Employee Benefits Update February/March 2020

This issue’s topics include:

IRS clarifies meaning of plan “contribution” for tax deduction purposes

When is an employer contribution to a retirement plan truly a contribution eligible for a tax deduction under ERISA Section 404(a)? Although this might seem like a rhetorical question, it was deemed worthy enough to warrant a ruling by the U.S. Supreme Court. The IRS also addressed the matter in a chief counsel memorandum (CCM). This article discusses how the issue can arise when a plan sponsor does something more complicated than simply transfer corporate funds from its own bank account to that of the retirement plan trust in a straightforward manner. A short sidebar covers several examples from the CCM.
Don E. Williams Co. v. Commissioner, 429 U.S. 569 (1977); IRS CCM 201935011

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Now is the time for MEPs

DOL regulations liberalize commonality requirement
What are multiple employer plans (MEPs) and “open” MEPs? For sponsors of small defined contribution plans, now is the time to ask these questions, thanks to a liberalization of the Department of Labor (DOL) regulations governing MEPs that took effect last October. This article examines what MEPs are (open or otherwise), and what’s in it for plan sponsors.
29 C.F.R. 2510.3-55(c)(2)

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Including financial wellness in your retirement plan strategy

Many employees are paying a high price for their inadvertent ignorance about personal finance matters, studies are concluding. The price isn’t measured solely in bad investment or spending decisions, but also emotional and physical health, as well as in diminished job productivity. Employees’ understanding of their employer’s retirement plan, or lack thereof, is a critical piece of the puzzle. This article discusses how designing a retirement plan educational strategy without considering employees’ financial wellness could yield disappointing results.
29 C.F.R. 2510.3-55(c)(2)

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2019 vs. 2020 retirement plan limits

This chart contains updated retirement plan limits for 2020.

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Compliance alert

This feature lists a few key tax reporting deadlines for February through April.

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Employee Benefits Update

As always, we hope you enjoy this edition of our newsletter and we look forward to receiving your feedback. Should you have any questions regarding the information contained in the attached materials or our Employee Benefit Plan Services, please feel free to contact me directly.

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The Secure Act: What Plan Sponsors Need to Know

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) became law in December 2019 and makes a number of changes that will affect plan sponsors. Many of these changes are effective immediately or within the next year. Here are some changes that plan sponsors need to know. We have attempted to keep this summary as brief as possible, so if you would like any more detail, please contact our team of Employee Benefit Plan experts here.

 

Reporting Penalties Related to Form 5500 Will Increase Under the New Tax Code

Applies to: All Plans

The previous IRS penalty for failing to file a required Form 5500 was $25 per day. Under the new tax code, this penalty increases to $250 per day, capped at $150,000 per year. Failure to file Form SSA adds a civil penalty of $10 per day per failure, capped at $50,000 per year. Failure to notify the IRS regarding important plan changes such as plan name or name or address of plan administrator comes with a penalty of $10 per day, capped at $10,000 per failure. Plan sponsors should review their reporting procedures in light of these increased penalties. These penalties will apply to tax returns due after December 31, 2019.

 

Minimum Required Distribution Age Increases to 72

Applies to: Qualified Plans, including 401(k) and 403(b) Plans

The current age at which retirees must begin drawing on their plan savings is currently 70 ½ . Under the SECURE Act, the new required age will be 72 starting in 2020. For participants who reached age 70 ½ in 2019, plans will still begin distributions by April 1 of 2020, and continue distributions for any participants who reached the required age in a previous year.

 

New Rules for Part-Time Employees

Applies to: 401(k) Plans Only

For plan years beginning after December 31, 2020, employers will be required to allow employees who work at least 500 hours per year for the last three consecutive years to make elective deferrals. The previous limit was 1,000 hours during a minimum of one year of service. This change will not take in to account any 12-month periods beginning before January 1, 2021, so the earliest a plan sponsor would be required to allow these contributions will be 2024.

 

QACA Auto Deferral Limit Increases to 15%

Applies to: 401(k) Plans Only

For plan years beginning after December 31, 2019, the automatic enrollment maximum default rate will increase from 10% to 15%. We recommend that plan sponsors begin planning now how to accommodate this change.

 

Lifetime Income Estimate Disclosures

Applies to: Defined Contribution Plans, including 403(b) Plans

The SECURE Act will require defined contribution plans to provide annual estimates of monthly payments a participant would receive if a qualified joint and survivor annuity or a single life annuity were elected. The DOL is expected to publish a model disclosure, and the plan sponsor’s disclosure requirement will go in to effect 12 months after the DOL publication date.

 

In-Service Distributions for Childbirth and Adoption

Applies to: Defined Contribution Plans, including 403(b) Plans

Defined Contribution plan sponsors may now amend their plans to allow for distributions of up to $5,000 upon the birth or adoption of a child. Distributions may be made after December 31, 2019 and must be made within one year of the birth or finalization of adoption.

