As has been reported in the press, there has been an increase in class action lawsuits relative to investment fees, plan administration costs, and other aspects of retirement plans. Several major universities – Yale, the Massachusetts Institute of Technology, New York University, Johns Hopkins University, Duke University, the University of Pennsylvania, Vanderbilt University and Emory University have now been sued over these issues for their 403(b) plans. St. Louis firm, Schlichter Bogard & Denton is representing the plaintiffs in all of the cases.
Apparently, the law firm was involved in some of the cases against for-profit companies 401(k) plans as well. To our knowledge, there is no action yet on the 403(b) suits but nonprofit employers should be aware that they are not immune from potential actions relative to 403(b) plans. We will follow these cases as they are reported on by the media.
Several weeks ago, the IRS released two new revenue procedures (2015-27 and 2015-28) designed to make plan corrections easier and less costly to employers through the Employee Plans Compliance Resolution System “EPCRS.” Rev. Proc. 2015-28 provides particular relief related to the correction of certain employee salary deferral errors for employers sponsoring 401(k) and 403(b) plans.
Retirement plans are required to operate per the rules set forth by the Internal Revenue Code and the governing plan document. Failure to abide by these rules gives rise to a plan failure called an operational defect. The EPCRS was established by the IRS in order to provide a framework for the correction of such operational failures so that employer-sponsored plans could maintain their qualified tax status. Correction of these errors can be made through a formal submission via the EPCRS or through self-correction depending on the facts and circumstances of the error(s). The IRS has worked diligently over the years to encourage employers to correct errors as soon as possible and to streamline corrections under the EPCRS.
Prior to the new revenue procedure, the standard correction for missed employee pre-tax salary deferrals was a corrective contribution made by the employer equal to 50% of the missed salary deferral and 100% of the missed employer matching contribution plus lost earnings. Revenue procedure 2015-28 established some new safe harbor correction methods for certain missed deferral errors that require reduced corrective contributions by the plan sponsor.
A general description of the new safe harbor corrections is detailed below:
Failure to Implement an Automatic Contribution Feature – Includes auto enrolling an eligible participant at the auto percentage, implementing an affirmative election made by a participant in lieu of the auto percentage, and failure to implement the proper auto escalation percentage. If the failure to implement the correct withholding does not extend past 9 ½ months after the year of failure, then no corrective employer contribution is required to correct the missed deferral. However, the entire missed matching contribution must be contributed as if the participant withholding began when it should have. Earnings must be included as part of the corrective deposit and notice must be provided to the participant no later than 45 days after correct deferrals begin.
If the failure to implement the correct automatic contribution withholding extends past 9 ½ months but deferrals begin prior to the end of the second year following the end of the year the failure began, then the employer must make a corrective contribution equal to 25% of the missed employee contribution. The remainder of the correction methodology follows the process detailed above.
Failure to Implement Employee Deferrals – If the failure to properly implement employee salary deferral elections is corrected by the first payment of compensation three months after the failure occurred, then no employer corrective contribution is required. However, the entire missed matching contribution must be contributed as if the participant withholding began when it should have. Earnings must be included as part of the corrective deposit and notice must be provided to the participant no later than 45 days after correct deferrals begin.
If the failure to implement the correct contribution withholding extends past three months but deferrals begin prior to the end of the second year following the end of the year the failure began, then the employer must make a corrective contribution equal to 25% of the missed employee contribution. The remainder of the correction methodology follows the process detailed above.
Errors caught after the timeframes referenced above or failure to provide the required notice revert back to the standard correction methodology. This clearly provides additional motivation for employers to police their plans carefully so they can benefit from these new safe harbors and reduce the cost of certain plan corrections.
This is designed to merely be a brief description of the new correction rules. Any employer that believes they have plan errors that can be corrected through the new safe harbor methods should contact Mark Flanagan of Aronson’s Employee Benefit Plan Services Group at 301.231.6257
Managing an organization’s retirement plan is no easy task. The rules are complicated and the penalties can be severe. Far too often, however, upper management doesn’t understand this dynamic and designates a person that is not technically-equipped to handle this serious responsibility.
Employers often hire a myriad of advisors to help them administer their plan, but these advisors do just that – help. As the plan administrator, the employer is responsible for the plan unless they pay a hefty fee to offload that responsibility, which makes it so surprising that many employers give this responsibility to the wrong person in their organization.
Some of the most important aspects of plan management are:
Congratulations! March 15th has come and gone and your 401(k) compliance testing is done and refunds have been issued. Now you can relax! Or can you? You still need to make sure your Form 5500 is filed for last year. Failing to file on time or failing to file the Form 5500 with audited financial statements, if required, can be quite costly. Don’t let this deadline sneak up on you.
Form 5500 must be filed electronically by the last day of the 7th calendar month after the plan year-end. For calendar year 2013 plans, this is July 31, 2014. Filing an automatic extension, Form 5558, extends the deadline an additional 2 ½ months, to October 15th for calendar year end plans. A penalty of up to $1,100 a day can be assessed for each day a plan administrator fails to file a complete and accurate return!
That deadline may seem far away, but if you are a large plan filer (generally more than 100 participants at the beginning of the plan year) and you must file audited financial statements with your Form 5500, you need to start the process
It’s the time of year to start thinking again about the audit of your benefit plan. If you are happy with the service you receive, and your audit goes smoothly and the deadline is met, that’s great! However, if you typically just go through the motion of engaging the same firm you have always used, you may be doing yourself a disservice. Be sure to ask yourself these questions: