November . . . December . . . January . . . these are busy months for 401(k) sponsors whose plans have a December 31 year-end. With forethought, there’s the opportunity during this busy time to ease plan administration and avoid errors. Before you’re too far into November, consider four areas where a little effort now could reduce frustration down the road.
Have You Noticed? – By the end of November, sponsors of plans with a December 31 year-end may have to send certain notices to plan participants. Depending upon the design of each plan, these can include Safe Harbor, Qualified Default Investment Alternative or Automatic Contribution Arrangement notices.
Tips: Understand which disclosures your plan requires by speaking with your Third Party Administrator, your Advisor and/or your Recordkeeper. Know that you must document the notices’ distribution for your compliance records. To ease this administrative burden, ask if one of your service providers will send the disclosures on your behalf; many Recordkeepers will distribute notices for a small fee and document their distribution for you. For efficiency’s sake, if you distribute notices yourself, ask if you now may be provided the annual Service Provider Disclosures (also known as ERISA 404(a)5 notices) so that you may reduce the number of times during the year when you must distribute plan communications.
Evade the Independent Audit – Plans above a certain size must undergo an annual audit. Performed by a CPA firm, the audit costs in the neighborhood of $10,000 – more or less depending upon the complexity of the plan. The first audit is required when a plan has more than 120 participants on the first day of the plan year. Audits must continue unless the plan’s participant count drops below 100; an audit then may be required when the number of participants again reaches 100.
Tips: Because the need for an audit is determined by the participant count on the first day of the plan year, November is an excellent time to obtain and review a participant census from your Recordkeeper. Your participant census will include all eligible participants, even if they are not deferring to the plan, as well as any terminated participants with account balances. If your plan allows you automatically to roll out terminated participants with balances of $5,000 or less, schedule this action for these participants before year-end. (If your plan doesn’t allow this, consult with your Third Party Administrator to amend your plan.) You shouldn’t have to perform the roll-out yourself; ask your Recordkeeper to connect you with a service provider that will notify and roll out non-responding terminated participants into an IRA. Now review the remaining active participants. Are any no longer employed; if so, provide termination dates to your Recordkeeper. Terminated participants without balances are eliminated from your plan count, those with balances of $5,000 or less may be rolled out.
Treat Bonuses Accurately – The end of the year is often a time for bonuses. Employees – seeking the full benefit of this extra pay – may not want 401(k) deferrals deducted from their bonus. But beware: depending upon your plan’s definition of compensation and its administrative policies, you may be required to remove deferrals unless certain actions are taken. Failure to do so may result in the need for employer corrective plan contributions.
Tips: Check with your Third Party Administrator before the bonus season. Are bonuses considered part of your plan’s definition of compensation? If so, as is frequently the case, then it’s likely you must take deferrals from bonuses as you do other compensation, unless you have an administrative policy that exempts bonuses from deferrals. For what constitutes an acceptable administrative policy, check with your TPA. Your TPA can also suggest what to do if employees don’t want deferrals taken from bonuses, often providing sponsors with forms employees may complete before the bonus is paid to determine whether they want deferrals on their bonuses
Year-End Administration – When January arrives, it’s time to provide an annual payroll census to your Third Party Administrator. Using the census, your TPA reconciles participant payroll and deferral information, performs plan testing to ensure nondiscrimination or suggests remedies to preserve your plan’s tax-exempt status, and provides allowable contributions amounts for profit-sharing.
Tips: Accuracy is a must. Consult with your Third Party Administrator to understand your plan’s definition of compensation, and break out each aspect of compensation separately: regular pay, bonuses, reimbursements and any other categories pertinent to your operation. Many Recordkeepers will make your job easier by providing TPAs with a portal to their recordkeeping site, reducing the number of reports they need to provide.
November is the start of a busy season. Take the time now to plan for an easier year-end and smoother future management for your 401(k) plan!
This blog is written to help makes the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans. Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan, and hence cannot be a guarantee against fiduciary breaches.