Volume 39 | Issue 136
The calendar provided in this FYI In-Depth will help you set up your own schedule of activities to address as the year progresses so that you do not miss important deadlines for your qualified plans. As you evaluate the various tasks, you can confirm suitable deadlines with your vendors for their completion. Our Reporting and Disclosure Guide will help you identify and address other activities that are event-based and participant specific. As you make your plans, we have a number of key issues for you to consider (along with the calendar deadlines) as we head into 2017.
Review of Plan Administration
In addition to verifying that routine tasks are monitored in accordance with plan terms and administrative policies — such as making required minimum distributions, sending safe harbor notices, and attending to the myriad annual reporting and disclosure requirements — administrators must be on the alert for some important tasks. Here are some key areas to watch:
Make timely 401(k) deposits. Failure to deposit employee contributions and loan repayments timely is a prohibited transaction that will subject the plan sponsor to excise taxes, interest charges and additional reporting. Deposits are timely if they are submitted as soon as contributions can reasonably be segregated from the employer’s assets. Once a plan sponsor demonstrates that contributions can be deposited within a certain number of days after payroll — say four business days — the DOL may view that as the standard for that plan. If deposited in a future cycle after eight days, for example, the deposit may be deemed late. As this continues to be an area of focus for DOL audits, consistency and attention to timeliness is critical.
Process automatic cashouts of small balances. Many plans provide for the automatic cashout of small balances to terminated participants. For plans with such rules, distributions of accounts must be timely cashed out and terminated participants must be notified. At the very least, an annual “sweep” of small balances should be conducted to keep in line with the plan terms. This process can be effective in keeping small balances out of the plan to avoid continued costly administration and having to track down missing participants in the future. Participants with larger balances are more likely to keep the recordkeeper informed of their addresses.
Identify lost participants with account balances. Returned plan notices, statements or distribution checks should be researched timely to find lost participants. The sooner the search is started, the more likely it will be that terminated participants whose addresses have changed can be located. Funds covering any check that remains outstanding for a significant period of time should be redeployed to the participant’s investment accounts or, depending on the amount and the payment’s eligibility for rollover, rolled into an IRA. Adjustments will be needed to address any income tax that had been withheld. Guidance from the DOL is available on how fiduciaries of terminated defined contribution plans can try to locate missing participants or beneficiaries and distribute balances. With the removal of the IRS and SSA letter-forwarding services, the use of Internet search tools is required. (See our September 3, 2014 For Your Information.) The DOL has recently focused more of its audit attention on whether plan sponsors are staying on top of finding missing participants so that plans can issue required distributions to them. (See our For Your Information from March 15, 2016.) Even though the PBGC has recently issued proposed regulations allowing a terminating DC plan to turn over its lost participant balances to the PBGC missing participant program, this option would not be available before plan termination (See our October 5, 2016 For Your Information.)
Based on the latest update to the Form 5500 instructions, the plan must take reasonable steps to locate participants/beneficiaries to avoid reporting a failure to provide a benefit when due.
Remind participants of any opportunity to name beneficiaries. Many plan administrators have had to sort out competing claims for death benefits because of unclear or missing beneficiary designations. These disputes can sometimes result in costly litigation. Most plans must make a participant’s spouse the default beneficiary. If the plan offers a choice, and a participant wants survivor benefits paid to someone else, such as children, parents or a favorite charity, a properly executed beneficiary designation is the ticket. Make a point of reminding plan participants to update their beneficiary designations.
Address foreign asset reporting obligations. In an effort to address tax evasion, money laundering and terrorist financing concerns, compliance requirements mandate reporting of assets held by foreign financial institutions (including retirement plans) and benefit distributions to certain individuals. Plan fiduciaries will want to assess compliance with these requirements, particularly the Foreign Account Tax Compliance Act (FATCA), the Report of Foreign Bank and Financial Accounts (FBAR), and regulations issued by Treasury’s Office of Foreign Assets Control (OFAC). Our June 12, 2014 For Your Information outlines these requirements.
Review forfeitures and investment credits. On an annual basis, plans with a vesting schedule may accumulate funds in a forfeiture account. Many plans provide that nonvested balances may be forfeited when the participant takes an actual distribution or after five one-year breaks in service. In addition, plans may accumulate credits from revenue sharing that are deposited into “ERISA accounts.” The plan must provide for how the forfeitures and revenue sharing will be used — to pay expenses, reduce contributions or be reallocated. At the end of the plan year, these accounts should be reviewed to confirm that no unused balances are held unallocated.
