Tags: Employee Benefit Plans

Plan Sponsor Alert: M&A Could be Your Next Challenge. Are You Ready?

Last year, despite pandemic fears, companies took advantage of low interest rates to create an unprecedented increase in mergers and acquisition (M&A) activity. On a global level, more than 63,000 transactions worth $5.9 trillion closed in 2021, with the U.S. leading the way in deals worth $2.6 trillion, according to Refinitiv, a British financial market data firm. Rising interest rates, ongoing geopolitical concerns and other factors may slow the pace of deals in 2022, but many analysts expect M&A activity to remain high for the foreseeable future.

Company retirement plans and their participants are typically an afterthought when M&A activity is happening at such a rapid pace. While much can wait until the deal is done, it is important to focus on a few areas that plan sponsors often miss in diligence or are surprised to learn about when acquiring a company or being acquired themselves.

First, who is in charge?

It may sound elementary but clarifying which company/plan sponsor is the acquirer and identifying the specific team leading the transaction is very important for managing the benefit plans part of the M&A equation. This group needs to decide who is going to make the benefits decisions and how benefits are going to be offered going forward.

Following a thorough analysis of any current plans in place, the team should decide whether they will terminate the target company’s plan, operate both plans separately or merge the plans. It is also important to review whether any newly established or legacy plans will be able to pass coverage and non-discrimination testing.

If there are any concerns about the plan being tainted – in other words, featuring elements of non-compliance, a full compliance review should be completed during the sign to close period (usually anywhere from 30-60 days after the deal is signed). The compliance review process should include detailed review of items such as plan documents, Forms 5500, employee census data and coverage testing to assess whether there are points of non-compliance.

It also can be valuable to do a “winners/losers” analysis to understand which participants may benefit the most versus have take-aways under the new plan. After this assessment, the team can decide whether and how to compensate those who “lose” in the new plan for example, through an increased benefits, salary increase, bonus, etc.

Second, managing service providers

One challenge with service providers is that once a merger or acquisition is in motion, many vendors become less invested in supporting the plan because they assume they will no longer be servicing the plan post-acquisition. In most cases, they will eventually do their part but often won’t be very responsive or provide hands-on support to determine how to bring the new plan together.

Savvy plan sponsors find service providers with a vested interest in the new plan. Such a provider should have a handle on deadlines, compliance issues and any important details that cannot be missed in the new plan. For example, it is important to have a strong understanding of the Internal Revenue Service’s Rev. Rule 2004-11, also known as the coverage transition rule, which deals with non-discrimination requirements during an ownership change.

Another helpful step is to ask the service provider for a temporary team member familiar with special events such as plan mergers or terminations, as applicable. Often day-to-day teams are not familiar with the extensive list of actions which need to be taken which can result in project delays and/or compliance risks.

Third, communication to participants is paramount

Plan sponsors need to clearly communicate with employees how their benefits will be affected by a merger or acquisition. Depending on how the plans are handled going forward, these events can have a significant impact on participants – for example, some participants may need to pay off loans if a plan is terminated, causing an unexpected taxable event for those individuals. If circumstances are not communicated clearly and effectively, plan participants can be caught off guard, creating challenges for both participants and sponsors.

Employees often do what is easiest, which is typically inaction. Plan sponsors have recognized this and the use of auto-enrollment in 401(k) plans and annual auto-increases have significantly increased both participation and employee contributions to plans. Best practice is to assume many employees will not take action and structure the process in such a way these employees will not be disadvantaged.

Insight: Set yourself up for Success

Transitioning plans into a new organization takes a lot of effort. Now is the time to get organized – even if there isn’t a deal looming on the horizon today. While the basics of having a list of all service providers, testing results and making sure documents and operations mirror each other is essential, your philosophy on how you want your plan participants to receive benefits moving forward should also be a core focus.

If you have questions or need more information about employee benefit plans, contact Kevin Hamaker.

    Tags: Employee Benefit Plans

    Remittance Schedules: How to Know and Meet your Deadlines

    Part of offering a defined contribution plan, whether a 401(k) or a 403(b) plan, is making sure that the money participants contribute from their paycheck is deposited in their retirement account in a timely manner. While this might seem like a relatively minor and simple task in the scope of a plan sponsor’s fiduciary duties, the Department of Labor (DOL) views non-compliance with remittance rules as a major issue, and missing deadlines for deposits—even by a couple of days—can carry significant penalties.

