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A Mistake a Day: Top 5 401(k) Compliance Mistakes & Best Practices

Last week, we discussed four of the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself.

On Monday, we discussed failures to timely update plan documents.

On Tuesday, we discussed an SPD’s failure to accurately describe the terms of a plan.

On Wednesday, we discussed a plan’s definition of compensation.

On Thursday, we discussed delinquent contributions.

We hope you enjoyed this refresher on best compliance practices.  For our last post in this five-part series, we discuss a topic that never goes out of style…

Plan Governance

Description

Plan governance generally encompasses the oversight policies and procedures that plans enact to ensure good process and operational compliance. The following discussion addresses two specific aspects of plan governance—those which are among the most commonly neglected.  Fortunately, these requirements for good plan governance are also extremely easy to satisfy.

Potential Liability

Errors stemming from poor plan governance can result in plan operational failures with potential consequences ranging from minor to loss of a plan’s qualified status.  To the extent poor plan governance stems from or results in a fiduciary breach, fiduciaries may be held personally liable.

Examples

Fiduciary Training. Plan fiduciaries should receive regular and thorough training on best practices in plan governance. Common errors resulting from a failure to receive such training include failure to properly establish and engage

A Mistake a Day: Top 5 401(k) Compliance Mistakes & Best Practices

This week, we are discussing the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself.

On Monday, we discussed failures to timely update plan documents.

On Tuesday, we discussed an SPD’s failure to accurately describe the terms of a plan.

On Wednesday, we discussed a plan’s definition of compensation.

In this, our penultimate post, we discuss the most common mistake of all: delinquent contributions.

Delinquent Contributions

Description

Employers are required to contribute employees’ elective deferrals to the plan on the earliest date that the contributions can reasonably be segregated from the employer’s general assets, and in no event later than the fifteenth (15th) business day of the month following the month in which the participant contributions are withheld or received by the employer. The Department of Labor takes the position that this rule requires the employer to deposit elective deferrals into the plan trust as soon as reasonably practicable – which would in virtually all cases be significantly sooner than the above described outside limit. An employer’s deposit history may establish a basis for what is possible. When employers contribute withheld amounts later than the time frame described above, the contributions are considered delinquent.

Potential Liability

When an employer mixes an employee’s contribution to a 401(k) plan with its general assets longer than necessary, it engages in a prohibited transaction. To

A Mistake a Day: Top 5 401(k) Compliance Mistakes & Best Practices

Welcome to the third installment of this series! This week, we are discussing the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself. Each day we will discuss a new compliance mistake. So far, we have discussed failures to timely update plan documents and an SPD’s failure to accurately describe plan terms. Today we discuss a plan’s definition of compensation.

Wrong Definition of Compensation

Description

401(k) plans may use different definitions of compensation for different purposes. For instance, plans may use any definition of compensation for certain purposes, but must use one of two statutory definitions of compensation found in the Internal Revenue Code (“IRC”) for certain other purposes. For example, (i) the IRC § 415 definition of compensation must be used when calculating the employer’s deduction for contributions and determining which employees are considered highly compensated, and (ii)  the IRC § 414 definition of compensation must be used for safe harbor plans and for determining if a plan meets nondiscrimination requirements. An operational failure occurs when the administrator uses a definition of compensation other than the definition specified in the plan documents. Even if the definition used for the calculation is legally permissible, the definition must match the definition contained in the plan’s terms.

Potential Liability

If the error is discovered by the plan sponsor, it may generally be corrected as described below. 

A Mistake a Day: Top 5 401(k) Compliance Mistakes & Best Practices

This week, we are discussing the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself. Each day we will discuss a new compliance mistake. Yesterday, we discussed failures to timely update plan documents. Today, we are discussing an SPD-related failure. Check in through the end of the week for more compliance mistakes!

SPD Fails to Accurately Describe Plan Terms

Description

A Summary Plan Description (“SPD”), by definition, must accurately summarize a plan. This means that all descriptions in the SPD must accurately describe the terms of the underlying plan document.

Potential Liability

If an SPD includes different provisions than the corresponding plan document, a court may enforce the provisions of the SPD rather than those of the plan. The facts that a plaintiff must prove to receive this relief varies from circuit to circuit.