Watch out for IRS audit issues. IRS often shares information about the types of mistakes they are picking up in plan audits. For defined contribution plans, they report finding that compensation used for plan allocations or nondiscrimination tests doesn’t always match plan document definitions, automatic enrollment is not correctly implemented, and employee deferrals do not correctly reflect participant elections. A self-audit is a good tool for finding and correcting these issues. The IRS and DOL websites contain excellent resources for areas to focus on and acceptable correction methods.
Confirm all payroll processes are clean and audited for year-end testing. Ensure that all relevant data is in order to enable year-end testing to start promptly with the new year. If highly compensated employees’ deferrals must be capped for testing purposes, early identification will prevent participants from exceeding plan limits. If any employer contributions are computed on an annual basis, or if the plan provides for the “true-up” of matching contributions, confirm that these calculations are addressed.
Update Plan Limits
IRS has announced changes to qualified plan limits. (See our FYI Alert from October 27, 2016.) Check with your payroll department and your administrative service provider to make sure the new limits will be properly taken into account when determining contributions.
Review and analyze insurance coverage. Two basic types of insurance are available to protect the plan:
Fidelity bond. A fidelity bond is required for every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan, with a few exceptions. On an annual basis, plans that require a fidelity bond should review existing bonds to ensure they have at least the required minimum coverage and that the elected level is appropriate for the plan. (In most circumstances, the amount of the required bond is capped at $500,000 for a plan without an employer securities fund and $1,000,000 for plans that hold employer securities.)
Fiduciary liability insurance. Insurance can be purchased to protect fiduciaries and the plan against liability or losses occurring due to a plan fiduciary’s act or omission. Fiduciaries are personally liable for losses incurred by a plan due to their breach; insurance can cover some or all of these losses. Recently, obtaining fiduciary liability insurance in the appropriate amount has become more imperative. DOL has stepped up reviews and is keeping score of ever-increasing monetary recoveries resulting from their investigations. This is in addition to dramatic settlements arising from ERISA class action litigation.
It’s important to analyze the insurance policy’s major defined terms to understand exactly what risks it covers. Furthermore, understanding when these policies are triggered is crucial to knowing whether the plan and its fiduciaries are adequately protected. An annual review of these policies may illuminate the requirement to report certain events to the insurer within a specific time frame to collect on a claim.
Key Point: Many policies cover compliance fees and penalties such as those imposed by the IRS under their Voluntary Correction Program, but require timely notification to the insurer.
Plan Amendments, Filings, and Documentation
Do your plan documents correctly describe the plan provisions as intended and are summary plan descriptions and administrative procedures in sync with the official documents?
Service Providers Need to Know
Have you provided your recordkeeper, consultant, TPA, etc. with copies of current signed documents? Have you informed them of any changes in your controlled or affiliated service group? Your service providers need up-to-date information about you and your plans to be able to spot issues and assure quality service. Make sure to keep them in the loop!
Evaluate the need for plan amendments – and deadlines. IRS procedures call for executing discretionary amendments by the end of the year and provide extended amendment periods (generally based on the employer’s tax filing deadline) for modifications necessary to address changes in legal requirements. If you implemented discretionary changes during the year, make sure documentation is inked before the plan year is over.
Consider implementing an annual review of your plan documents to make sure they’re up to date. If you missed making required amendments, consider IRS’ correction program. Until January 1, 2017, the applicable fee for a Voluntary Correction Program (VCP) submission that addresses only a failure to amend a plan in a timely manner is reduced by 50 percent if it is made within one year after the expiration of the amendment deadline. Starting in 2017, IRS will announce the VCP fees and associated rules in its annual Revenue Procedure for written determinations issued each January. We expect that IRS will continue to offer discounted VCP fees when sponsors voluntarily correct plan document failures within a short time after the deadline (such as one year) and prior to audit. Our For Your Information from October 21, 2016 provides an update on the most recent changes.
Get IRS review of your document. Do you have a current IRS determination letter? In 2015, the IRS announced that their program for periodic review of individually designed plan documents would soon be severely curtailed. Our For Your Information from July 8, 2016 provides further details about the changes to the IRS determination letter program. Individually designed plans of employers with EINs ending in 1 and 6 (and plans sponsored by a member of a controlled group or an affiliated service group that previously elected to have all employers in the group file their plans under this cycle) are eligible for one last review as an ongoing plan. These employers should be alert to the upcoming January 31, 2017 deadline for this review. Submissions to the IRS for a determination letter must include a restated plan document (working copies are no longer accepted). Be sure to leave time for this step.