    Unfortunately, there is much confusion about how quickly plan sponsors are required to make these deposits. The DOL expects plan sponsors to separate employee elective deferrals and loan repayments from the employer’s general assets as soon as reasonably possible, but no later than the 15th business day of the following month. Small plans, which have fewer than 100 participants, have a safe harbor of seven business days to make this transaction happen, but larger plans are expected to do this as soon as reasonably possible.

    Many plan sponsors mistakenly—and understandably—think this means that they have until the 15th of the next month, which is just what the DOL says. They see this as a safe harbor—which it is not. The DOL requires participant contributions and loan repayments to be transferred as soon as reasonably possible. The 15th deadline is the last possible day that can be considered timely.

    Defining What Is “Reasonable”

    So what is reasonable? It varies depending on the company’s circumstances. For companies with more streamlined operations, it may be within a few business days of completing payroll withholding taxes. But some companies with multiple locations, it may be up to eight days to be reasonable. Others differentiate between regular and business days. Many companies outline the remittance schedule in the plan document. Whether the plan has a remittance policy or not, the DOL will look at the deposit history and assume that the pattern established by the plan sponsor is the default procedure.

    The DOL considers late participant contributions and loan repayments to be prohibited transactions under the 1974 Employee Retirement Income Security Act (ERISA); they are subject to an excise tax based on the amount of the late remittance as well as other possible penalties. After a late remittance is determined, plan sponsors need to report the transaction on their Form 5500.

    Often, plan sponsors are unaware of remittance violations. Holidays, key employee absences or other factors could play into the delayed remittance that may go unnoticed by the plan sponsor. It’s not uncommon for us to find late remittances when conducting the regularly scheduled audit that is required for larger plans.

    Avoiding Missed Remittance Deadlines

    Given the lack of clarity about remittance rules, what can plan sponsors do to strengthen their practices related to depositing employee contributions? First, it’s important to think about what works for your company. If the company has multiple locations, do you need more time to organize the remittance? How often are you able to review your transactions to make sure you are meeting deadlines?

    Many organizations find that it’s helpful to review the remittance schedule on a quarterly basis and to tie the 401(k) remittance schedule to the payroll tax withholding timetable. Reviewing the remittance schedule on a quarterly basis will speed up the correction process, making it easier and less expensive to address any mistakes. Delayed deposits mean missed opportunities for employees to earn interest and capital gains from the investments, so the longer the money is detained, the more expensive it will be to make up lost earnings.

    Another added protection is to develop a backup strategy. People get sick and go on vacation, so it’s a good idea to have multiple employees trained in completing the remittance procedures. Reviewing possible holidays each quarter also may help in planning around those days when the company, financial institutions or other partners are closed.

    Lastly, if there is a late remittance, it’s critical to document why the transaction was delayed.  This helps your auditor and the DOL understand the situation and your actions to apply a remedy.

    Insight: Make Remittance Compliance a Top Priority

    Protecting participants’ retirement accounts is a top priority for the DOL and making sure plan sponsors stick to a regular remittance schedule is something the DOL monitors very closely. Many plan sponsors are under the false assumption that they have a good bit of time each month to complete the task. The DOL wants it done as soon as reasonably possible—and on a regular basis. Your plan document may help in guiding this schedule, but the DOL looks at the remittance history and considers that as policy.

    Following a regular remittance schedule – whether formal or informal – may seem like an easy task, but holidays, employee absences and other unexpected issues may hamper your ability to follow your procedures. If you have questions about depositing employee elective deferrals, please contact your firm representative.   

    Written by Beth Garner. Copyright © 2022 BDO USA, LLP. All rights reserved. www.bdo.com 


    If you have questions or need more information about employee benefit plans, contact Kevin Hamaker.

      Tags: Employee Benefit Plans

      DOL Alert: Proposed Regulation on ESG Investing and Shareholder Rights

      The Department of Labor (DOL) is preparing to finalize a proposed rule that changes the way environmental, social and governance (ESG) factors are viewed in a plan sponsor’s investment process and proxy voting methods. The proposal, which was issued in October 2021, aims to help plan sponsors understand their responsibilities when investing in ESG strategies and makes significant changes to two previously issued ESG rules.

      Here, we provide an update on the DOL’s proposed rule and seek to help plan sponsors understand their potential new responsibilities when considering ESG investments.

      Background on ESG rules

      For many years, the DOL has considered how non-financial factors, such as the effects of climate change, may affect plan sponsors’ fiduciary obligations. Amid an increasing focus on ESG investments, the Trump administration issued a final rule on ESG in November 2020 that required plan fiduciaries to only consider financial returns on investments—and to disregard non-financial factors like environmental or social effects. The rule also banned plan sponsors from using ESG investments as the Qualified Default Investment Alternative (QDIA).