Examples

The plan requires that a participant be employed on the last day of the plan year to receive a matching contribution.  The SPD indicates that participants will receive a matching contribution regardless of whether they are in the employer’s employment on the last day of the year. The SPD does not accurately describe the of plan’s eligibility provisions.

The Fix

Regularly review the SPD for consistency with applicable plan terms and plan operation.

A Mistake a Day: Top 5 401(k) Compliance Mistakes & Best Practices

Mistakes are all too easy to make, but fortunately, they are also easy to prevent! This week, we are discussing the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself. Each day we will discuss a new compliance mistake, so stay tuned.

Failure to Timely Update Plan Document

Description

Statutes and regulations establishing qualification requirements change relatively frequently. Plans must be modified to conform to the requirements as required by each statute and regulation.

Potential Liability

Potential liability will differ based on the statute or regulation in question. In some circumstances, failure to timely adopt legislative and/or regulatory changes may result in disqualification of the plan.

Examples

Most recently, the Department of Labor updated the regulation governing the process for disability claims. The new regulations provide participants with enhanced rights, and require, among other things, that claims administrators provide claimants with more thorough descriptions and information supporting their denial of benefits. If a plan fails to conform to the regulations, claimants will be deemed to have exhausted all of their administrative options immediately, meaning that they may file a lawsuit without following the plan’s disability claims appeal procedures.

The Fix

Most 401(k) sponsors rely on their benefits lawyer, plan provider or plan administrator to keep them apprised of new documentation requirements.  In the absence of such an arrangement, plan sponsors should check on an annual basis to determine whether there

The 162(m) Grandfather Reveal Party: IRS Releases Limited Guidance on Internal Revenue Code Section 162(m)

It took roughly nine months, but you may now be in a position to identify and reveal the status of contracts as 162(m) grandfathered – or not.  Last week, in IRS Notice 2018-68, the IRS provided long-awaited, albeit limited, guidance concerning the changes made to Internal Revenue Code Section 162(m) by the Tax Cuts and Jobs Act. Specifically, the notice includes additional information about the new definition of “covered employee” (i.e., an employee with respect to whom the compensation deduction is capped at $1 million) and…drum-roll please…. the meaning of “written binding contract” for purposes of determining whether a contract is grandfathered under Section 162(m).

Notice 2018-68 anticipates that future regulations will incorporate its contents, but that any such regulations will only apply to taxable years ending on or after September 10, 2018. The notice further specifies that any future guidance, including regulations, addressing the issues covered by Notice 2018-68 in a manner that would broaden the definition of “covered employee” will apply prospectively only.

Read on for a brief summary of the guidance provided by the notice – and stay tuned for our next post which will explore the most common questions companies are asking about the guidance, including questions about equity and deferred compensation arrangements, and steps companies can take in response to it.

Covered Employees 

End of Year Requirement: Before we address the grandfather guidance, we want to explore the expanded the definition of covered employee as this may impact the employees with respect

J, K, L, M and N: What’s In a Letter?

Over the last few months, the Internal Revenue Service (IRS) has been replying to responses to their Letter 226-J, which notifies employers of a proposed Employer Shared Responsibility Payment (ESRP). The IRS has recently updated its website to include additional information on its Letter 227 series. The various letters either close the ESRP case or provide the employer with next steps.

If you responded to a Letter 226-J, the reply from the IRS will come in the form of one of the following four 227 letters:

  • Letter 227-J. If you submitted a completed Form 14764, ESRP Response agreeing to the ESRP amount proposed in your Letter 226-J, the IRS will acknowledge its receipt using Letter 227-J and provide instructions for making the ESRP. If full payment is not received within 10 days, the IRS will issue a Notice and Demand for the outstanding balance.
  • Letter 227-K. You want this letter. Letter 227-K acknowledges acceptance of the information you provided disputing the proposed ESRP amount and renders a determination that no ESRP is due. The case is closed and no further action is required.
  • Letter 227-L. The IRS acknowledges receipt of your response to Letter 226-J and notifies you of the revised ESRP amount using Letter 227-L. An updated ESRP Summary Table and Form 14765 (PTC Listing) will be included. If you agree with the revised ESRP amount, you must submit a completed Form 14764, ESRP Response with the required payment. If you disagree with the revised ESRP