Changes in overtime rules. In addition to analyzing the impact of the new DOL overtime rule on cash compensation, have you considered how additional overtime payments will affect plan benefits or nondiscrimination tests? Plan amendments may be needed to ensure benefits remain compliant and within the budget. Read more about the overtime rule in our May 18, 2016 FYI Alert.
Make sure your summary plan description matches your plan document. In addition to being a disclosure required under ERISA, the SPD plays an important role in ERISA disputes, and a well-drafted and well-integrated plan and SPD will minimize successful challenges to plan determinations or fiduciary decisions. Make sure it, or a timely summary of material modifications (SMM), reflects any plan amendments made during the plan year. Don’t forget that an SPD must generally be restated and redistributed every five years.
Key Point. A factor in many plan challenges is the statute of limitations for taking an official complaint to the federal courts for review. Sponsors should confirm that plan documents state a statute of limitations period and announce that period in summary plan descriptions as well as benefit claim denial communications.
Assemble and maintain documentation. Keeping plans up to date is crucial — but don’t toss the old documents. Plan participants and beneficiaries may request prior plan materials, and plan administrators need to address requests within a 30-day window. Failure to comply can lead to legal challenges; a court may hold a plan administrator who fails to comply personally liable for up to $110 per day per affected person from the date of failure. Along with plan documents, SPDs and SMMs, be sure to create and maintain records of participant data, such as proof of benefit distributions, benefit elections and beneficiary designations. Arrange for continued access even after termination of the plan.
ERISA 408(b)(2) fee disclosure notices to plan sponsors by covered service providers initially went out in 2012. Notices are not required to be sent annually, so it’s important that plan sponsors review current arrangements, especially in light of rising plan balances, to validate that fee arrangements are still reasonable. Depending on when plan services were last put out to bid, it may be time to revisit. Whether or not electing to rebid plan services, it is equally important to document why the decision is made to stay with the current provider as it is to document the need for a change. Courts have held that plan fiduciaries that follow a prudent process designed to ensure that the actions taken were for the exclusive benefit of the plan participants have not breached fiduciary duties even if the outcome could have been better. In addition, plan sponsors may wish to consider fiduciary training for the individuals responsible for making decisions about plan assets.
Plan Features to Boost Retirement Savings
If you share the concern that your employees may not have sufficient funds to last through retirement, the timing may be right to add provisions such as auto-enrollment or auto-escalation to boost participant savings rates. If you’re thinking of amending a 401(k) plan to add an automatic enrollment or auto-escalation feature (or of revamping one that is already in place), you will need to act soon. Plans generally need to furnish notices to participants describing the automatic contribution arrangement that will be in effect 30 to 90 days before the start of the plan year.
You may also consider adding annuities to your retirement plans now that the IRS and DOL have made it easier to do so. In 2014, the IRS issued final regulations on qualifying longevity annuity contracts that, if properly structured, enable a participant to start payments at an advanced age — as late as 85 — and exclude the value of the annuity from required minimum distribution calculations. Our July 10, 2014 For Your Information explains the option.
Planning with trusted advisors to identify tasks and set compliance goals for the coming year is an important first step for assuring smooth operations in 2017. In addition to the above referenced testing and reporting requirements, you may want to perform an annual “checkup” (i.e., a review of operational practices and fiduciary responsibilities). The checkup should address plan expenses, design considerations, participant fees and investments, and confirm compliance with the terms of the plan document and investment policy statement, if any. Review compliance test results with an eye toward making necessary plan design changes to improve testing results or eliminate testing altogether. You may elect to conduct your own review or contract with an independent party. Regardless of who performs the review, identifying problems and initiating corrections in advance of any audit by a government agency is the preferred course of action.
We have published a companion to this FYI In-Depth: 2017 Planning for ERISA Single-Employer Defined Benefit Plan Operations.
