Tuesday, October 19 2021

When a 401 (k) defined contribution plan or similar does not apply the correct definition of compensation in the determination of benefits, does not correctly calculate the vesting service or does not make distributions to the participants who are to obtain the minimum distributions required, who is responsible? Plan sponsors are often surprised to learn that they are.

Why your archivist is not responsible

Plan sponsors may find they are still responsible when their plans are selected for IRS audit or when they are sued for benefit miscalculation. More frequently, the archivist may find the error when reviewing transactions, and IRS procedures require that an expensive correction be made.

Because they rely on their providers to manage their plans, plan sponsors may mistakenly assume that their records manager is the legal administrator of the plan responsible for correcting these errors. To understand why administrative responsibility has not been legally delegated to their archivists, plan sponsors need to review their service agreements.

Typical language of the service contract

Plan record keeping agreements contain disclaimers that the registrar does not provide services as a trustee, which means they do not assume the legal responsibilities of a plan administrator. as defined in the Employees Retirement Income Security Act (ERISA). Certainly, providers could and should do a better job of explaining their limited legal role to plan sponsors. A few years ago I wrote an article titled “What Your Prototype Supplier Won’t Tell You” highlighting this problem, but unfortunately too little has changed.

ERISA requires each plan to have a statutory administrator and designates the plan sponsor as the default administrator when no other person has been appointed. This means that if the agreement does not make the archivist the administrator of the trustee plan, plan sponsors remain liable for errors made by the archivist found during an audit or by a court, even if they have. simply did what the archivist told them to do or if they were unaware of the archivist’s actions.

Additionally, error correction costs are not allowed to be paid from plan assets, so this understanding of the archivist’s real role may coincide with an obligation to pay substantial correction costs to maintain the system. qualified diet.

Some record keeping agreements provide that record keepers will compensate the plan sponsor for errors caused by gross negligence or intentional misconduct, but this is a threshold that most ordinary errors fall short of. Today, the indemnification obligation is also often subject to a dollar cap, which can be a multiple of the fees paid to the registrar. While plan sponsors may try to negotiate more favorable indemnity provisions, they will always offer limited protection.

There are alternatives

There are options available for busy corporate trustees who want to make sure their plans are executed properly. Just as they can transfer the fiduciary responsibility for day-to-day investments to professional trustees, plan sponsors can hire professional administrators to take on many of the legal responsibilities of plan administration. Professional administrators are referred to as 3 (16) administrators according to the section of ERISA that defines the plan administrator, and busiest corporate trustees should consider hiring them.

Professional administration can be set up for a single employer plan and also as part of a common employer plan (PEP), a new type of plan created by the Setting Every Community Up for Retirement Enhancement Act ( SECURE) which covers unrelated employers and is managed by a common plan provider. The common plan provider must register with the Ministry of Labor and serves as the designated trustee of the PEP under ERISA.

What to consider

There is no standard administration contract, and 3 (16) administrators vary in the tasks they are willing to take on. The best practice would be to do a Request for Proposal (RFP) for an administrator and compare not only the cost of the services provided, but also their scope.

A good way to do this is to request a copy of the candidate’s contract form, which should be specific about the responsibilities assumed. Plan sponsors should also verify the experience, qualifications and background of their applicants, as with any request for proposals.

Given the impact of participant account hacking and ransomware, and the Ministry of Labor’s new focus on cybersecurity best practices, it is especially important to investigate each candidate’s cybersecurity procedures. and whether applicants have cybersecurity insurance and / or provide a guarantee.

If a PEP option is being considered, it is important to verify the qualifications of each of the PEP service providers. There are advisors who can help plan sponsors evaluate and compare these new plan options.

It is not complete protection

As in any hiring situation, plan sponsors remain responsible for the careful selection of the 3 (16) administrator or PEP provider group and may have to replace them if they are not doing a good job, but it is is a much more limited liability than them. had before.

Administrator 3 (16) must also get correct information from the plan sponsor in order to do his job properly. For example, is the plan sponsor part of a controlled group? What are the employee hiring dates? Who owns the shares of the plan sponsor and other related companies? Wrong answers to these and similar questions from administrator 3 (16) can always lead to avoidable errors in plan operations.

There is no easy way to avoid all administrative errors, given the complexity of plan requirements, but the outsourcing of administration can significantly limit a plan sponsor’s exposure to liability.

Carole Buckmann is founder and partner of the law firm Cohen & Buckmann. © 2021 Cohen & Buckmann PC Originally published in LexisNexis Practical Guidance. All rights reserved. Republished with permission.

Articles related to SHRM:

In the swimming pool? Enhance 401 (k) plans,
SHRM online, September 2021

DOL: Retirement plan audits to include compliance with cybersecurity guidelines,
SHRM online, August 2021

[Small businesses can find offering a retirement plan to be daunting. SHRM is offering a program through Raymond James that may help. Visit www.shrm.org/401k to learn more.]


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