Important 401(k) Testing Deadlines to Remember!

In general, 401(k) plans must be tested annually to demonstrate that they do not discriminate in favor of highly compensated employees, or provide benefits that exceed certain statutory or regulatory limits. If a plan “fails” any of the required tests, the plan sponsor must take corrective actions, and there are established deadlines for correcting certain failures. The following is a brief summary of these deadlines:

Note: Deadlines are based on a calendar year.

• March 15th – Deadline for issuing corrective distributions to correct ADP/ACP testing failures for non-safe harbor 401(k) plans.

In general, corrective distributions must be issued within 2 ½ months following the close of the plan year to avoid a 10% excise tax imposed on the excess amounts. Plan sponsors of 401(k) plans that include an “eligible automatic contribution arrangement” have up to 6 months to issue corrective distributions without incurring the excise tax.

In either situation, correct distributions must be issued no later than the last day of the plan year following the plan year in which the testing failure occurred to protect the qualified status of the plan.

• April 15th – Due date for issuing corrective distributions for excess deferrals (i.e. participant deferrals made in excess of 402(g) limit – $18,500 for 2018). If the excess amount, plus related earnings, is not distributed by this date, the participant is in effect taxed on the excess amount twice, both in the year the excess occurred and the year of the distribution. (Note: This deadline is the same, regardless of plan year).

• June 30th – Extended due date for issuing corrective distributions for ADP/ACP testing failures under “eligible automatic contribution arrangement” 401(k) plans; the 10% excise tax applies to distributions made after this date.
• October 15th – Deadline for adopting a retroactive plan amendment to correct a coverage or nondiscrimination testing failure (if applicable). The amendment must be adopted no later than 9 ½ months following the close of the plan year in which
the failure occurred, as provided for under the applicable regulations.

• December 31st – Final deadline for issuing corrective distributions for ADP/ACP testing failures for the prior year (or for making a QNEC/QMAC to correct the failure).

The deadlines 401(k) plan sponsors must observe are numerous and complex; the deadlines listed above are not meant to be comprehensive, but rather, represent critical dates related to the correction of specific plan testing failures.

Please contact us to learn more about how these rules impact your plan and participants!

Fiduciary checklist for hiring Service Providers

You reached a great milestone when your organization became competitive enough to offer your employees a qualified retirement plan under ERISA (Employee Retirement Income and Security Act of 1974).

However, success can bring new challenges. As the assets of your Plan grow, so can your fiduciary liability, exposing you to loss and litigation.

As a Plan Sponsor, you can mitigate your risk by hiring service providers who agree to assume or share fiduciary liability. ERISA specifically describes the duties of Plan Administrator and Investment Advisors

in sections 3(16), 3(21) and 3(38) that can be outsourced to help you avoid risk and non-compliance with federal regulations. (See Types of ERISA Fiduciaries).

Here is a checklist of some questions to ask yourself in deciding if the time is right for you to hire service providers, and a list of some areas to address with a potential provider.

Plan Design

Plan design is an important part of any plan. A solid plan design and attention to the execution of these features will help plan sponsors maximize the benefit of their plan for themselves and their employees.

• Has it been more than 18 months since you reviewed your Plan Document?

• Are you certain you have maximized benefits for owners and key employees?

• Does your Plan allow participants to make after-tax (Roth) contributions to their accounts?

Management, Administration, and Fees

The management, administration, and fees related to the operation of any retirement plan are important

factors when choosing a service provider. As mentioned previously paying “reasonable” fees and expenses

while ensuring that the management and administration of your retirement plan runs smoothly is a balance

that each fiduciary must meet (see Fiduciary Responsibilities for Benefit Plans under ERISA).

• Were you made aware of new plan design options on a timely basis?

• Does the administration of your retirement plan take too much of your time?

• Do you offer self-service features to help participants manage their own retirement accounts?

Participant Education and Retirement Resources

Ensuring that your participants have the resources available to make informed decisions and are kept up to date on the issues affecting their retirement plan helps plan sponsors motivate employees in making sound retirement decisions.

• Do you maintain a formal education program?

• Do you have regularly scheduled enrollment and education meetings?

• Are you happy with the percentage of employees participating in your retirement plan?

Investment Selection and Monitoring

The selection of investments in your retirement plan is as important as the design of your plan. Outsourcing these services to a 3(21) or 3(38) fiduciary can help limit the liability plan sponsors face when choosing and monitoring the investments (see Types of ERISA Fiduciaries).

