401(k) Boot Camp - Part 1 Getting People Into the Plan

Transcription

1 401(k) Boot Camp - Part 1 Getting People Into the Plan November 5, 2014 Presenter: Nancy J. Manary, Director Benefits Consulting Verisight, Inc.

2 401(k) Boot Camp Part 1 Part 1 Getting People Into the Plan Eligibility rules Enrollment procedures 2

3 401(k) Boot Camp - Overview Key Objectives for Attendees Understand your plan s actual provisions Apply plan rules correctly to avoid operational errors Increase your comfort level with respect to in-house plan responsibilities Improve the accuracy of your explanations of plan provisions to employees Make your plan run smoothly and effectively 3

4 Definitions Plan Sponsor the employer in the case of an employee benefit plan established or maintained by a single employer, the employee organization in the case of a plan established or maintained by an employee organization, or in the case of a plan established or maintained by two or more employers or jointly by one or more employers and one or more employee organizations, the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan. Plan Administrator person specifically so designated by the terms of the instrument under which the plan is operated; in the absence of a designation in the case of a plan maintained by a single employer, the employer. 4

5 Definitions Third Party Administrator (TPA) Organization that is hired by the plan sponsor (typically the employer) to run many day-to-day aspects of a retirement plan. Examples of responsibilities amending and restating plan documents; preparing employer and employee benefit statements; assisting in processing all types of distributions from the plan; preparing loan paperwork for plan participant; testing the plan each year to gauge its compliance with all IRS nondiscrimination requirements as well as plan and participant contribution limits; allocation of employer contributions and forfeitures; calculating participant vested percentages; and, preparing annual returns and reports required by IRS, DOL or other government agencies. 5

6 Definitions Recordkeeper Custodian of plan assets or the plan s investment platform. Examples of responsibilities value investments; provide participants with statements on their accounts; process distribution checks 6

7 BASIC PRINCIPLES FOR IN-HOUSE 401(k) PLAN OPERATIONS 7

8 Basic Principles for In-House 401(k) Plan Operations #1 Know the provisions of your plan Not all 401(k) plans use the same provisions. Do not assume what the plan rules are. Provision may be permissible, but may not be in your plan. Your plan provisions may have changed when document was updated for legislative changes. Plan document (Adoption Agreement plus basic plan document) must be your primary reference. Summary Plan Description may not have sufficient detail for individuals responsible for plan operations 8

9 Basic Principles for In-House 401(k) Plan Operations #2 Follow the provisions of your plan Failure to do so may cause IRS or DOL sanctions. If you do not like or understand a plan provision, talk to your Third Party Administrator or consultant. Some provisions are simple to change 1. Continue following existing provision until a plan amendment has been adopted Some changes may result in undesirable consequences or expenses. This will determine whether a change can or should be made. 9

10 Basic Principles for In-House 401(k) Plan Operations #3 Treat all participants in non-discriminatory manner Be consistent in applying plan rules, especially those that involve employer discretion. Call your TPA or plan consultant if you have a special needs situation discuss possible alternatives before making an individual exception 10

11 Basic Principles for In-House 401(k) Plan Operations #4 Maintain good records Records of employee salary deferral elections Records of declinations important for auto-enrollment plans Records of declinations important for safe harbor plans In-house employee census and contribution data is the basis for annual compliance testing Current and historical records will be crucial during an IRS or DOL audit System to substantiate timely compliance of providing important documents, such as: SPD, annual notices, enrollment forms, participant statements, fee disclosures, etc. 11

12 Basic Principles for In-House 401(k) Plan Operations #5 Call your TPA or plan consultant for assistance Ask before you act. A quick phone call or to your TPA or plan consultant often can prevent an operational error. Fixing a problem after an incorrect action has occurred can be expensive and difficult. 12

13 ELIGIBILITY RULES - OVERVIEW 13

14 Eligibility Rules Check the plan document or adoption agreement for each aspect of your plan s eligibility requirements Possible eligibility provisions include: Excluded or ineligible categories of employees Minimum age requirement Minimum service Entry date after satisfying all eligibility requirements 14

15 Eligibility Rules There may be different eligibility requirements for different types of contributions Example: Salary deferral contributions: No minimum age or service, monthly entry dates Employer matching contributions: No minimum age or service, quarterly entry dates Profit sharing contributions: 1 year of service & age 21, semi-annual entry dates 15

