Tips for Your Annual Retirement Plan Checkup

As a new year approaches, now is the opportunity for plan sponsors to review their retirement plans to ensure that they’re legally compliant and up to date. From increases in annual contribution limits to sweeping changes to the IRS regulations governing hardship distributions, an annual review should be conducted to even the most well-crafted plan. Read on for some helpful tips that can make your annual retirement plan checkup as streamlined and stress-free as possible.

Check Your Plan Document

The first step in any comprehensive retirement plan checkup begins with the plan document itself. This governing document should be regularly updated, incorporating the latest regulations and contribution limits, and must also reflect the actual operation of your plan.

The plan document should always be up to date. As time goes by, plan sponsors may make certain discretionary amendments to their retirement offerings to better serve employees. However, if these changes never make it into the plan document, plan sponsors can have trouble reconciling their actual procedures with those to which the document commits them.

The plan should be operated based on plan document terms. Conducting an annual top-to-bottom review of your plan document can help head off any potential issues before they occur. In addition, it is crucial to operate the plan in accordance with the plan document to maintain a status of a qualified plan per the IRS and as a fiduciary obligation under ERISA.

Update proper plan amendments when necessary. In September 2019, the IRS finalized its new regulations on hardship distributions from retirement accounts. Incorporating these regulations into your plan document now can give you a head start for when many of these provisions take effect on January 1, 2020. Included in these regulations are provisions that:

• Eliminate the “all relevant facts and circumstances” standard for determining whether a hardship distribution is necessary, replacing this test with a general one that evaluates whether a distribution is necessary to satisfy an “immediate and heavy financial need”; and
• Require the employee to certify that they have accessed all other available non-hardship distributions, including ESOP dividends, before applying for a hardship distribution.

Even though these interim amendments don’t become effective until 2020, adding them in conjunction with a holistic plan checkup can give you one less thing to do at year-end 2020.

Ensure the Correct Definition of Compensation

One often-overlooked aspect of a retirement plan is its definitions of “compensation.” But when the formula for making retirement contributions to or withdrawing retirement contributions from an employee’s account is based on a percentage of their compensation, determining which parts of an employee’s pay constitute compensation becomes crucial. This formula should be outlined in your plan document and must comport with IRS regulations.

Review All Contributions

In addition to reviewing the definition of compensation, plan sponsors should know the plan provisions regarding contributions. Any employer matching contributions must be made in accordance with your plan documents and policy terms. Thus, it’s important to have all the sufficient information to identify which employees are eligible for matching contributions.

You’ll also need to take measures to ensure that participants do not exceed the maximum annual contribution limits and that deferrals are timely deposited in participants’ accounts.

Complete ADP/ACP Nondiscrimination Tests

Each year, 401(k) plan sponsors must pass the Actual Deferral Percentage (ADP) and 401(k) and 403(b) plan sponsors must pass the Actual Contribution Percentage (ACP) tests to maintain qualified status. These tests are designed to ensure that all employees, not just the highly compensated employees, are able to participate in the retirement plan; and failing one or both non-discrimination tests can subject a plan sponsor to returning excess contributions, as well as penalties ranging from hefty fines to the potential disqualification of the retirement plan.

Fortunately, the IRS provides a grace period for companies that don’t meet the ADP/ACP nondiscrimination tests for a particular plan year—as long as these tests are met within the 12-month period after the end of the non-qualifying plan year, no penalties will be assessed. However, it is best practice to ensure completion of these tests as part of your retirement plan checkup.

Timely File Your Form 5500

This key plan administration and compliance form for ERISA plans, the Form 5500 Annual Returns/Reports of Employee Benefit Plan, must be electronically filed on the last day of the seventh month after the end of the plan year. For plans that are tied to the calendar year, a Form 5500 must be filed by July 31 of the next year. If this deadline can’t be met, a two-and-a-half-month extension is available.

Calendar Your Key Deadlines

As plan sponsors know, complying with ERISA, Department of Labor and IRS regulations on qualified retirement plans isn’t just a one-day-a-year event. Each month can bring with it new deadlines and missing just one date can often have cascading effects. Calendar these key deadlines and regularly check back through the month to make sure you’re on target.

• Safe harbor plans must provide safe harbor notices to employees between 30 and 90 days before the start of the plan year.
• Auto-enrollment notices are also due to employees between 30 and 90 days before the plan year begins (although this notice can be provided to new hires on the date of hire).
• Qualified Default Investment Alternative (QDIA) notices must also be sent out between 30 and 90 days before the beginning of the plan year in which the QDIA takes effect.

Get Expert Assistance from PlanPILOT

Following these helpful tips during your annual retirement plan checkup will help your organization prepare to stay on top of the administrative and regulatory challenges as a plan sponsor. Enlisting the help of a qualified retirement plan consultant is beneficial to plan sponsors and their plan participants. We deliver retirement plan advisory services to 403(b), 457, and 401(k) plan sponsors, and as an independent Registered Investment Advisor, PlanPILOT is not tied to any investment fund or recordkeeper. We offer clients unbiased advice and assistance to control their retirement plan risks and deliver benefits effectively. We encourage you to contact us at (312) 973-4911 or info@planpilot.com so we can help your retirement plan administration team and plan participants achieve better outcomes.

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