• Has your investment policy been reviewed and followed in the last 12 months?

• Do you have a documented rigorous investment selection and review process?

• Does your plan offer all the appropriate core investment categories?

ERISA Compliance and Fiduciary Responsibility

Understanding your role as a fiduciary of the plan is important in meeting the high standard of conduct defined under ERISA. To see if you are a fiduciary of the plan, your responsibility as a fiduciary, or how to mitigate your liability as a fiduciary read our recent articles: Are you a Fiduciary?, Fiduciary Responsibilities

for Benefit Plans under ERISA , and Types of ERISA Fiduciaries.

• Are you provided excellent guidance, education and support in understanding your fiduciary responsibilities?

• Do you have a fiduciary assurance feature related to the suitability of the investment monitoring process and fund lineup?

• Do you have all the tools and resources needed to help discharge you of your fiduciary responsibilities?

Download EJReynolds’ 401(k) Compliance Review to assess how well your 401(k) Plan is operating up to today’s standards.

EJReynolds, along with your advisor, can assist you in reviewing and defining you plan objectives, help you be more prescriptive with your investment options, and more easily communicate with employees who want to understand how to achieve their own retirement income goals.

Plan Compensation – Not So Simple!

At face value, it seems like “compensation” would be one of the simplest issues to deal with in a retirement plan, but it is actually one of the most complex. Understanding what compensation is “plan eligible” is one of the biggest headaches for plan sponsors and an area in which plan sponsors often make mistakes.

If you think about all the different forms of compensation you pay your employees (e.g. bonuses, commissions, fringe benefits, paid sick time, vacation time, automobile allowance, severance pay, group term life in excess of $50,000, etc.), it becomes clear why this is such a complex issue!

What is “plan eligible” compensation?

Plan eligible compensation must be defined under the terms of the plan, and the terms of the plan must be followed. There are 3 basic definitions of compensation that are commonly used:

  • W-2 Compensation
  • Income subject to federal income tax withholding
  • “415” Compensation (basically, an all-encompassing definition)

Note: Other definitions of compensation may be used, but they are generally subject to additional testing requirements.

Why does plan compensation matter?

It matters for several reasons, but primarily because all contributions must be based on the plan’s definition of compensation.

What is this important to me as a plan sponsor?

At the end of the day, a plan must be operated in accordance with the terms of the plan to protect its qualified status, so it is very important to understand what compensation is plan eligible.

Common sense often drives employers to make decisions about whether to apply an employee’s 401(k)/Roth election to certain compensation items, but common sense doesn’t rule in this situation.

For example, one of the most common mistakes made by plan sponsors is to not withhold employee deferrals from bonuses, rather than allowing employees to make this election.

Bonuses are plan compensation, unless specifically excluded under the terms of the plan. Unless the plan allows employees to make a specific election with respect to bonuses, the deferral election must be applied to this compensation.

So, what happens if an employer makes a decision not to withhold from bonuses? Generally, the correction is for the employer to make a corrective contribution on behalf of the affected participants for the “missed deferral” along with any related matching contributions, adjusted for earnings. A mistake that is costly for the employer and totally preventable!

Can a plan exclude bonuses or commissions from its definition of compensation?

It depends; unless the plan uses one of the “common” definitions, certain testing must be done each plan year to ensure the plan’s definition of compensation doesn’t discriminate in favor of the plan’s highly compensated employees. Excluding bonuses or commissions from eligible compensation requires this additional testing, so whether it is viable in a given situation depends on a number of factors.

What about fringe benefits; must they be included?

No, provided the plan’s definition excludes all of the following (even if includible in gross income): reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation, and welfare benefits.

Can we exclude other compensation items from the plan’s definition of compensation?

It depends on your specific company, how you compensate your employees, the demographics or your workforce and the general provisions of your plan. It is certainly acceptable to design your plan in such a way that certain compensation items are excluded provided the plan can meet the necessary nondiscrimination testing requirements and you can properly administer its provisions.

The Bottom Line

A plan’s definition of compensation is one of the most complex issues impacting retirement plans. It is important your plan is designed properly to meet your specific needs and that you, as a plan sponsor, understand your plan’s definition of compensation so that you can keep your plan in compliance and avoid costly mistakes!

We possess the necessary expertise to help you navigate through these issues and want to help you optimize your plan’s design so that it works well for you and your employees! Please contact us to learn more.