16 Eligibility Rules There may be different eligibility requirements for different categories of employees Example: Full-time & Part-time ees w/>1,000 hours/year: Salary Deferrals--immediate eligibility & entry Employer Contributions age 21 & 6 months of service requirement, w/ monthly entry dates Part-time ees w/<1,000 hours/year: Salary Deferrals immediate eligibility & entry Employer Contributions--Excluded 16

17 Eligibility Rules Understanding Definition of Year of Service Hours Method: 12 Months in which Employee is credited w/at least 1,000 hours Credit all hours for which individual was entitled to be compensated, either directly or indirectly, such as: Vacation Jury duty Holidays Sick leave Lay-off Leave of absence Military duty 17

18 Eligibility Rules Understanding Definition of Year of Service Must use one of DOL equivalencies on employees for whom hours records are not maintained DOL hours equivalencies are based upon any portion of the measurement period for which the individual was entitled to receive compensation: 10 hours per day 45 hours per week 95 hours per semi-monthly pay period 190 hours per month 18

19 Eligibility Rules Understanding Definition of Year of Service Elapsed Time: Employee is actively employed 12 months after hire date No hours required Consecutive employment not required Known as Service Spanning Rule Often overlooked when employee rehired 19

20 Example Applying Eligibility Requirements ABC Co. 401(k) Plan has the following eligibility rules: Salary deferrals: 60 days of service & no minimum age, w/quarterly entry dates Matching contribution: 1 year of service & no minimum age, w/monthly entry dates Excluded categories Union & Leased employees 20

21 Audience Question Jim is a non-union, non-leased employee hired August 15, What is the earliest date that you can let Jim start making salary deferral contributions to the plan? 1. October 1, October 15, January 1, August 15,

22 Audience Question Same facts: 60 day waiting period and quarterly entry dates for salary deferrals, one year of service and monthly entry dates for matching contributions. Jim hired on 8/15/2014. On what date will Jim start getting matching contributions? 1. November 1, January 1, August 15, September 1,

23 Eligibility Rules Part-time employees Treatment of part-time employees By statute, employees cannot be excluded from the plan because they are not fulltime. You cannot exclude part-time employees from the plan because they are not considered as benefits eligible under your internal policies. You must apply the plan s written eligibility requirements to all employees--fulltime & part-time. 23

24 Eligibility Rules Part-time employees Treatment of part-time employees The only part-time employees that may be excluded by category are those credited w/ less than 1,000 hours of service per year. Permissible Excluded Category: Part-time or Seasonal Employees Expected to Work less than 1,000 hours per year. If employee is ever credited w/more than 1,000 hours during a year, he/she would cease to be a part of the excluded category for the current and all subsequent years. 24

25 Eligibility Rules Part-time employees Treatment of part-time employees Common provision other than excluding by category is to establish service requirement. Example: Service requirement of 1 Year of Service using hours method (1,000 hours) would not allow part-timers working less than 1,000 hours to enter the plan. 25

26 Eligibility Rules Part-time employees Treatment of part-time employees Careful when using Elapsed Time service crediting method. Elapsed time method has no minimum hours requirement; Plan document must exclude by category: All part-time employees expected to work less than 1,000 hours per year 26

27 Eligibility Rules Part-time employees Treatment of part-time employees If the plan s service requirement is a period of less than one year (six months, 30 days, no waiting period, etc.), your plan must be covering part-time employees, unless: the plan document excludes part-time employees working less 1,000 hours/year by category. 27

28 Eligibility Rules Rehired employees Treatment of rehired employees Rehire who previously satisfied plan s age and service conditions normally does not have to satisfy them again after rehire. 401(k) plans typically allow immediate entry at rehire Profit sharing plans may apply the hold-out rule. Hold-out rule temporarily disregards prior service until employee completes plan service conditions again. After completing service conditions following rehire, ee must receive credit retroactively back to date of rehire. Check your plan document for exact provisions 28

29 Eligibility Rules Rehired employees Treatment of rehired employees Prior periods of service with the company (or a related entity) continue to apply to the eligibility waiting period in most cases Exception: Rule of Parity may apply to rehires in plans without employee deferral contributions. Rule of Parity allows plan to permanently disregard prior service, depending upon the period of severance prior to rehire. Rule of Parity will not work in 401(k) plans. If you have ignored prior service for rehired employees in your 401(k) plan, contact your TPA or plan consultant. 29