      A separate ruling issued in December 2020 said that managing proxy and shareholder duties (for investments within the plan) should be done for the sole benefit of the participants and beneficiaries—not for environmental or social advancements. It also stated that fiduciaries weren’t required to vote on every proxy and exercise every shareholder right.

      In March 2021, the Biden Administration said it would not enforce the previous year’s rulings until it finished its own review. The current proposed rule is the result of that research.

      Overview of the new proposed ESG rule

      In October 2021, the DOL proposed a new rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.” According to the proposed rule, fiduciaries may be required to consider the economic effects of climate change and other ESG factors when making investment decisions and exercising proxy voting and other shareholder rights. The proposal states that fiduciaries must consider ESG issues when they are material to an investment’s risk/return profile. The rule also reversed a previous provision on QDIAs, paving the way for ESG investment options to be used in automatic enrollment as long as such investment options meet QDIA requirements.

      The new ESG rule also made several changes to fiduciaries’ responsibilities when exercising shareholder rights. First, it changed a provision on proxy voting, giving fiduciaries more responsibility in deciding whether voting is in the best interest of the plan. Second, it removed two “safe harbor” examples of proxy voting policies. Next, the proposed rule eliminated fiduciaries’ need to monitor third-party proxy voting services. Lastly, the proposal removed the requirement to keep detailed records on proxy voting and other shareholder rights.

      In addition, the DOL updated the “tie-breaker test” to allow fiduciaries the ability to choose an investment that has separate benefits (e.g., ESG factors) if competing investments equally serve the financial interests of the plan.

      Comment letter analysis shows broad support for the proposed rule

      The DOL received more than 22,000 comment letters for the proposed regulation. Ninety-seven percent of respondents support the proposed changes according to an analysis of the comment letters by the Forum for Sustainable and Responsible Investment (US SIF), a membership association that promotes sustainable investing. While some respondents asked the DOL to revisit the tie-breaker provision and other specifics of the proposed rule, many respondents agreed that the proposed rule clears the way for fiduciaries to consider adding ESG investment options to benefit plans.

      Insight: Consider how the proposed ESG rule affects your plan today

      Based on the typical timeline for similar rule changes, the DOL is expected to issue its final version of the proposed rule by mid- to late-2022. This means that plan sponsors shouldn’t have to wait long for clarification on their ability to add ESG investments to their plans. To prepare for the potential changes, plan sponsors should review the proposed rule and consider creating a prudent selection process that reviews all aspects that are relevant to an investment’s risk and return profile. As always, documentation is a critical step in this process.

      The team at BSB is following the latest developments and will continue to provide updates. If you have questions or need more information about 401(k) plans and other employee benefit plans, contact Kevin Hamaker.

        Tags: Employee Benefit Plans

        GAO Report: Participants Don’t Understand Fee Information

        The Department of Labor (DOL) released a groundbreaking final rule in 2012 that required plan sponsors to issue plainly written information about 401(k) fees. The Government Accountability Office (GAO) issued a study showing that despite plan sponsors’ efforts, 41 percent of plan participants don’t think they pay a dime for their 401(k)s.

        Helping participants better understand 401(k) fees not only can improve participants’ financial wellness—it may reduce the risk of litigation for plan sponsors.
         

        Both the DOL and Plan Sponsors Have Fallen Short

        The DOL’s regulation in 2012 aimed to give plan participants the information necessary to make informed decisions on investments in their 401(k) accounts. The rule required plan sponsors to provide investment and administrative fee information on an ongoing basis. Plan sponsors must clearly show participants’ account-specific fees on a quarterly basis.

        For many participants, disclosure statements can be confusing, the GAO found. For example, the DOL regulation does not specify or define the proper terminology for investment fees. As a result, the GAO found that 10 large 401(k) plans use 11 different terms for investment fees. This inconsistency in terminology may make it challenging for plan participants to compare fees on their plan investments versus other investment options.

        The GAO made five specific recommendations for the DOL to amend its original regulation:

        1. Require consistent terms and measures for investment fees
        2. Show the actual cost of the investment fees
        3. Educate participants on the cumulative effect of fees over time
        4. Require fee benchmark information so participants can weigh the competitiveness of their investments
        5. Require investment ticker information so participants can research and compare their options

        In its response to the GAO report, the DOL admitted that plan and investment fee information can be very complicated and that the GAO’s study demonstrated this. The DOL said the recommendations pose significant technical and feasibility challenges, and applying the suggestions would force it to forgo other initiatives. The GAO noted that the status of the recommendations remains open.