 

IRS to Issue Guidance on 403(b) Plans

Applies to: 403(b) Plans Only

The SECURE Act has directed the IRS to issue guidance on the termination of 403(b) plans, allowing for distribution of assets in custodial accounts upon plan termination. The act also clarifies that retirement income accounts can cover certain employees of churches or church-controlled organizations.

 

Additional changes related to the SECURE Act include:

  • Rule Changes for Post-Death Distributions
  • In-Service Pension Distributions Permitted as Early as 59½
  • Nonelective Contribution Safe Harbor Plans Will Have Increased Flexibility
  • Access to Plan Loans Through a Credit Card Is Now Prohibited
  • Portability of Lifetime Income Annuities That Are Removed as Investment Options
  • Consolidated Form 5500 for Unrelated Employer Plans
  • Simplified Reporting Permitted for Small Multiple-Employer Plans
  • “One Bad Apple” Rule Eliminated for Multiple-Employer Plans
  • New Type of Multiple-Employer Plan: Pooled Employer Plan
  • Frozen Defined Benefit Plans Receive Automatic Nondiscrimination Relief
  • “Cadillac Tax” Repealed (Health & Welfare Plans)
  • “Health Insurance Tax” or “HIT” Repealed (Health & Welfare Plans)

 

If you are interested in more detail or have any questions about these changes, please contact our Employee Benefit Plan team here.

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Employee Benefits Update Year End 2019

This issue’s topics include:

RMDs and “lost” participants

Steps to comply with your fiduciary duty

Losing contact with former participants who have vested benefits remaining in your plan can be problematic for both the former participants and the plan sponsor. The issue becomes more urgent when it’s time for them to begin receiving their required minimum distributions (RMDs) the year after they hit 70½. This article takes a look at why it’s a problem and what plan sponsors can do about it.

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How plan eligibility can help achieve recruitment goals

In a tight labor market, employees may feel more confident about finding another job if they’re unhappy with the one they have. For plan sponsors, 401(k) plan participation eligibility requirements take on greater significance in this market. In general, employers can require a new hire to wait a year before being eligible to participate in a qualified retirement plan, in addition to requiring that the employee be 21 years old. This article discusses the pros and cons of giving new employees the opportunity to enroll in the plan immediately.

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Plan advisor fiduciary category status: It’s more than numbers

Like so many other facets of retirement plan management, the role of plan advisors who help you with plan investments is governed by ERISA. And it may seem that many plan sponsors speak in ERISA code sections. For plan sponsors, the question is: Do you need a 3(38) fiduciary, or is a 3(21)ii fiduciary more fitting? This article reviews the duties of each and why a plan sponsor may choose one or the other.

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Should your 401(k) vest now or later?

Survey data from the Plan Sponsor Council of America (PSCA) indicates that roughly 40% of 401(k) plan sponsors provide immediate vesting on their matching contributions. In theory, employers that offer immediate vesting on matching 401(k) contributions might have a leg up on other companies when recruiting workers in a tight labor market. This article discusses why immediate vesting is an important aspect of your recruiting strategy.

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Compliance alert

This feature lists a few key year-end tax reporting deadlines for December and January.

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notebook reading employee benefits to discuss plan eligibility and recruitment goals

As always, we hope you enjoy this edition of our newsletter and we look forward to receiving your feedback. Should you have any questions regarding the information contained in the attached materials or our Employee Benefit Plan Services, please feel free to contact me directly.

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Employee Benefits Update October/November 2019

This issue’s topics include:

Will a merger or acquisition upend your 401(k) plan?

Beware of ERISA entanglements and higher costs

Companies contemplating buying another company, or a division of one, must assess and plan for the impact on their 401(k) plan, and that of the company they’re acquiring, before pulling the trigger. The same applies for companies on the receiving end of an acquisition (though they might not be able to do as much if they’re the acquisition target). This article reviews the important decisions that companies must make regarding 401(k) plans when part of a merger or acquisition. A short sidebar reviews two ways to merge 401(k) plans.

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IRS liberalizes availability of self-correction program for plan “failures”

A recent IRS Revenue Procedure allows plan sponsors to jump through fewer hoops to fix several so-called “plan failures” relating to plan loans. Specifically, plan sponsors can now fix more categories of loan glitches using the streamlined Self-Correction Program (SCP) under the IRS’s umbrella Employee Plans Compliance Resolution System, instead of the more burdensome Voluntary Correction Program (VCP). This article highlights what plan sponsors need to know about the changes.

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Warn participants of the risks of front-loaded deferrals

Some 401(k) plan participants have been known to shoot themselves in the foot when taking aim at higher investment returns. Some of these individuals may not be open to advice, but plan sponsors can still provide information about the dangers of firing blindly and expecting to hit a target. This article looks at a case in point: front-loading deferrals in hopes of boosting returns over the course of the year.