30 Eligibility Rules Rehired employees Treatment of rehired employees When providing employee census data to your TPA for year-end testing: Specifically identify any rehired employees Provide the following data about each rehired employee: original date of hire date of termination date of rehire Do not simply list a rehired employee as a new employee 30

31 Eligibility Rules Transferred-In Employees Treatment of transferred-in employees (from a related company) Service with another entity that is part of a controlled group or affiliated service group with your company must count under your plan Example: Service with a wholly-owned subsidiary would count toward the eligibility requirement of the parent company s 401(k) plan if an employee is transferred from the subsidiary to the parent company. 31

32 Eligibility Rules Transferred-In Employees Treatment of transferred-in employees (from a related company) When providing employee census data to your TPA for year-end testing: Provide information about service with the related company for transferred employees Do not simply list a transferred employee as a new employee 32

33 Eligibility Rules Participating Employers Participating Employer Related or unrelated employer to the Plan Sponsor Arrangement under which employer participates in a retirement plan sponsored by another employer for the benefit of its own employees 33

34 Eligibility Rules Acquired companies Treatment of employees from an acquired company In a stock acquisition, prior service with the acquired company must count for eligibility purposes under the acquirer s plan if the stock acquisition makes the acquired co part of a controlled group with the acquirer. Example: Company A purchases 100% of the stock of Company B and transfers some employees of B to A. The transferred employees would get credit for their years of service with B under A s plan. 34

35 Eligibility Rules Acquired companies Treatment of employees from an acquired Co. In an asset acquisition, employees of the acquired Co. can be treated as new employees of the acquirer, w/ no credit for prior service, unless acquirer adopted plan of acquired co. Example: Co. X purchases the assets of Co. Y and then hires some (or all) of the former employees of Y. The former Y employees can be treated as new hires under X s 401(k) plan, unless X elected to amend its plan to recognize prior service with Y or X adopted Y s 401(k) plan. 35

36 Eligibility Rules Temporary Staffing Agencies Service performed for your company by an individual working thru a temp agency must be treated as service worked directly for your co if you later hire the individual and the following 3 conditions were met: 1. Services were the result of an agreement (oral or written) between your co & the agency; 2. Individual was employee of temp agency; & 3. Individual performed services under your co s primary direction or control. 36

37 Eligibility Rules Temporary Employees Example: Plan has 90 day eligibility waiting period for salary deferrals. Individual works for employer through a temp agency for 120 days. Individual is then hired as a statutory employee on day 121. The 120 days of service for the employer through the temp agency count as though the person had worked directly for the employer The individual would be eligible to defer immediately upon hire date as an employee of the plan sponsor 37

38 Eligibility Rules for Rollover Into Plan Rollovers from not-yet-eligible employees A plan can include a provision to accept rollovers from employees who have not yet met the eligibility requirements. Check your plan document for this provision. It can be added if needed and not currently in the document. Acceptance of rollover does not accelerate the employee s entry into the plan for any other contribution purpose. 38

39 ENROLLMENT PROCEDURES 39

40 Enrollment Procedures Tracking eligibility rules for new employees Use a tickler file to track the entry date when each new hire will be eligible to enter the plan (or each portion of the plan) As each entry date nears, check the tickler file for those still employed on that date Check hours of service if 1,000 hours are required for eligibility Provide enrollment materials to employees who have met all eligibility requirements by the upcoming entry date 40

41 Enrollment Procedures Enrollment materials to provide to newly eligible employees Summary Plan Description (SPD booklet) Salary deferral election form Designation of beneficiary form Investment fund information and investment election procedures Any applicable notices, such as Safe Harbor 401(k) Notice, QDIA Notice, Auto-enroll Notice, etc. 41

42 Enrollment Procedures Administrative procedures for enrollments Get a signed salary deferral election from every newly eligible employee, even if deferral election is 0% of pay. This proves that enrollment was offered If deferral enrollment is on-line, follow up with employees who have not made an on-line election Notify your payroll department or outside payroll service company of new participants deferral elections and effective dates for these new deferrals. 42

43 Enrollment Procedures Administrative procedures for enrollments Insure all newly deferring employees select investment options Also insure all newly eligible non-deferring employees select their investment options if the plan has the possibility of a non-matching employer contribution For example, profit sharing or safe harbor non-elective contributions 43

44 Enrollment Procedures Participant Investment Elections Most 401(k) plans use a daily recordkeeping platform that allows employees to select, monitor, and change their investment elections at any time via phone or internet Employer is not responsible for tracking employees investment elections in these electronic daily recordkeeping arrangements. However, employer should insure its record keeper has reliable system that can produce evidence of election changes as needed. 44