        Plan Sponsors Can Help Themselves While Helping Participants

        Ensuring that their participants get the information they need to make informed decisions is especially important given the recent uptick in fee-related litigation targeting plan sponsors. There are several ways that plan sponsors can implement changes before being on the defense in court.

        A sensible place to start is with service providers. The DOL requires service providers to disclose their fee information to 401(k) plan fiduciaries. Plan sponsors must review and clearly understand this data, because any lack of clarity about the fees charged by service providers may eventually lead to confusion about participants’ fees.

        The GAO reviewed methods used in Europe, Australia and New Zealand to improve participants’ understanding of fees and other plan-related information. Examples include:

        • Financial literacy: Educate participants on basic financial concepts such as compound interest.
        • Visual elements: Use histograms and icons to show cost information.
        • Cost breakdowns: Instead of issuing one final figure, break down fee information so participants can compare investment options.
        • Performance and fee information: Provide investment return estimates on participants’ accounts.
        • Page limits: Use fewer pages to help empower participants, not overwhelm them.
        • Standardized formats: Provide uniform retirement plan and product information to help participants compare investment options.
        • Promotion of fee awareness: Use advertising, social media, television and other outlets to increase fee awareness.

        Insight: Get to Know Your Participants

        Before embarking on a financial education campaign or revamping your communications, plan sponsors should start by engaging with their participants to gain a better understanding of their specific needs. Some participants may need financial literacy education, while others may need visual or auditory elements to help with their decision making. Plan sponsors should seek to develop a plan that works for their particular group of participants.

        If you have questions about employee benefit plans, please reach out to Kevin Hamaker for more information.


          Tags: Employee Benefit Plans

          Abandoned 401(K) Accounts and the Great Resignation

          The trend of U.S. workers leaving their jobs and employers struggling with high levels of employee turnover continues to gain momentum. Another 4.5 million U.S. workers quit their jobs in November alone, according to data from the U.S. Bureau of Labor Statistics. Meanwhile, the number of job openings in the United States remains elevated at 10.6 million, as companies across sectors and industries continue to have a hard time recruiting and retaining employees.

          How are the issues related to what is now called the “Great Resignation” affecting plan sponsors in particular? The current environment not only makes it hard to build and manage an effective workforce, but plan sponsors also may face problems down the road when departing workers leave their 401(k) balances with their previous employers.

          Growing Concern of Abandoned 401(k) Accounts

          An estimated 2.8 million 401(k) accounts are forgotten, left behind, or abandoned each year, representing an average account size of $55,400, according to Capitalize, a fintech company that consolidates 401(k) plans. (For the purposes of this article, we use the term “abandoned” to cover these accounts whether they are forgotten or left behind intentionally at a previous employer.)

          Abandoned accounts aren’t just a potential issue for employees—they can lead to penalties and administrative challenges for employers, too. Capitalize notes that abandoned 401(k) accounts can cost employers up to $700 million in administrative fees. Failing to follow missing participant guidance or forfeiture rules also may lead to penalties for plan sponsors.

          How can plan sponsors resolve these issues?

          Fortunately, there are some easy ways for plan sponsors to limit the potential burden of abandoned 401(k) accounts. Plan sponsors should start by ensuring that they have up-to-date contact information before an employee’s final day with the organization. Cell phone numbers, email addresses, and mailing addresses are critical data points to gather. Email addresses and other digital contact information are especially important in today’s increasingly digital world.

          Existing rules can help employers resolve smaller accounts that are abandoned. By law, employers are allowed to cash out small, vested accounts of $1,000 or less. For vested account balances between $1,000 and $5,000, employers are permitted to move these assets to an Individual Retirement Account (IRA).

          Currently, there is no specific guidance for account balances larger than $5,000. Because of this, employers have relied on Field Assistance Bulletin (FAB) 2014-01, which is meant for participants in terminated defined contribution plans. Under this bulletin, plan sponsors are instructed to send a certified letter to the participant’s last known address; keep records on attempts to reach the missing participant; ask co-workers how to find the missing participant; and call the missing participant’s cell phone, among other instructions.

          To help mitigate these issues in the future, some employers are adopting auto-portability benefits. These tools automatically transfer small balances to new employers. Plan sponsors that offer auto-portability benefits should explain how this tool works to departing employees.

          Plan Document Language on Forfeitures and Cash-Outs

          For participants who leave before they are fully vested in a 401(k) plan, employer contributions are typically placed in forfeiture accounts. This section of the plan document can be written in a variety of ways, so it is crucial to understand how the timing and use of the forfeiture account is established in your specific plan.

