Finding Missing Participants
Situation: We need to locate several plan participants who have terminated employment to begin making required minimum distributions to them. IN the past, we used the IRS’s or Social Security Administration’s (SSA’s) letter-forwarding services to find participants who may have moved without notifying us. But I’ve read that both the IRS and the SSA have discontinued their letter-forwarding services.
Question: How can we locate the Missing participants without these services? Answer: There are alternative methods for locating participants and beneficiaries your plan can consider using. In addition, you may want to consider various steps that could help minimize the number of participants and beneficiaries who cannot be located.
Discussion: The IRS stopped its letter-forwarding program in 2012, and the SSA ended its letterforwarding services earlier this year. Both the IRS and the SSA cited the availability of the Internet and other locator services as one of the reasons for the suspending their programs.
In lieu of letter forwarding, the RIS Suggests plan sponsors use one or more of a variety of other methods to find missing participants, including commercial locator services, credit reporting agencies, and Internet search tools.
Internet search tools are simple and often free to use. Keep in mind, however, they may not satisfy an auditor as “reasonable actions” if you fail to find a participant or beneficiary. You may want the protection provided by using a commercial locator service.
Maintaining regular contact with plan participants, both before and after employment ends, can help reduce the number of participants who can’t be located. Having various types of contact information on file (mailing addresses, email addresses, phone numbers, etc.) and encouraging participants to keep their contact information up to date can also help.
If the contact information your retirement plan has on file is not current, consider checking the records of other benefit plans you may sponsor for more current information. Or see if you can get in touch with the missing participant’s designated beneficiary to secure updated contact information for the participant. The DOL suggested both of these steps in its guidance related to locating missing participants of a terminated plan.
Finding Missing Participants
A participant who has terminated employment and attained age 70 ½ is required to begin taking minimum distributions, known as required minimum distributions (RMDs). More-than 5 percent owners who have attained age 70 ½ are required to begin taking minimum distributions even if they are still employed. This RMD rule is sometimes referred to as the “age 70 ½ rule.” Failure to begin taking minimum distributions when required triggers an excise tax, which is payable by the participant. The excise tax is equal to 50 percent of the amount of the RMD. So, if the participant is still working (and is not a more-than-5-percent owner), he or she can delay the “required beginning date” for the required minimum distributions (RMD) to April 1 following the later of:
- The calendar year in which the participant attains 70 ½ years; or
- The calendar year in which the participant retires.
However, this answer doesn’t apply if the employee is working for another employer. For example, if a participant retires but then goes and works for another employer, he or she would still be required to take an RMD from the plan sponsored by the previous employer (that he or she no longer works for).
Prohibited Transactions: Fiduciaries Beware
Under ERISA plan sponsors have a legal obligation to act in a manner that is most beneficial to participants. Stated differently, rather than acting in a manner that is beneficial to shareholders, a plan fiduciary must apply all of his or her skills and expertise to benefit plan participants and the organization’s interests should be completely excluded from consideration. If this “Exclusive Benefit Rule” is violated, it becomes a “Prohibited Transaction.” Prohibited transactions arise when a party in interest enters into, or benefits from, any transaction involving plan assets, including a sale, exchange or lease of property, extension of credit, transfer or use of plan assets, investments or employer securities or employer real estate, in excess of legal limits. Unfortunately, prohibited transactions are not always immediately recognizable. For example, entering into a lease for building space with a tenant who happens to be a family member of someone providing services to the pension plan may be a prohibited transaction. ERISA’s rigid prohibited transaction rules continue to cause confusion regardless of the fact that they have been in effect for 30 years. Should you encounter a situation that creates any doubt as to whether a prohibited transaction exists, please contact your plan consultant for clarification and/or an ERISA attorney referral.
Which plan expenses can be paid from the assets of a retirement plan?
Only certain plan expenses can be paid using the plan’s assets. The U.S. Department of Labor (DOL) applies strict standards in determining the types of expenses employers can pass on to the plan. You need to very clear on what is permissible and what is not so that you do not inadvertently violate the pension law.