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New exempt status income threshold could impact 401(k) plan costs

The 401(k) plan employer contribution formula for hourly employees that includes overtime pay may increase plan costs next year — along with overtime pay outlays. That’s because in late September the U.S. Department of Labor published a revised rule (effective January 1) increasing the income threshold for overtime pay eligibility. This short article reviews the rule and what it means for plan sponsors.

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Compliance alert

This feature lists a few key tax reporting deadlines for October and November.

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As always, we hope you enjoy this edition of our newsletter and we look forward to receiving your feedback. Should you have any questions regarding the information contained in the attached materials or our Employee Benefit Plan Services, please feel free to contact me directly.

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Employee Benefits Update August/September 2019

This issue’s topics include:

Is it time to give a fresh look at “alts” in retirement plans?

Are many plan participants gaining the benefit of a truly broad diversification of retirement portfolio assets? The answer might depend on whether they’re covered by a defined benefit (DB) plan or a defined contribution (DC) plan. This article takes a look at why DB plans offering “alternative” investments, also known as alts, may make a big difference.

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Time for class

Widening the scope of training for retirement plan committee members

Learning the ropes of overseeing a retirement plan isn’t a “one and done” exercise. Periodic training updates for retirement plan committee members acting in a fiduciary capacity is a prudent approach to ensuring that they maintain the current knowledge essential to carry out their duties. This article reviews why it’s important to ensure that new committee members get a strong grounding in plan operations and their responsibilities promptly on being appointed to a plan committee, if not before. A sidebar discusses whether following the “prudent man rule” is sufficient for retirement plan fiduciaries to perform their duties effectively.

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DB plan de-risking strategies in full swing

Private sector employers have been retreating from the defined benefit (DB) pension model for decades. This is largely motivated by a desire to “de-risk” the company from a financial obligation that’s as variable as financial market behavior. More recently, holdouts on that trend have been given new motivation to depart from the DB design: escalating Pension Benefit Guaranty Corporation (PBGC) premiums. 2015 legislation set the stage for annual increases through 2019, after which the increases will be indexed for inflation. This article examines what plan sponsors of DB plans need to know about de-risking their plans.

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Make your SPDs user-friendly

The text of a summary plan description (SPD) is usually the product of a tug-of-war between cautious ERISA attorneys who worry about the use of general, simple statements, and human resources professionals familiar with their average employees’ reading level. The attorneys often tug harder, and the result is a document that many employees pick up, glance at, and promptly toss. This article discusses why that’s not a good outcome.

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Compliance alert

This feature lists a few key tax reporting deadlines for September.

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adults business meeting, training for retirement plan committee members

As always, we hope you enjoy this edition of our newsletter and we look forward to receiving your feedback. Should you have any questions regarding the information contained in the attached materials or our Employee Benefit Plan Services, please feel free to contact me directly.

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Employee Benefits Update June/July 2019

This issue’s topics include:

Help retirees plan their retirement spending, survey says

Long after defined benefit (DB) plans became scarce in the private sector, many employees still mourn their departure. With DB plans, participants are given an estimate of their monthly benefit at retirement. However, with defined contribution (DC) plans, participants often lack confidence in their understanding of how much their DC plan will provide in monthly income when they start drawing down their accounts. This article discusses why more and more 401(k) plan sponsors are beginning to try to address this concern in various ways — without revisiting the DB plan model. A short sidebar provides some statistics for plan sponsors on keeping plan assets from being transferred out of the plan.

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ERISA disclosure 101: A quick overview of plan sponsor obligations

Qualified retirement plan sponsors are subject to many disclosure requirements. This article provides a “top ten” (and thus incomplete) list of key required defined contribution plan disclosure documents from the Department of Labor (DOL), offered to reinforce a general understanding of those requirements. A note of caution: This list doesn’t include IRS disclosure requirements. Also, while disclosures are generally directed to plan participants, a plan beneficiary, in the case of a participant’s death, typically would also be covered by the disclosure rules.

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Not every plan that benefits retirees is an ERISA plan

The fact that a compensation arrangement can provide a substantial source of income in retirement doesn’t make it subject to ERISA. That was the result the U.S. Court of Appeals for the Second Circuit delivered to three former partners of Booz Allen, a consulting company. This article reviews the case, which serves as a helpful primer on the definitional limits of an ERISA “retirement” plan.

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Appeals court sacks spouse’s attempt for QDRO

What makes a domestic relations order a qualified domestic relations order, or QDRO? The distinction is essential for retirement plan administrators when deciding whether to accept a state court’s instructions to turn over some portion of a plan participant’s (or, in some cases, a deceased participant’s) retirement plan assets to an “alternate payee.” This article briefly looks at this difference, as it was part of a legal battle waged by the former spouse of a deceased professional football player covered by the NFL’s retirement plan.

