Corporate governance is how a company polices itself and employees. It is intended to increase the accountability of the company, serve as a preventative measure, and help build transparency and trust. Corporate governance as it relates to plan administrators involves meeting your fiduciary responsibilities. Under the Employee Retirement Income Savings Act (ERISA), meeting your fiduciary responsibilities is a central responsibility. This involves acting in the interest of plan participants, carrying out your duties and responsibilities, carrying out the plan document and keeping it consistent with ERISA, diversifying plan investments, and paying plan expenses within reason.
To ensure fiduciary responsibilities are being carried out in a timely and accurate manner, the plan should be conducting regular plan administrative committee meetings with minutes documenting these actions by the Plan. The minutes should include reviews of plan agreements with third party administrators and investment managers, including any reasons for changes, and compliance with 408(b)(2) service provider notices and investment policies. Minutes should also record the review by the administrator of the list of parties in interest and prohibited transactions; approval of benefit payments; employer contributions; and investment results. As a part of the process, the committee should be following up on participant complaints, checking actual fees, inquiring about trading, and investment performance. Additionally, if the Plan has hired an investment provider to help participants make informed investment decisions, it should be carried out in the same manner as hiring any plan service provider and should be included and monitored through committee minutes.
Minutes are significant documentation, establishing that the plan administrative committee is actively involved in managing the Plan for the benefit of the Plan’s participants and their beneficiaries. Not only is this a best practice for plan administrators but neglecting committee minutes as a part of corporate governance leaves the company without a record of how they are achieving their fiduciary responsibilities.
By Sherry L. StaggsPosted on September 7 2016 by admin
Employers are allowed to terminate 401K benefit plans offered to employees for a variety of reasons. Employers are not required by law to provide retirement savings plans, and can terminate them as a part of a bankruptcy or merger, in order to switch to another type of plan, or voluntarily terminate the plan.
According to the IRS, employers must give their employees notice of the plan termination at least 30 days in advance, and employees in the plan must immediately be 100% vested in their accounts upon plan termination, regardless of what the vesting schedule is within the plan document. This means they will be 100% vested in employer matching contributions and profit sharing contributions in their accounts upon termination of the plan. Employers are required to distribute the assets of the plan to employees as soon as it is feasibly possible upon plan termination, usually within one year. Participants are also allowed to roll over the distributed funds into another qualifying IRA or 401(k) without penalty.
An employer can also incur a partial plan termination. This usually happens when an employer closes a plant or division that results in significant number of employees being terminated at one time (usually above 20%). Employees that are affected by the partial plan termination have the same rights as if the entire plan was terminated, therefore they are also become 100% vested in their accounts regardless of the normal vesting schedule of the plan. Normal turnover is not considered a partial plan termination, even if it is over the 20% threshold in a given year. Some factors that signal normal turnover are if the terminated employees are replaced, the new employees perform the same functions and have the same job titles, and the new employees receive similar compensation. Voluntary terminations or employees that quit generally will not qualify the plan for a partial termination.
Employers need to be aware of partial plan termination guidelines to make sure that terminated employees receive proper benefits. In a partial plan termination, terminated employees should not incur any forfeiture in their accounts, as they are 100% vested upon the partial termination of the plan. If forfeitures are incurred in this situation, the employer is responsible to pay employees the amount that was forfeited. However, if the termination event does not fall under a partial plan termination, employees may have to forfeit portions of their account that are made up of matching and profit sharing contributions, based on the terms of the plan document.
Plan terminations can happen for a lot of reasons; however, the IRS has rules in place to protect the assets of employees in the event of termination. Employers should also consider the repercussions of plan terminations or partial terminations, and be aware of the rules regarding these events.
By Tyler HenkelPosted on August 25 2016 by admin
Many retirement plan participants may already know about the option to take out a loan against their retirement account. What you may not know about is the option to take out a hardship (though, all plans may not offer the option). A hardship, as defined by the Internal Revenue Service (“IRS”), “must be made on account of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need”. In addition, there are certain “safe harbor” instances in which the IRS regulations have automatically determined an immediate and heavy financial need exists. They are:
- Certain medical expenses
- Costs related to purchasing a principal residence
- Tuition and related educational fees and expenses
- Payment to prevent the eviction from or foreclosure on a principal residence
- Burial or funeral expenses
- Certain expenses to repair damages to a principal residence
Outside of the examples above, a hardship is able to be taken if a participant can document their immediate and heavy financial need.
Once a hardship distribution is taken, the employee will typically not be allowed to make contributions to their plan for a minimum of six months. A hardship is not required to be paid back and will permanently decrease the balance of the employee’s retirement account.