          For example, forfeitures can be paid at the time of termination or when the participant hits a five-year break in service. Employers wanting to access non-vested amounts more quickly should consider amending the plan document to allow access to non-vested amounts at the time of termination (as opposed to the time of distribution).

          While plan documents can set cash-out thresholds (within the minimum and maximum allowable amounts), plans may elect the small balance cash-out option for accounts under $5,000. Rollover balances also can be disregarded when determining the $5,000 threshold, but this caveat must be written into the plan document.

          Insight: Don’t Waste a Plan Restatement Cycle

          Every six years, the Internal Revenue Service (IRS) requires employers with qualified, pre-approved plans to have their basic plan documents re-written or restated onto new plan documents. The current restatement cycle for defined contribution plans will close on July 31, 2022.

          The current restatement cycle provides an opportunity to amend your plan to make it beneficial to employers and employees when team members leave your organization. Your advisor can help review your plan documents and make the most of your plan restatement process in the context of current trends in the labor market and your organization’s objectives.

          If you have questions about employee benefit plans, please reach out to Kevin Hamaker for more information.

            Tags: Employee Benefit Plans

            ERISA Update and Outlook for 2022

            Employers have spent the last two years dealing with many challenges and disruptions, and they are now looking to move forward in 2022 against a backdrop of economic and pandemic-related uncertainty and market volatility.

            Here are some themes that plan sponsors should be keeping a close eye on in 2022.

            The #1 Financial Story of the Year: Inflation

            You can’t go anywhere without hearing about inflation—and for a good reason. The Consumer Price Index (CPI) rose 6.8% from November 2020 to November 2021, the largest 12-month increase in nearly 40 years. But how do increases in prices for gas (up 58%), meat (up 13%) and cars (up 31%) affect retirement accounts?

            For participants in defined contribution plans, these price hikes mean that their paychecks don’t go as far in covering living expenses. As a result, some participants may choose to decrease their plan contribution rates to increase the amount of take-home pay. A significant number of participants may stop contributing altogether, which could alter the plan’s fee structures. Rising prices could also lead to increases in loans and hardship withdrawals. Finally, while financial wellness plans have been in place at many organizations for some time, plan sponsors should consider whether such benefits properly address participants’ concerns about inflation.

            New Strategies for Massive Shifts in the Labor Market

            The coronavirus pandemic caused many companies to shut their doors and employees to work from home. As a result, the hybrid and remote work environment evolved faster than expected. In addition, there was a massive exodus from traditional 9-to-5 jobs in America. According to data from the Bureau of Labor Statistics (BLS), 6.3 million people left the workforce in November 2021 alone.

            In response to the tight labor market, employers should consider a variety of strategies to attract and retain top talent. Potential solutions include stronger retirement benefits (such as matching contributions), referral bonuses, more flexible hours, remote work stipends, childcare assistance or parental family leave and shorter work days around holiday time.

            Cybersecurity Practices Draw Increasing DOL Scrutiny

            Last April, the Department of Labor (DOL) released its first-ever guidance on cybersecurity best practices for fiduciaries, recordkeepers and participants. Soon after that, the DOL began conducting investigations on retirement plan cybersecurity practices. The DOL has asked for a comprehensive set of documents related to the plan’s cybersecurity or data security practices to assess cybersecurity risk and the safety of plan data. The DOL is also reviewing relationships with service providers, such as recordkeepers, attorneys, investment managers, and advisors, to ensure that they are doing their part to protect plan data.

            Plan sponsors should take a proactive approach to cybersecurity in 2022, including reviewing the DOL’s guidance and comparing it to their plan operations to determine whether operational changes are required. Plan sponsors also should discuss cyber risk measures with service providers to learn about their cybersecurity protocols. In particular, plan sponsors should review whether service providers are contractually permitted to cross-sell participant data. Lastly, plan sponsors should carefully review providers’ SOC1 reports, which is an essential step to monitor service providers properly.

            Insight: Do Your Homework to Hit the Ground Running in 2022

            While the direct health implications of the COVID-19 pandemic continue to dominate headlines, issues created in the wake of this crisis will garner increased attention in 2022. Inflation, the rapidly changing workforce, cybersecurity and other audit concerns are areas that plan sponsors will need to focus on in the upcoming year.

            If you have questions about employee benefit plans, please reach out to Kevin Hamaker for more information.