What should we do if our plan fails the ADP Test?
If you plan fails, you can take corrective action to protect the plan’s qualified status.
The ADP test compares the average rate at which highly compensated employees defer salary with the average deferral rate for non-highly compensated employees. The difference between the averages for the highly paid and lower paid employees must be within certain limits.
If your plan fails testing, you need to take corrective action. The three ways to make corrections are:
- Distribute excess contributions to highly compensated employees within 12 months after the end of the plan year. A 10% excise tax generally will apply to any excess contributions that are not distributed within the first 2 ½ months of the new plan year. For plans that are “eligible automatic contribution arrangements” and cover all eligible employees, corrective contributions can be made up to six months following the end of the plan year without incurring the excise tax.
- Re-characterize the excess contributions as after-tax contributions within 2 ½ months of the plan’s year-end.
- Make qualified non-elective contributions (QNECs) or qualified matching contributions (QMACs) within 12 months.
Do many plans use automatic plan features, and how receptive are plan participants to them?
According to the Plan Sponsor Council of American, in 2011 (the most recent data) 45.9% of defined contribution plans surveyed offered automatic enrollment, up from 41.8% in 2010 to 23.6% in 2006. More than half of the plans (55.2%) had automatic contribution escalation feature in 2011. Another study by Cogent Research found 49% of plan participants surveyed wanted access to automatic contribution increases.
Employee Communication Strategies for All Seasons
With all the uncertainty in the marketplace, there is likely no better time to provide education to your participants then there is today! Education may consist of the following vehicles: employee meetings, webinars, memos, flyers, payroll stuffers, or mailers (just to name a few). We encourage you to utilize a variety of these methods to keep the material fresh and exciting to participants. We also encourage you to focus on more than one education topic throughout the year. For example, one quarter, you may consider mailing participants a piece on the benefits of automatic rebalancing. The next quarter your education focus could be about investing during recessions. The following quarter could be a webinar to tour your service provider’s website capabilities. We also encourage you to reach out to your service provider to see what new information and materials they have available for your participants and find out what assistance they may provide. Creating a clear education plan is a great way to keep you on track to meet your goals and objectives.
To loan or not to loan?
As you re-evaluate your retirement plan's design, consider asking yourself, "Should our plan continue allowing participants to take loans from their retirement accounts?"
If your retirement plan currently permits loans, you are not alone. According to the Profit Sharing Council of America's (PSCA) recently published 55th Annual Survey of Profit Sharing and 401(k) Plans, loans are permitted in 88% of profit sharing/401(k) plans.
Many mistakenly believe that the plan provision enhances the plan and encourages participation. On the contrary, participants utilizing the loan option substantially reduce their savings potential. And contrary to myth, loan elimination does not deter participation. This is why plan sponsors are increasingly embracing and adopting a "courageous" plan design philosophy to eliminate loans. There are many concerns:
- As loan assets are removed (borrowed) from the plan, they are not invested in the plan's offerings and may result in a lost opportunity for asset growth.
- While it is true that the participant is (re)paying himself/herself back, the after-tax interest paid on plan loans (which can be considerable) is added to the participant's account as a "pre-tax" deposit by the plan's record keeper, resulting in "double-taxation" when the account is eventually paid out.
- Loan set-up and maintenance fees may apply
- Participants often elect to reduce or suspend contributions during the repayment period resulting in diminished accumulation.
- Termination of participant employment most often triggers immediate and full loan repayment; participants unable to do so incur taxes and, in many cases, penalties.
- Loans require plan sponsor administration which can be time-consuming, cumbersome and costly.
The continued allowance of loans should not be assumed or taken lightly. Consider adding it to the agenda of your next fiduciary committee meeting. Does the loan provision further your committee's efforts to maintain a successful plan? If the answer is not a resounding "yes" then consider taking action to eliminate it. As always, act in the best interests of your participants and their beneficiaries.
When are employee contributions required to be submitted?
Guidelines state participant's contributions must be remitted by the date contributions can be reasonably segregated from the general business assets. It is recommended for participant contributions to be remitted as soon as reasonably possible. All employee contributions should be made with consistency. Failure to comply can result in criminal and civil penalties.