When to take a hardship versus a loan
A hardship distribution is typically seen as a last resort. Many plans require that you take out all possible loans before the hardship distribution will be granted. However, if the loan will cause additional harm, then the employee may be able to take the hardship without the loan first. Examples of this can be if the loan repayments are to put the employee in further financial stress; or, in the case of purchasing a primary residence, the loan could prevent the employee from obtaining additional financing.
As with loans, each plan will have different requirements. This blog does not cover every situation and you should go to your plan administrator or human resources personnel for specialized information.
By Alyssa BorregoPosted on August 9 2016 by admin
Does your plan have target date funds (TDFs)? Are you doing enough in managing those investments as the plan fiduciary? Let’s see what the Department of Labor (“DOL”) says about these funds.
The DOL has general guidance on the selection and monitoring of TDFs. With many plan sponsors making these TDFs available to participants, it not only helps the non-savvy participant select an investment without having to actively manage their retirement account, but it also satisfies the DOL’s qualified default investment alternative (“QDIA”) requirement. This requirement is for plan sponsors to designate default investments for participants who enroll and do not select an investment choice. This typically occurs in a plan where auto enrollment is in play.
TDFs are attractive investments because they automatically rebalance to become more conservative as the participant approaches retirement age. When retirement is a number of years away, the fund is heavily weighted in stocks which can render larger returns but can also be quite volatile. As retirement date nears, the investments are more weighted in bonds which are more conservative and less volatile. TDFs can vary drastically from one fund manager to another, even TDFs with the same target dates. Because of these differences, it’s a responsibility of the fiduciary to understand the differences and make the best choice for their plan.
Here are some things to remember when choosing TDFs:
- Establish a process for comparing and selecting TDFs
- Establish a process for monitoring the selected TDFs
- Understand the TDFs investment mix, including the allocation in different asset classes, individual investments and how these will change over time
- Review the fees and investment expenses to ensure they do not violate the plan document
- Document the process of selecting and monitoring
For more information, visit the DOL’s website.
By Leslie A. Lee, CPAPosted on July 26 2016 by admin
There are a few simple steps that can be taken during the planning phase of the audit in order to gain efficiencies during the fieldwork phase. You should be in communication with your auditor before the Plan’s year-end date. This is the best time to come to an agreement about the terms, timing and fees associated with the audit.
Once an agreement has been reached, your auditor can begin planning the audit. You can help your auditor to achieve successful planning by doing the following:
- Discuss any issues encountered by the Plan in the year under audit.
- Communicate when your team is available to work with the auditor.
- Ensure the auditor has access to the Plan’s Third Party Administrator website.
- Request and forward the audit package from the Third Party Administrator to the auditor.
- Fully read and respond to audit communication before fieldwork.
- Ask any questions you have as soon as possible.
Upfront communication allows your auditor to assess risk and schedule staff with the appropriate experience and expertise. Confirming the fieldwork dates also helps your auditor to schedule adequately skilled associates. Ensuring that the auditor has access to any necessary online platforms and the audit package as soon as it is available will allow them to import the trust trial balance into the audit software. The trial balance will be used in every phase of the audit, so timely importing is key.
Your auditor will be sending requests for client prepared schedules, forms which include important inquiry items and sample selections. Keep lines of communication open, and reach out to your auditor with any questions, especially when you need clarification regarding items requested. Answering inquiry items and supplying the auditor with schedules and support requested well before the fieldwork dates allows your auditor to work through the more routine audit documentation. It also allows them to reassess whether staffing is appropriate before fieldwork. Finally, it allows everyone involved to be focused on more difficult audit areas during fieldwork, which is the time everyone has committed to being focused on, and available for, the audit.
Following these steps will result in the most efficient use of everyone’s time.
By Kristi RayPosted on July 12 2016 by admin
A determination letter is a formal document from the Internal Revenue Service (IRS) that declares a retirement plan to be operating within the Employee Retirement Income Service (ERISA) guidelines. If the plan meets all the requirements, it becomes certified as a qualified plan and is then eligible for applicable tax benefits.
Earlier this year, the IRS released Notice 2016-03, which explains that expiration dates on determination letters that were issued prior to January 4, 2016 will no longer be applicable. This is in preparation for the 2017 changes that will result in a determination letter being applicable until the plan’s termination with few exceptions.
As a result of the IRS’s need for efficiency, new changes are coming to the determination letter for qualified retirement plans. Effective January 1, 2017, in relation to the recent IRS Announcement 2015-19, Revisions to the Employee Plans Determination Letter Program, plans will only need to apply upon initial qualification of a plan and upon the plan’s termination. A plan sponsor who amends an individually designed plan will be unable to receive an IRS opinion letter. Changes made by the amendment do not affect the tax-qualified status of the plan.