              Tags: Employee Benefit Plans

              Tracking the Trends: Retirement Plan Benefits

              Within the past couple of years, there has been a flurry of laws and regulations enacted to address the challenges workers face in saving sufficiently for retirement and provided short-term COVID-19 pandemic relief (financial and otherwise). Several legislative changes impacted retirement benefits offered by employers where the legislators were attempting to address key issues facing today’s workers through the incorporation of new retirement plan provisions.

              Improving the retirement savings rate

              The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 included several provisions intended to improve the retirement savings rate for workers. One change requires plan sponsors to provide each participant with two separate examples illustrating their account balance converted to a lifetime income product. The hypothetical examples are intended to help participants recognize whether they are on track to generate sufficient income to fund their retirement and to better understand how their savings translates into an estimated monthly dollar amount.  The participant can then use this information to better plan their savings rates, if needed.

              The SECURE Act also provided a safe harbor pathway for 401(k) plans to offer annuities (perhaps not coincidentally as some anticipate an increased demand for annuities or other products that provide lifetime income). A recently introduced bill—dubbed SECURE 2.0—would also ease restrictions on Qualified Longevity Annuity Contracts (QLACs), if passed.

              When considering adding lifetime income benefit options, employers should assess whether this strategy is a good fit for the organization and its employees. Adequate investor education is crucial when incorporating these options to ensure participants are fully aware of the costs, benefits, and risks associated with annuities.

              Enhancing access to retirement funds while also plugging the “leaks”

              While retirement plans allow for in-service withdrawals for serious financial hardships and participant loans for significant expenditures, many workers perceive retirement funds as their most viable option to cover routine expenses and budget shortfalls. Even prior to the COVID-19 pandemic, it was estimated that more than a third of Americans would be unable to manage a $400 emergency expense, according to 2019 data from the Federal Reserve.

              With the pandemic spurring an increased need for loan and withdrawal assistance, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (passed in March 2020) temporarily eased defined contribution loan, withdrawal, and repayment rules for participants affected by the pandemic. While most of the provisions were discretionary, a significant number of employers adopted them. A November 2020 report from the Plan Sponsor Council of America (PSCA) showed that about a third of employers offered increases in plan loan. About a quarter of plan sponsors noticed an uptick in loans since the onset of the pandemic, while more than a third saw an increase in withdrawals.

              • Increased participant access to retirement funds is a concern for the long-term impact on retirement readiness. This so-called retirement fund “leakage” (which occurs through early withdrawals for hardship, participant loans taken but not repaid, and other cash-outs) represents a significant challenge to building workers’ retirement preparedness. Some employers are incorporating special tactics and tools to discourage participants from using their retirement plan accounts as “rainy-day” funds, including:
              • Greater restrictions and limits on participant loans (including limits on the number of loans and allowing loans only for serious financial hardships)
              • Use of sidecar savings accounts, which are savings accounts linked to the participant’s retirement plan account
              • Offering an employee financial wellness program
              • Encouraging use of alternative sources of funds or borrowings
              Assisting with student loan debts

              Student loan debt is a crushing burden for many American workers: Americans carry a total of $1.7 trillion in student loan debt, according to Federal Reserve data. The CARES Act provided some temporary relief through suspension of repayments and interest accruals (through a zero percent interest rate) on federal loans through September 30, 2021. The Act’s provision allowing employers to pay up to $5,250 toward an employee’s student loans as a tax-free benefit was recently extended through 2025 by the Consolidated Appropriations Act (CAA). The proposed SECURE 2.0 legislation also includes a provision allowing employers to make matching contributions to employee 401(k) plans based on their student loan repayments. 

              These offerings may be attractive as an approach to attain and retain workforce talent, but be sure to realistically consider what portion of the employer’s workforce would actually benefit from this assistance. Employers interested in helping employees manage their student loan debt should work with service providers to understand the various tools available and investigate any potential downsides of the benefit (which can be expensive).

              Insight:
              Monitor legislation and trends while preparing for change

              Changes and trends in retirement benefits are often driven by legislative or regulatory action. Since retirement plan solutions are often developed as a direct response to legislation, we encourage employers to monitor recent and ongoing legislation for temporary or optional provisions that could become permanent components of retirement benefits.

              The axiom “change brings opportunity” is a notable reminder as employers face today’s evolving workforce and workplace. Employers have an opportunity to use these legislative changes to redesign retirement benefit offerings to better meet employee needs as well as to further their goals and objectives.

              Written by Beth Garner and Joanne Szupka. Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com

              If you have questions about employee benefit plans, please reach out to Kevin Hamaker for more information.

