The summer is a great time for employers to review common pension plan administrative issues and determine if any course corrections need to be made to their qualified pension plans (“plans”) during the year. .
The following list summarizes some of the most common plan administration errors that we regularly see in our practice:
Late or unpaid minimum required distributions
Plan participants are generally required to begin Required Minimum Distributions (“RMD”) no later than April 1st following the year in which he reaches the age of 72 (or 70 and a half if the member was born before July 1, 1949) or, for members who do not hold more than 5% of the company, the date of their termination, if later. Adverse tax consequences (in the form of a 50% excise tax) for the participant may arise if an RMD is distributed late. Employers should periodically review participant records (especially age and address fields) to ensure that participant data is up-to-date and that participants start their RMD in a timely manner. Additionally, employers should document their procedures for finding missing attendees and ensure that their procedures comply with IRS and DOL guidelines.
Poor administration of scheme loans
Where a plan permits loans to participants, those loans must be issued in accordance with the terms of the plan, including any adopted loan policies and applicable IRS regulations. Failure to adhere to these loan parameters may result in negative tax consequences for participants and potential operational failures for the plan. Employers should periodically review the administration of Plan loans against the Plan terms and loan policy to ensure that all loans are properly administered and paid and to correct any errors in a timely manner.
Does not fully document difficulty breakdowns
As with loan administration, hardship distributions must comply with plan terms and applicable regulations. One of the most recent regulatory changes regarding hardship distributions, the IRS’s 2019 Hardship Final Rule, changed the rules for hardship distributions. Therefore, if your plan offers hardship distributions, it should have been amended around 2020 to reflect these final hardship regulations. Employers who offer hardship distributions through their plans should ensure that an interim amendment has been enacted in a timely manner to these regulations.
From an administrative perspective, for an approved hardship allocation request, it is recommended that the employer obtain and retain (1) documentation indicating the hardship request, review and approval, ( 2) documentation of the participant’s assertion that they do not have sufficient cash or other liquid assets to meet their financial needs, and (3) documentation demonstrating that the distribution was properly made in accordance with the applicable rules and terms of the plan and properly reported for tax purposes. Although an employer may engage the services of a Third Party Administrator (“TPA”) or Registrar to assist in processing hardship distributions, Employers should not assume that the TPA or Registrar Registries takes action consistent with these practices without confirmation from the TPA. If an employer is unsure of the practices of their TPA or caseworker regarding hardship allocation, they should review their agreements with the TPA and caseworker and determine what procedures have been implemented. In the absence of procedures similar to those suggested above, an employer may consider implementing their own internal procedures or otherwise discuss options they may have with their TPA and records manager. A hardship breakdown document may be requested in the event of an audit and if it is not available from the TPA or the employer, you may need to go back and request the information from the participant.
Incorrect application of plan compensation definition
Failure to correctly apply the Plan’s definition of compensation may result in erroneous deferred contributions, matching contributions and/or employer contributions. Employers should periodically review their pay codes against their plan’s compensation definition, particularly after any new compensation types or employee groups are added, to ensure ongoing compliance. The treatment of post-severance pay must also be in accordance with the terms of the plan.
Late transfers of member contributions
A fiduciary breach may arise if an employer fails to transfer participant contributions (voluntary deferrals or participant loan payments) from employer assets/payroll to the plan in a timely manner in accordance with applicable regulations. Employers should periodically review payroll practices to ensure that member contributions are transferred to the Plan as soon as administratively possible.
Unidentified Controlled Group Members and Participating Undocumented Employers
When an employer brings in a new affiliate (for example, by acquiring or establishing a new business or subsidiary), careful consideration should be given to the terms of the plan to determine how the employees of the new affiliate are treated under the plan. If this is not properly tracked and communicated prior to the closing of an acquisition, the new Affiliate’s employees may be incorrectly included or excluded from the Plan. In addition, many pension plans require any affiliate of the plan sponsor who wishes to adopt the plan as a participating employer to affirmatively elect to participate in the plan before their employees begin participating. This may require the affiliate (and the plan sponsor) to approve the resolutions and sign a participation agreement before the affiliate’s employees can participate in the plan. When transactions are being negotiated, a benefits advisor should be engaged to ensure that all participating employers are properly documented and to ensure that the plan is amended as necessary to accommodate new participating affiliates. In addition, employers should periodically review their corporate structure to ensure that all employers participating in the plan are properly documented in plan documents.
If a problem is identified and not resolved in a timely manner, the Internal Revenue Service and the Department of Labor have remediation programs that may provide relief to employers. The important thing is to resolve any identified issues in a timely manner and through the appropriate remediation program, if applicable, and to put procedures in place to ensure that these issues do not reoccur.
© 2007-2022 Hill Ward Henderson, All Rights ReservedNational Law Review, Volume XII, Number 200