Calendar of Significant Defined Contribution Plan Compliance Tasks
|Notice to interested parties if filing Cycle A determination request at end of month, else, no less than 10 days or more than 24 days before submission||January 20, 2017|
|Form 5300 (for plan sponsors with EINs ending in 1 or 6, or plan sponsors that are controlled or affiliated service group members if the group made a Cycle A election — Cycle A filers)||January 31, 2017|
|Form 945 to IRS (to report income withheld on distributions)||January 31, 2017|
|Form 1099-R, 1099-DIV to participants (or write letter for 30-day extension)||January 31, 2017|
|Form 945 (alternative date if withholding deposits timely made)||February 10, 2017|
|Fourth quarter benefit statements||February 14, 2017|
|Form 1099-R to IRS (if paper; or file Form 8809 for 30 day extension)||February 28, 2017|
|Notice of intent to request prior year funding waiver (money purchase pension plans)||March 1, 2017|
|ADP/ACP test corrective distributions to avoid excise taxes, unless EACA for full year 2016||March 15, 2017|
|Request for prior year minimum funding waiver (money purchase pension plans)||March 15, 2017|
|Report US source income of foreign persons: Form 1042-S to participants and IRS (or file Form 8809 for 30 day extension for 1042-S filing with IRS; write letter to request 30-day extension for providing 1042-S to participants); Form 1042 to IRS (or file Form 7004 for 6-month extension )||March 15, 2017|
|Form 1099-R to IRS (if electronic; or file Form 8809 for 30-day extension)||March 31, 2017|
|Form 5330 excise tax on prior year (2015 testing year) excess contributions and excess aggregate contributions||March 31, 2017|
|Required minimum distributions for first time qualifying participants including 5% owners||April 1, 2017|
|Distribution of all excess 2016 deferrals (over $18,000 plus $6,000 catch-up)||April 15, 2017|
|File IRS Form 990-T to report and pay any Unrelated Business Income Tax owed by the Trust (or file for 6-month filing extension on Form 8868). This tax is sometimes triggered if the plan’s trust earns income from certain plan investments (for example, limited partnership interests).||April 18, 2017|
|First quarter benefit statements||May 15, 2017|
|EACA corrective distributions (to avoid 10% excise tax on ADP/ACP refunds)||June 30, 2017|
|Summary of material modifications if amendments adopted in 2016||July 29, 2017|
|2016 Form 5500 and 8955-SSA (or file Form 5558 to request an extension)||July 31, 2017|
|Form 5330 excise tax on funding deficiency for money purchase pension plans, nondeductible contribution, prohibited transaction, etc. (or file Form 5558 to request 6 month extension)||July 31, 2017|
|Statement of deferred vested benefits (SSA information) to terminated participants (unless on Form 8955-SSA extension)||July 31, 2017|
|Annual participant statement (if no right to direct investments and not on extension for Form 5500)||July 31, 2017|
|Second quarter benefit statements||August 14, 2017|
|Participant fee disclosures in plans with participant directed investments||August 30, 2017 (up to 14 months from last mailing, if later)|
|Minimum funding contribution due (money purchase pension plans)||September 15, 2017|
|2016 Forms 5500 and 8955-SSA, and SSA information to participants, if corporate return extension||September 15, 2017|
|Annual participant statement (if no right to direct investments and corporate extension for Form 5500)||September 15, 2017|
|Summary annual report, if no 5500 extension||September 30, 2017|
|Earliest day to send out safe harbor notices for 401(k)/401(m) nondiscrimination safe harbor plans (including notice of qualified automatic contribution arrangement) and plans with eligible automatic contribution arrangements.||October 3, 2017|
|Retroactive amendment to correct prior year coverage/nondiscrimination failures||October 15, 2017|
|Annual participant statement (if no right to direct investments and using Form 5558 extension for Form 5500)||October 16, 2017|
|2016 Form 5500, 8955-SSA, and SSA information to participants, if on Form 5558 extension||October 16, 2017|
|QSLOB Form 5310-A modification or revocation election (if changing QSLOB for the 2016 plan year.)||October 16, 2017|
|Third quarter benefit statements||November 14, 2017|
|Summary annual report if Form 5500 extension using corporate extension applies||November 15, 2017|
|Deadline for participant notices including: auto-enrollment, QDIA, safe harbor||December 2, 2017|
|Summary annual report if Form 5500 extension using Form 5558 applies||December 15, 2017|
|Required minimum distributions||December 31, 2017|
|Corrective distributions for 2016 plan year||December 31, 2017|
|Last day to adopt discretionary plan amendments for 2017||December 31, 2017|
 Assumes calendar plan and sponsor tax year. Does not account for short plan years or new plans. Weekend rule generally applies to filing deadlines and certain other acts under tax rules, but not contributions, distributions and other Title I ERISA obligations. If a deadline is not extended to the next business day, be sure to take appropriate action in advance of the deadline.