                Tags: Employee Benefit Plans

                SECURE Act Guidance for Safe Harbor Retirement Plans

                Employers now have more flexibility in adding or amending safe harbor 401(k) or 403(b) plans, thanks to the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act and subsequent guidance from the Internal Revenue Service (IRS). These changes should increase access to the benefits that safe harbor plans offer, such as avoiding administrative costs and burdens of performing certain nondiscrimination tests and strengthening retirement readiness thanks to meaningful employer contributions.

                We outline the most significant changes that the SECURE Act made to safe harbor plans. We also explain why plan sponsors should talk with their advisors now about amendments that they may need to make to their plan documents to comply with these SECURE Act changes.

                Mid-year and Retroactive Adoption of Safe Harbor Plans

                Before the new law, plan sponsors had to adopt safe harbor plans before the beginning of the plan year. Now, plan sponsors can retroactively convert a traditional 401(k) plan to a safe harbor plan that uses employer nonelective contributions.

                This option is particularly helpful for plan sponsors that realize mid-year that their traditional plan might not pass nondiscrimination testing for contributions on behalf of highly and non-highly compensated employees. As a reminder, plans that fail nondiscrimination testing generally return a portion of highly compensated employees’ contributions to the employee, which are subject to income tax.   

                Plans now have until 31 days before the end of the current plan year to retroactively implement a safe harbor plan that makes employer nonelective contributions of at least 3% to all eligible employees. If plan sponsors miss this deadline, they can still retroactively implement a safe harbor plan until the last day of the following plan year, but at this point the minimum nonelective contribution increases to 4%.

                Elimination of Annual Notice Requirements for Nonelective Safe Harbor Plans

                Before the SECURE Act, plan sponsors needed to send participants annual notices outlining the safe harbor contributions. The IRS guidance clarified that plans that use nonelective contributions to satisfy the safe harbor requirement no longer need to send these annual notices. This change should help reduce administrative burdens for plan sponsors that use the nonelective contribution option. It is important to note, however, that safe harbor plans that use matching contributions must still send the annual notices.

                Increased Auto-escalation Contribution Cap

                Plan sponsors that automatically enroll participants into a safe harbor plan that uses a qualified automatic contribution arrangement (QACA) must default the employee’s contribution to at least 3% of the employee’s pay with an annual increase of 1% to at least 6%. The automatic escalation of the employee’s contribution previously was capped at a maximum of 10%, but the SECURE Act increased that limit to 15%. Plan sponsors can choose to stop the auto-escalation at an amount lower than 15%, however, as this increase is not a required change. This higher limit could be especially helpful in enhancing the retirement readiness of employees who tend to put their retirement savings on autopilot.

                Insight:

                Start Conversations About Safe Harbor Plan Amendments Now

                Plan sponsors that use safe harbor plans—or may consider adopting one retroactively—should start conversations with their third-party administrators and other relevant service providers about possible amendments to their plan documents. Many safe harbor amendments, related to SECURE, are due by the end of the first plan year starting in 2022.

                Although plans have until the last day of the next plan year to retroactively implement a safe harbor plan using employer nonelective contributions, doing so at least 31 days before the end of the current year will save one percentage point per employee (3% vs. 4%). So now is the time to start doing the necessary calculations to see whether your plan is in danger of not passing nondiscrimination testing.

                Written by Beth Garner and Nicole Parnell. Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com

                If you have questions about safe harbor retirement plans or other EBP issues, please reach out to Kevin Hamaker for more information.

                  Tags: Employee Benefit Plans

                  Expect some changes for your next employee benefit plan audit

                  Employee benefit plan (EBP) administrators should be aware of some changes that will go into effect soon.

                  After Dec. 15, 2021, EBP audits will be much different than they were in the past. Due to recent changes by the American Institute of CPAs (AICPA), EBP plan managers will receive more comprehensive information from auditors.

                  This is good news for managers who are wishing for more transparency. The new audit reports will include an explanation of responsibilities with financial statements, include a statement about Department of Labor (DOL) conformity, and provide the scope and nature of audits formerly known as “limited scope” audits.

                  All new audits will include a two-pronged approach with enhanced performance standards. Some standards include acknowledgement of management responsibilities, better understanding of the plan, identifying plan provisions, determining compliance, considering reporting accuracy, identifying possible financial statement inconsistencies, and evaluating certification assessment.

                  The new reports will allow managers and plan administrators to better understand any inconsistencies or issues with the EBP. Rest assured that auditors will be well trained in the new standards to provide you with the most transparent, comprehensive audit possible.

                  If you have questions about the new audit standards or other EBP issues, please reach out to Kevin Hamaker for more information.