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Compliance alert

This feature lists a few key tax reporting deadlines for June and July.

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People sitting at a table plan for retirement

As always, we hope you enjoy this edition of our newsletter and we look forward to receiving your feedback. Should you have any questions regarding the information contained in the attached materials or our Employee Benefit Plan Services, please feel free to contact me directly.

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Employee Benefits Update April/May 2019

This issue’s topics include:

Proposed IRS regs liberalize rules for hardship withdrawals

How hard should a hardship be to justify a hardship withdrawal from a 401(k) plan? Proposed IRS regulations could, according to the agency itself, enable eligible plan participants “to access their money more quickly with a minimum of red tape.” This article provides a short summary of several key provisions of the detailed proposed regulations. A sidebar looks at different ways employers might respond to the changes.

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Fiduciary liability
First Circuit shifts burden of defending a fiduciary breach claim

A recent ruling could set the stage for a definitive U.S. Supreme Court opinion regarding retirement plan fiduciaries’ liability on the subject of monitoring plan expenses. The U.S. Court of Appeals for the First Circuit’s ruling in Brotherston v. Putnam Investments shifts a key aspect of the burden of proof of a fiduciary breach from the plaintiff employees to the plan sponsor defendant. This article reviews the case and the court’s decision.

Brotherston v. Putnam Investments, No. 17-1711, October 15, 2018 (First Cir.)

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Have you outgrown the need for matching 401(k) contributions?

Administrating a retirement plan is an evolving process. For example, many plan sponsors provide matching contributions on participant 401(k) plan deferrals without realizing there’s an alternative: making substantial nonelective contributions instead of matching contributions. It’s not a strategy that will work for all employers, but there is nothing to lose — and perhaps much to gain — by at least considering it.

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Take a close look at your plan expense categories

Keeping a sharp eye on your 401(k) plan’s expenses — a fundamental duty of fiduciaries — can require the use of a magnifying glass, at least metaphorically speaking. Take the case of what’s paid out of retirement plan investment funds, as opposed to paid directly by the plan or the company as the plan sponsor. Individual pieces can be measured in basis points (hundredths of one percent), but they add up. This article briefly explains some common contributors to a plan’s gross expense ratio and how even small distinctions can substantially affect participant investment returns over time.

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Compliance alert

This feature lists a few key tax reporting deadlines for April and May.

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As always, we hope you enjoy this edition of our newsletter and we look forward to receiving your feedback. Should you have any questions regarding the information contained in the attached materials or our Employee Benefit Plan Services, please feel free to contact me directly.

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Employee Benefits Update October/November 2018

This issue’s topics include:

Why target date fund oversight matters

Money management giant Vanguard began tracking the popularity of funds with professionally managed allocations — primarily target date funds (TDFs) — in 2003. Over the years, the organization has reported a steady growth of their prevalence in defined contribution retirement plans. As of the end of 2017, 58% of participants invested in a TDF, and Vanguard projects that number will hit 77% by 2022. This article discusses the reasons behind the TDF explosion, and a short sidebar covers some tips from the Department of Labor.

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Investment option overload?

A cautionary tale from Yale University

When it comes to defined contribution plan investment options, giving participants an abundance of choices can backfire. Yale University recently dodged a bullet in this regard when it beat back — at least initially — a class action lawsuit accusing the institution of an ERISA breach. This article discusses why the case is instructive for plan sponsors.
Vellali et al v. Yale, Civil No. 3:16–cv–1345 (AWT), 03/30/2018

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Pointing to agenda analysis of chart for investing and planning

Investing in HSAs for long-term retirement goals

Retirement plans are about saving for the cost of living in ― retirement. And typically one significant expense for retirees is medical bills. Actuaries at Fidelity Investments estimate that a typical 65-year-old couple retiring in 2018 will incur $280,000 in combined out-of-pocket health expenses during their retirement, excluding the cost of long-term care. This brief article discusses Health Savings Accounts, when employers can offer them to participants and why participants may be interested in them.

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New IRS preapproved plan regime takes effect

Last year, in Revenue Procedure 2017-41, the IRS announced a new regulatory regime for defined contribution plans. The regime was issued to encourage employers with individually designed plans to convert to the preapproved format. This article discusses what employers should know going forward to meet the October 1, 2018, deadline for prospective submitters of “preapproved” defined contribution plan documents.

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Compliance alert

This feature lists a few key tax reporting deadlines for October and November.

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As always, we hope you enjoy this edition of our newsletter and we look forward to receiving your feedback. Should you have any questions regarding the information contained in the attached materials or our Employee Benefit Plan Services, please feel free to contact me directly.

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