HSA Eligibility for Retirement-Age Individuals

Employers who offer high deductible health insurance plans to their employees typically also offer Health Savings Accounts (“HSAs”). HSAs allow employees to pay for uninsured medical expenses with pre-tax dollars and are set-up under Internal Revenue Code Section 223. HSAs are subject to annual contribution limits—single individuals may contribute up to $3,450 for 2018, families may contribute up to $6,900 for 2018, and individuals over the age of 55 may contribute an extra “catch-up contribution.” In most years, determining an employee’s maximum allowable contribution to an HSA is straightforward—an employee is either covered by a high deductible health plan or not, their spouse or dependent(s) are either covered by a high deductible health plan or not, and the employee is either at least age 55 or younger. However, in the year that an individual turns 65, determining the maximum allowable HSA contribution can become tricky. Read on to learn more about this complicated issue!

Background

HSAs may only be used by “eligible individuals,” as defined in Internal Revenue Code Section 223(c)(1). To qualify as an eligible individual, an individual must be enrolled in a high deductible health insurance plan. In addition, to be an “eligible individual,” an individual may not be enrolled in any other health plan, including Medicare. Eligibility to contribute to an HSA is determined on a month-to-month basis, so if an individual enrolls in any other non-high deductible health plan, that individual ceases being an eligible individual for the HSA in that month and for the remaining

Deep Dive: Association Health Plans, Part 2

On October 12, 2017, President Trump signed a “Presidential Executive Order Promoting Healthcare Choice and Competition Across the United States” (the “Executive Order”) to “facilitate the purchase of insurance across State Lines and the development and operation of a healthcare system that provides high-quality care at affordable prices for the American People.” One of the stated goals in the Executive Order is to expand access to and allow more employers to form Association Health Plans (“AHPs”). In furtherance of this goal, the Executive Order directed the Department of Labor to consider proposing new rules to expand the definition of “employer” under Section 3(5) of the Employee Retirement Income Security Act of 1974 (“ERISA”). The Department of Labor issued its proposed rule on January 5, 2018.

In Part 1 of this “Deep Dive” series, we started examining the history of AHPs and the effects of the changes proposed by the Trump Administration by providing a high-level, summary overview of the three types of arrangements that fall under the umbrella of health arrangements sponsored by associations. This week, we compare features of the three types of arrangements when such arrangements are offered on a fully-insured basis.

Plan Feature Group Insurance Arrangement Affinity Plan Association Health Plan (fully-insured) ACA plan design requirements (e.g., requirement to provide essential health benefits) Look to size of employer to determine the extent to which ACA plan design requirements apply Look to size of employer to determine the extent to which ACA plan design requirements apply ACA requirements relating

Seventh Circuit Holds that ERISA does not Preempt State “Slayer Statute”

We turn once again to the sad and difficult task that plan administrators face when distributing the benefits of a participant who has been murdered by his or her designated beneficiary. Sad for obvious reasons.  Difficult because ERISA and state law may provide different answers.  ERISA directs a plan to honor a participant’s beneficiary designation—meaning that the murderer would receive the benefit. “Slayer statutes” prohibit the murderer from receiving a financial benefit from his or her victim, requiring the plan to disregard the beneficiary designation.

Our prior blog post suggested three strategies that a plan administrator might employ in the face of uncertainty: interpleader, receipt and refunding agreement, and affidavit of status.  Under the interpleader approach, the plan administrator would pay the benefit into the registry of the court and join each potential claimant as a party defendant. Each claimant would then argue for receipt of the benefit, and the court would award the benefit and issue a judgment upon which the plan administrator may rely for protection against the losing claimants.  This certainty comes at the cost and effort required by litigation in federal court.

A recent Seventh Circuit case involves just this approach.  In Laborers’ Pension Fund v. Miscevice, No. 17-2022, the participant was killed by his wife.  At the state criminal court proceeding, the court determined that the wife intended to kill her husband without legal justification but also that she was insane at the time and therefore not guilty of

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