Saturday, September 28, 2019

5 Things Plan Sponsors (Still) Screw Up

Plan sponsors have a lot of responsibilities and often rely on others to help them keep their plan operating in accordance with the law. And yet, even with the most attentive plan sponsors, mistakes (still) occur. Here’s a list of some of the most common missteps:

1. Not using the plan’s definition of compensation correctly for all deferrals and allocations.

The term “compensation” has several different applications in qualified retirement plan operations, depending on the particular compliance goal. For example, a plan may use one definition of compensation to allocate employer contributions and a separate, distinct one for testing whether employee salary deferrals are nondiscriminatory. Note that one of the top plan compliance concerns identified by the IRS is a failure to identify and apply the correct definition of compensation in a particular scenario.

Note that while plans often use different definitions of compensation for different purposes, it’s important to apply the proper definition for deferrals, allocations and testing. A plan’s compensation definition must satisfy rules for determining the amount of contributions.
You should review the plan document definition of compensation used for determining elective deferrals, employer nonelective and matching contributions, maximum annual additions and top-heavy minimum contributions. Review the plan election forms to determine if they're consistent with plan terms.

2. Not following the terms of the plan document regarding the administration of loan provisions (maximum amounts, repayment schedules, etc.) or hardship withdrawals.

Plan documents routinely provide that hardship distributions can only be obtained for certain very specific reasons, and that participants first avail themselves of all other sources of financing before applying for hardship distributions (these conditions often are incorporated directly from the requirements of the law). Similarly, loans are permissible from these programs only when they comply with certain standards regarding the amount, purpose, and repayment terms.

Failure to ensure that these legal requirements are met can, of course, most obviously result in a distribution not authorized under the terms of the plan document—and, since these types of distributions are frequently quickly spent by participants (and thus not readily recoverable), it can be complicated and time-consuming to set the situation right.

Oh – and don’t forget that we now have some updated final regulations on hardship distribution and conditions.

3. Not depositing contributions on a timely basis

The legal requirements for depositing contributions to the plan are perhaps the most widely misunderstood elements of plan administration. More significantly, a delay in contribution deposits is also one of the most common flags that an employer is in financial trouble – and that the Labor Department is likely to investigate.

Note that the law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the payday. If employers can reasonably make the deposits sooner, they need to do so. Many have read the worst-case situation (the 15th business day of the month following) to be the legal requirement. It is not.

4. Failing to obtain spousal consent.

The IRS has long noted that a common plan mistake submitted for correction under the Voluntary Correction Program (VCP) is the distribution to a participant of a benefit in a form other than the required QJSA (e.g., a single lump sum) without securing proper consent from the spouse.

This often happens when the sponsor’s HR accounting system incorrectly classifies a participant as not married (or when the participant was not married at one point and subsequently got married – or remarried). The failure to provide proper spousal consent is an operational qualification mistake that could cause the plan to lose its tax-qualified status.

5. Paying expenses from the plan that are not eligible to be paid from plan assets.

Plan sponsors are frequently interested in what expenses can be paid from plan assets. It’s important to keep in mind, however, that the first step in that determination involves making sure that the plan document actually allows the payment of any expenses from plan assets.

Assuming that the plan allows it, the Department of Labor has divided plan expenses into two types: so-called “settlor expenses,” which must be borne by the employer; and administrative expenses, which – if they are reasonable – may be paid from plan assets. In general, settlor expenses include the cost of any services provided to establish, terminate, or design the plan. These are the types of services that generally are seen as benefiting the employer, rather than the plan beneficiaries.

Administrative expenses include fees and costs associated with things like amending the plan to keep it in compliance with tax laws, conducting nondiscrimination testing, performing participant recordkeeping services, or providing plan information to participants.
ERISA imposes a duty of prudence on plan fiduciaries that is often referred to as one of the highest duties known to law – and for good reason. Those fiduciaries must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

Oh – and if you’re not “familiar with such matters” – or aren’t certain of that status – it’s a good idea – one might even say “prudent” – to engage the help and support of someone who is.

p.s.: Oh, and when a mistake does occur, check out the IRS Fix-It Guide at https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide.

- Nevin E. Adams, JD

No comments:

Post a Comment