The changes coming in 2017 have a significant impact on plan sponsors. This announcement has already resulted in an immediate elimination of off-cycle determination letter applications with the exception of new plans effective July 21, 2015 through December 31, 2016. Furthermore, a qualified plan’s determination letter is relied on by auditors, used in mergers and acquisitions and by the IRS. The IRS is ultimately the entity that states a plan is tax-qualified. As a result of no longer reviewing a plan’s amendment applications, plan sponsors ostensibly have no reassurance that the IRS will discover qualification errors in the future. Ultimately, this results in an inability to rely on a plan’s determination letter especially in the case of a merger or acquisition.
Additionally, the plan sponsors will see a loss in the remedial amendment period under §401(b) which is a period where a plan can amend their plan to retroactively comply with the qualification requirements.
I expect the IRS to come out with additional clarification on the coming changes and effects on the determination letter. The ultimate impact of these changes may lessen the reliance that is placed on the determination letter held by plans.
By Sherry L. Staggs
IRS Announcement 2015-19, Revisions to the Employee Plans Determination Letter Program, https://www.irs.gov/pub/irs-drop/a-15-19.pdf
IRS Notice 2016-03, Revisions to the Employee Plans Determination Letter Program Regarding Cycle A Elections, Determination Letter Expiration Dates, and Extension of Deadlines for Certain Defined Contribution Pre-Approved Plans, https://www.irs.gov/pub/irs-drop/n-16-03.pdfPosted on May 17 2016 by admin
The Department of Labor (“DOL”) has been working on revisions to the current “Fiduciary” Conflict of Interest Rule for multiple years but on April 8, 2016, the DOL’s final rule was posted to the Federal Register which is effective June 7, 2016 and applicable beginning April 10, 2017.
The rule now defines who is a “fiduciary” for separate instances:
- An employee benefit plan under the Employee Retirement Income Security Act of 1974 (“ERISA”)
- A plan (including an individual retirement account (“IRA”)) under the Internal Revenue Code of 1986 (“Code”).
The final rule amends the regulatory definition of fiduciary investment advice in 29CFR 2510.3-21 to replace the prior restrictive five-part test with a new definition that better mirrors the language in ERISA and the Code. The final rule provides that a person who renders investment advice if they provide for a fee or other compensation, director or indirect, certain categories or types of advice including:
- A recommendation as to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property, or a recommendation as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA.
- A recommendation as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., brokerage versus advisory); or recommendations with respect to rollovers, distributions, or transfers from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer or distribution should be made.
- Excluded from the new rule in providing general investment education on retirement saving and “order-taking” whereby a broker is simply executing a buy or sell order without any recommendation.
While this rule change will impact advisers, the DOL sought to preserve business models for delivery of investment advice by publishing new exemptions from ERISA’s prohibited transaction rules that would permit firms to continue to receive many common types of fees, as long as they are willing to adhere to applicable standards aimed at ensuring that their advice is impartial and in the best interest of their customers. The DOL is also publishing exemptions that accommodate a wide range of current types of compensation practices, while minimizing the harmful impact of conflicts of interest on the quality of advice.
Overall, the final rules will likely result in structural changes for many financial service companies and broker-dealers. In addition, it is likely that many insurance companies that offer investment services could implement changes to their structure and business models. Look for future blog posts that discuss the new DOL exemptions (84-24 and the Best Interest Contract Exemption) and other impacts of the new rule.
By Kevin C. Bach, CPA, CVAPosted on April 12 2016 by admin
As a Plan Sponsor, you have important fiduciary responsibilities which, according to the Employee Benefits Security Administration (“EBSA”) within the Department of Labor (“DOL”), include:
- Acting solely in the interest of plan participants and their beneficiaries
- Carrying out duties prudently
- Following the plan documents (unless inconsistent with ERISA)
- Diversifying plan investments
- Paying only reasonable plan expenses
Carrying out these responsibilities will require expertise in a variety of areas, and establishing a plan committee is a great first step in covering these areas.
401(k) Plan Committee Members – Your 401(k) plan committee should include a variety of individuals, and depending on your plan’s needs, will fall into two categories:
- Permanent Members:
- Plan Fiduciary (should be indicated on your plan documents)
- At least one member of senior management (e.g. CFO, COO)
- The company’s legal counsel
- External Vendors (can include representatives from the plan’s record keeper, trustee, and/or investment adviser)
- Temporary Members (alternating new members into the committee on an annual or other basis):
- Committee Secretary (a person to be responsible for documenting all committee meetings and decisions)
- Plan Participant(s) (voluntary representation for current participants)
Establishing a Charter – Once the structure of the committee members has been established, the next item on your agenda should be establishing your plan committee’s charter. This charter should define the plan committee’s purpose, responsibilities, and its processes for conducting reviews and resolving issues. You may also define how often you will meet, required attendees versus optional attendees, and/or file retention policies for plan committee meeting minutes.