                    Tags: Employee Benefit Plans

                    Consolidated Appropriations Act: What Plan Sponsors Need to Know About Retirement Plan Relief

                    The Consolidated Appropriations Act, 2021 (CAA), which was enacted on December 27, 2020, is mostly known for the $900 billion it provided in additional stimulus funding for pandemic relief. Additionally, the law contains several useful provisions for retirement plans, including non-COVID disaster emergency relief, multiemployer and defined benefit plan changes, and updates to partial plan terminations. All of these provisions are discretionary, and have very narrow applicability. Regardless, plan sponsors should take the time to understand the relevant parts of the law and see whether the various provisions might benefit their organizations and plan participants.

                    Non-COVID-Related Disaster Relief

                    The CAA allows (but does not require) special retirement plan distributions for non-COVID major disasters (such as the 2020 Gulf Coast hurricanes and California wildfires) that occurred between December 28, 2019 and December 27, 2020 (the date the CAA was enacted), so long as the disaster declaration occurs no later than 60 days after the CAA was enacted. Participants whose principal residence was within the disaster area and who sustained an economic loss as a result of the disaster have until June 25, 2021 (180 days after the CAA was enacted) to receive these special CAA disaster distributions. It is important to note that this law does not extend disaster relief outlined in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, but it does mirror aid offered for previous natural disasters. The law allows organizations to amend their 401(k), 403(b) or 457(b) plans to permit qualified participants living in the declared disaster area to obtain special relief using the following methods:

                    • Disaster-related distributions: Qualified participants in defined contribution retirement plans and individual retirement accounts (IRA) may take up to $100,000 out of their accounts for each separate disaster without incurring the 10% early withdrawal fee. Although such distributions are taxable, they may be repaid in full or in part over a three-year period beginning on the distribution date (and such repayments will be treated as rollover contributions).
                    • Plan loan relief: Similar to the CARES Act provision, participants can borrow the lesser of 100% of the vested account balance or $100,000 for each separate disaster.
                    • Loan repayments: Repayments on the aforementioned loans may be suspended for up to one year if the repayment of the loan would have normally been due on the first day of the disaster through 180 days after the last day of the disaster.  
                    • Recontribution of hardship distributions for home purchases: Qualified participants who took a distribution to buy or reconstruct a home and were unable to use some or all of the funds can return those funds to their accounts. The funds must have been received no more than 180 days before and up to 30 days after the qualified disaster.

                    In general, plan sponsors interested in adopting all or some of these changes should amend their plans on or before the last day of the first plan year beginning on or after January 1, 2022.


                    Money Purchase Plan Distributions Qualify for COVID-Related Distributions (CRDs)

                    The CAA reverses Internal Revenue Service (IRS) Notice 2020-50, which said in-service distributions from money purchase pension plans did not qualify as a CRD. The change may have come too late for plan sponsors that denied CRDs based on the IRS’s initial notice, but it could reassure others who altered their plans to help participants.

                    Relief for Overfunded Pension Plans

                    The Internal Revenue Code (IRC) Section 420 says plan sponsors with overfunded defined benefit plans can make a future transfer of that surplus to retiree health and/or insurance accounts. Because of market volatility over the past year, pension funding may have declined, so the CAA allows plan sponsors to reverse their planned, future Section 420 transfers.


                    In-Service Distributions for Specific Trade Multiemployer Plans

                    IRC Section 401(a)(36) provides incentives for phased retirement programs by allowing in-service distributions from multiemployer plans for active/working participants age 59½ or older. The CAA reduces this age requirement to 55 for participants in multiemployer plans from building and construction industries. One additional requirement: participants must have been in the plan on or before April 30, 2013.


                    Partial Plan Terminations

                    The CAA creates a safe harbor to protect plans that might otherwise experience a partial plan termination. Before, a partial plan termination would have generally occurred when 20% or more of employees participating in a defined benefit or defined contribution plan were involuntarily terminated from employment without full vesting during a plan year (or over several plan years). The CAA provides that if the number of active participants covered by the plan on March 31, 2021 is at least 80% of the number of active participants covered by the plan on March 13, 2020, the plan will not be treated as having a partial termination. The relief is based on the total number of active participants, so employers do not have to rehire the same workers who were laid off.

                    Insights

                    The CAA offers many tools plan sponsors can use to help ease participants’ financial strain. It is important to read the details in the law’s provisions and pay attention to qualifications and deadlines. Plan sponsors interested in adopting any aspects of this relief should reach out to the plan’s service providers to see whether immediate adjustments are needed to existing plan processes.

                    Our professionals can examine retirement plans and assist in determining whether the CAA provisions might benefit your organization’s circumstances.