suggests that the oversight can be treated as an administrative error and that the plan sponsor must revise its procedures to make sure future notices are provided timely.
What’s the moral to this story? EPCRS can generally only be used to self-correct if the plan sponsor had existing policies and procedures in place that were designed to prevent the failure being corrected, and the newsletter’s reference to revising procedures is further confirmation that there must have been a procedure there in the first place. As a result, it is highly recommended that employers confirm they have internal controls in place in order to preserve the ability to self-correct if accidents happen.

As you can see, the safe harbor 401(k) plan continues to evolve. There are certainly many advantages to this design and there are additional restrictions as well. If you have a safe harbor plan or are thinking of adding the feature, the moral to this story is that working with an experienced provider who can help you plan ahead is a great way to build in added flexibility.