401(k) Plan Committee Meeting Topics – Most of your meetings will probably focus in on the plan’s investments. Work with your investment adviser and have them present an investment review at least annually. If your plan does not have an investment policy statement, you can also ask your adviser for a template that can be adopted for use by the plan. Additional items to discuss may include:
• Plan administration topics
• Enrollment updates
• Client service issues
• Regulatory updates
• Reasonableness of plan fees
• Review of service auditor’s report provided by your custodian or trustee
Having an effective 401(k) plan committee will bring additional knowledge and expertise to your plan and will provide the crucial oversight that can not only help you carry out ERISA’s five responsibilities noted above, but also reduce legal and fiduciary risk related to your 401(k) plan.
By Audrey D. RichardsPosted on March 29 2016 by admin
As plan auditors we are frequently asked how long documents relating to a plan should be retained by the plan sponsor. Like anything related to the Internal Revenue Service (IRS), there is no one simple answer. Before discussing some general guidelines on record retention, let’s discuss some general responsibilities of the plan sponsor to operate a plan successfully.
First and foremost, a plan sponsor should select and retain a qualified Third Party Administrator (TPA), to ensure both the plan sponsor and the TPA has the same goal of administering a retirement plan for the benefit of the employees. Secondly, the plan sponsor is required to have a written plan document which outlines the provisions of the plan. These plan documents are periodically amended to keep them current with IRS requirements. Lastly, the plan sponsor must communicate the plan provisions to the participants through Summary Plan Descriptions and Summary of Material Modifications. Plans must be operated in accordance with the current plan document and the items listed above must be able to be substantiated to the IRS.
Just like with individual and business tax returns, benefit plans are subject to audit and records should be retained for substantiation. The Employee Retirement Income Security Act (ERISA) requires records to be retained for six years; however, records to determine an employee’s benefit must be retained until after the employee withdraws their benefit. Below are some general guidelines on retirement plan record retention:
By Leslie Lee, CPAPosted on March 17 2016 by admin
Required minimum distributions (RMDs) are minimum amounts certain participants (or retirement account owners if the participant has passed) must take as distributions from their account on an annual basis. Generally, RMDs begin the year in which the participant reaches the age of 70 ½ or the year in which the participant retires, provided they are not a 5% or greater owner of the Company. Depending on the terms of the Plan, the initial RMD can be delayed until April 1st of the year following attainment of the two criteria previously noted. For all subsequent years, the RMD must be made by December 31st. An important thing to note is the December 31st RMD will still be due even if the initial RMD was withdrawn in the same year.
RMDs are calculated each year by dividing the prior December 31st account balance by the life expectancy factor published by the IRS. There are three different life expectancy tables to choose from based on the participant’s individual situation:
- Joint and Last Survivor Table – to be used if the sole beneficiary of the account is a spouse and the spouse is more than ten years younger than the participant
- Uniform Lifetime Table – to be used if the sole beneficiary of the account is not a spouse and the spouse is not more than ten years younger than the participant
- Single Life Expectancy Table – to be used by a beneficiary after the participant has died
These tables can be found in IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).
RMDs must be calculated separately for each account a participant owns. Certain types of retirement accounts require the distributions to be made from each account as calculated; however, in some instances the withdrawal can be made from only one account or any combination of accounts owned. RMDs may be calculated by a Plan sponsor or custodian; however, it is ultimately the participant’s responsibility to ensure this is done. The penalty for not withdrawing the full amount of a calculated RMD or withdrawing the amount after the deadline is a 50% tax on the amount not withdrawn.
By Crystal L. Becerril, CPA-- Older Entries »
Finding information on employee benefit plans can be difficult and time consuming. As a service to our clients, and other interested parties who are involved in or in need of employee benefit services, we'll gather all of the information for you. We'll keep you up-to-date on the latest laws and regulations and we will even add our own personal insight into what else is occurring in the employee benefits world. We will provide these posts weekly and hope to get your input and feedback on the various topics. We will also share that feedback with others, as we find appropriate.
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- Importance of Minutes as Evidence of Corporate Governance
- Plan Terminations and Partial Terminations
- Retirement Plan Loan Alternative
- Target Date Funds
- How to Prepare for Your 401(k) Audit
- Determination Changes Impacting Qualified Retirement Plans
- DOL Fiduciary Rule
- Forming a 401(k) Plan Committee
- Plan Sponsor Record Retention Guidelines
- Required Minimum Distributions