401(k) Plan Top 10 Year End Laundry List

20 October 2021 Legal News: Employee Benefits Insights Publication
Author(s): Michael Abbott Isaac J. Morris

No one really appreciates laundry, but having a calendar year-end top 10 list may be exactly what plan sponsors and administration committees need in order to prevent operational or document compliance issues being raised by a 401(k) plan participant or beneficiary, the Internal Revenue Service (“IRS”), or the U.S. Department of Labor (“DOL”).

This 401(k) list highlights issues for sponsors and administration committees between now and year-end for calendar year plans (now that the IRS Form 5500 filing deadline has generally passed for sponsors who have calendar year-end plans).

Plan sponsors and administrators should soon consider whether consulting with their outside plan advisors will be helpful to make sure these administrative issues are handled in a timely manner.

1. Annual Participant Notices (sometimes combined into a single document)

a) Qualified Default Investment Alternative (“QDIA”)In addition to providing notice to eligible participants at least 30 days before eligibility or before any QDIA investment is made for a participant or beneficiary, plan sponsors also must give this notice at least 30 days prior to the beginning of each subsequent plan year.

b) 401(k) Safe Harbor. Although there are exceptions to the general rule based on relevant facts and circumstances, this notice is required to be given within a reasonable period before the beginning of the plan year.This requirement is deemed to be satisfied if the notice is provided at least 30 days and not more than 90 days before the beginning of each plan year.Different rules apply for employees who become eligible after the 90th day before the beginning of the plan year.

c) Automatic Contribution Arrangement (“ACA”) Notice. The general notice requirements for an ACA are different than the more detailed requirements applicable to so-called QACAs and EACAs.For an ACA, the general 401(k) requirement that an employee must have an “effective opportunity” to make or change an election at least once during each plan year applies.Most plan sponsors have adopted long-standing IRS sample language under IRS Notice 2009-65 that provides for distribution of this notice at least 30 days but not more than 90 days before the beginning of a plan year.

d) Participant Fee Disclosure. 401(k) plan administrators have a fiduciary obligation to provide certain participant fee disclosures to participants and beneficiaries who are able to direct the investments held within their plan accounts.Disclosure is required at the time an employee is first eligible to participate in the 401(k) plan and then annually thereafter.In general, participants and beneficiaries are entitled to information related to all administrative and individual expenses that may be assessed against the individual’s plan account.In addition, a quarterly fee disclosure is required regarding the dollar amount actually charged against a participant’s account for the prior quarter.

2. Corrective Distributions – ADP/ACP

Although a 10% excise tax will be incurred for corrective distributions of ADP/ACP testing failures that are not made within two and a half months after the end of the applicable plan year, corrective distributions do need to be made by the following December 31 in order to avoid a potential plan qualification issue.For example, if a plan fails ADP testing for 2021, then corrective distributions should be made by March 15, 2022 to avoid the 10% excise tax and not later than December 31, 2022 to avoid qualification issues.If the corrective distributions are not made by the following December 31, then correction may be made through the IRS’s Employee Plans Compliance Resolution System (“EPCRS”).

3. Discretionary and Other Plan Amendments

Generally, plan sponsors are required to adopt discretionary amendments by the end of the plan year in which they are operationally placed into effect.This is just a general rule, however, other important rules also applicable to 401(k) plans (e.g., anti-cutback limitations, safe harbor or contribution required allocation rules) may result in a proposed plan year end amendment being too late.As a result, plan sponsors should verify the timing of any discretionaryamendments with their legal counsel.Regarding other, non-discretionary plan amendments, including some of the items discussed in this article, calendar-year plan sponsors may have until December 31, 2022 to make the revisions.Regardless, many plan sponsors, especially those with individually-designed plans, may choose to complete any required plan amendment task during 2021, and focus on potential new laws and regulations in 2022.

4. RMDs

Due to changes enacted as part of the SECURE Act in 2019, Required Minimum Distributions (“RMDs”) may now be distributed annually starting with the calendar year that a participant reaches age 72 (i.e., it is still 70½ for those participants who attained age 70½ before January 1, 2020) or, if later, the year in which a participant retires from service with the employer sponsoring the 401(k) plan.Different rules apply to a participant who is a 5% owner of the plan sponsor, plus there are more detailed RMD requirements applicable beneficiaries of deceased participants.Keeping track of and satisfying RMD requirements is critical for an affected participant or beneficiary to avoid a 50% penalty for failure to withdraw the full amount of the RMD.

5. SPD Distribution

Under ERISA, the 401(k) summary plan description (“SPD”) must be distributed to participants within 90 days after they have become eligible under the plan’s terms.Plan administrators also need to remember that an updated SPD must be distributed to eligible participants every five years if plan revisions have been made and every 10 years if there have been no material revisions, as Foley has noted previously.In the interim, notice of material revisions needs to be distributed pursuant to a Summary of Material Modification (“SMM”) within 210 days after the end of the plan year in which the applicable revisions have been made, unless a revised SPD previously has been distributed.Electronic distribution of an SPD or SMM is permitted in accordance with specific DOL guidelines.Plan administrators should also remember that there may fiduciary and practical reasons to distribute such updates as soon as possible, notwithstanding the foregoing deadlines.

6. Adoption of Prototype/Cycle 3 Amendment and Restatement

Although it is not a specific December 31, 2021 deadline, plan sponsors who have adopted or wish to adopt IRS pre-approved plan documents need to remember that they have until July 31, 2022, to adopt new pre-approved, Cycle 3 documents.As a result, plan sponsors should confirm the status of their new or amended and restated documents with their plan providers in order for these documents to be reviewed by them and other outside advisors as soon as possible.

7. CARES Act Amendments

Many 401(k) plan sponsors permitted increased plan loan amounts up to $100,000 in addition to a 1-year delay for certain loan repayments, plus a $100,000 hardship withdrawal without being subject to any 10% penalty that would typically apply.Although these distributions were permitted under legislation enacted in light of the Covid-19 crisis, plan amendments were not immediately required to be made.For calendar year plans, the amendment deadline currently is December 31, 2022.

8. Review of Potential Year-End Legislation and Regulations

As always, plan sponsors and administrators need to be on the lookout for new legislation and governmental regulations that may directly affect the administration of their 401(k) plans.While too numerous to list all of the potential provisions, 401(k) plans may experience changes in the near future relating to automatic enrollment, higher catch-up limits, RMD requirements and the IRS’s EPCRS program.

9. Summary Annual Report

And now that a complete IRS Form 5500 has been filed with an independent audit for those plans with 100 or more participants (unless a DOL exception applies), plan sponsors need to distribute the summary annual report to participants within 60 days after any extended deadline for filing the 5500 (i.e., November 15, 2021 for those with a September 30, 2021 deadline and December 15, 2021 for C corporation sponsors who were subject to an October 15, 2021 deadline).

10. Accessing the Retirement Portal

As discussed recently, plan sponsors and administrators would do well to spend time reviewing their plan’s website or portal, determining the ease or difficulty of enrolling (or dis-enrolling), making or changing elections or investment options, requesting distributions, and similar actions.Doing so now, and on a regular basis going forward, may uncover issues that can be adjusted and corrected and may help prevent participant claims or irritation in the future.

Certainly, this laundry list could be expanded but plan sponsors and administrators may wish to check off this “top 10 list” before year-end to avoid 401(k) compliance issues.


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