How do we handle a terminated employee's distribution?
Complete the termination notice and fax it to our office (317-844-5125). CSI will provide the employee with the necessary information to make an informed decision on their distribution. Necessary information and signatures to distribute the monies will be sent to the employer's office when the participant makes an election and completes the required forms, as necessary.
How do we remove terminated employees from our qualified retirement plan?
The IRS regulations allow the employer to cash out any terminated employee with a vested account balance of less than $5,000. It is recommend the Trustee sends a certified letter to the terminated employee notifying the participant of their distribution rights and provide the necessary termination paperwork. If the benefit form is not received by the Trustee within 30 days, the Trustee authorizes the cash out of the benefits. Participants with over a $5,000 vested account balance cannot be forced from the plan.
Should we provide for hardship distributions?
The hardship provision is used as a last resort for a participant to receive monies. Hardship provisions allow a participant to withdraw monies for the following safe harbor reasons:
- Eviction from residence
- Purchase of a primary residence
- Medical expenses which exceed 7.5% of the employee Adjusted Gross Income (AGI)
- Higher education expenses for employee or dependent
- Tuition payments of post-secondary education for me or my dependents
- Expenses for the repair of damage on my primary residence that would qualify for the casualty deduction under IRC 165.
- Payment for burial or funeral expenses for my deceased parent, spouse, children, or dependents.
If the participant qualifies, typically, only the money the participant has electively contributed is allowed for withdrawal. The participant will be subject to a 10% penalty, plus federal, state and local taxes (if applicable). The participant also may not contribute to the plan for six (6) months.
When can a re-hired employee, who was previously eligible for the plan prior to termination, come back into the plan?
An employee who is rehired with less than a five (5) year break in service is immediately eligible for the retirement plan upon re-hire.
Who signs the 5500 form?
The plan trustees and employers sign the 5500 form. In many cases the trustee and the employee are the same person, and the same person can sign both lines on the 5500.
Do we need a fidelity bond?
For self-trusteed plans, it is required the plan obtain a fidelity bond. The fidelity bond is required to be maintained in the amount of 10% of the plan assets. There is a question on the annual 5500 form requesting information on the fidelity bond. CSI does not sell or provide fidelity bonds. Normally they may be purchased through a property and casualty agent
Are my participants eligible for catch up contributions?
Catch up contributions are allowed in IRA's, 403(b)'s and 401(k) plans. Participants are eligible for the catch up contribution as long as they obtain age 50 or older by the last day of the calendar year.
Should I offer a match?
Matching contributions are a great way to encourage participation. Matching contributions can be fixed or discretionary. The most common form of matching is a fixed formula. For example a typical match is a $.50 match on each $1.00 of an employee's contributions up to 6% of their pay. Typically this type of fixed match is made on a payroll basis.
Discretionary formulas allow for the employer to decide on the amount or percentage of the contributions, and can and will vary year by year. Typically this type of match is made once a year after the end of the plan year.
What types of investments and how many should we offer?
Every qualified plan must have a plan trustee(s) who is legally responsible for selecting the type of investments in the plan. Often, plan sponsors do not make this decision alone, but seek the advice and guidelines of a qualified investment advisor who is familiar with retirement plans and the variety of investment options available.
The plan trustee(s) is responsible for selecting an investment advisor and the company or companies that will invest the qualified monies. Federal law requires choice are made in the best interest of the participants
Are you excluding part-timers from the 401(k) plan?
Many plan sponsors mistakenly believe that they are not required to offer the retirement plan to part time employees. Regardless of what type of retirement plan you have, all part-time employees must be offered the retirement benefit. Though your plan may contain a service requirement that essentially prevents "part-timers" from ever becoming eligible (such as 1 year and/or 1,000 hour requirement), part-time employees may NOT be excluded as a class of employees.
If you have not informed your part-time employees that they are eligible to participate in the retirement plan, please contact your plan consultant to discuss immediate corrective measures.