45 Enrollment Procedures Participant Investment Elections Make certain employees have access to current plan investment information so they can make informed decisions Updates may be provided by the investment institution Updates may be provided by the plan s investment advisor through periodic employee meetings 45

46 Enrollment Procedures Automatic Enrollment Plans Employees are automatically enrolled in the 401(k) plan as soon as the eligibility requirements are met, using a default salary deferral % of pay, unless the employee affirmatively elects a different salary deferral amount, or unless the employee opts out of the deferral opportunity. 46

47 Enrollment Procedures Automatic Enrollment Plans Use of automatic enrollment is increasing Results in more employees saving for retirement Refunds can be made to participants who opt-out within 90 days after automatic deferrals began Later opt-outs cannot get refunds of amounts already deferred, but benefits will be paid upon termination of employment Advance notice and annual reminder notices are crucial if your plan uses automatic enrollment. 47

48 Enrollment Procedures Rationale for using automatic enrollment To increase participation by employees who never enroll in the plan due to inertia, fear, or lack of understanding They do not understand how the plan works or how it will benefit them They do not know how much they can afford to defer They do not understand investments and fear making bad investment choices 48

49 Enrollment Procedures Rationale to use automatic enrollment Increased participation will help the plan pass non-discrimination testing--adp and ACP tests Increased participation will improve the probability that employees will enjoy a financially secure retirement Increased participation will increase total plan asset value, providing quicker access to lower expense class funds. Lower expense fund class provides higher income returns. 49

50 Enrollment Procedures Rationale not to use automatic enrollment Increased employer fiduciary responsibility for employee notices, QDIA selection, and monitoring of enrollment process. Increased employer contribution costs for plans with employer matching. 50

51 Enrollment Procedures Challenges with automatic enrollment Internal payroll department or outside provider must have strong processes in place to timely enroll employees who do not return a deferral election form Failure to timely enroll can require employer-funded corrective contributions for eligible employees who were overlooked Rehires, transferred, or acquired employees can slip through the cracks in automatic enrollment plan without strong procedures 51

52 SALARY DEFERRAL PROCEDURES 52

53 Salary Deferral Procedures General salary deferral rules Salary deferrals can be made only by payroll deduction. Deferrals can apply only to compensation paid after the employee has met the eligibility requirements and entry date You must withhold salary deferrals from all paychecks until employee submits another election form to stop or change the deferral amount 53

54 Salary Deferral Procedures Salary deferrals from bonuses (or other special payroll checks) Employee s current election (% of pay or flat $ amount per pay period) must apply to bonuses and any other special paychecks Unless the plan excludes bonuses or other special compensation from the definition of plan compensation, or Unless the employee has made a deferral election with respect to any bonus he/she may be paid 54

55 Salary Deferral Procedures Payroll System Issues Most payroll systems automatically stop an employee s salary deferrals when YTD deferrals reach the dollar maximum for that year ($18,000 for 2015) If you use an internal payroll system, determine how the dollar limits are updated each year. If your plan allows both traditional and Roth salary deferrals, make sure the payroll system combines both types of deferrals when automatically stopping deferrals at the dollar maximum 55

56 Salary Deferral Procedures Payroll System Issues Determine and document how your payroll system can identify employees who qualify for the age 50+ catch-up salary deferrals. ($6,000 for 2015) Some payroll systems require a separate catch-up salary deferral deduction 56

57 Salary Deferral Procedures Changes in Salary Deferral Amounts Frequency of salary deferral changes is a written plan provision that must be followed. Frequency of change dates must be administratively feasible for the payroll department. Apply the change frequency rules uniformly to all participants. 57

58 Salary Deferral Procedures Changes in Salary Deferral Amounts Review your system to notify payroll whenever an employee changes (or stops) his/her salary deferral amount. Failure to carry out the employee s salary deferral instructions is an operational error that must be corrected by an employer contribution to make up for the missed deferral opportunity. 58

59 Salary Deferral Procedures Non-Deferring Participants Periodically remind non-deferring employees who have met the eligibility requirements that they can begin deferrals at the next available enrollment/change date. An active employee who stops deferring is still a plan participant and cannot take a distribution prior to termination of employment Unless he/she is over age 59 ½, or Unless he/she has an allowable hardship situation 59

60 Salary Deferral Procedures Limits for 2015 Elective deferrals - $18,000 Catch-up contribution - $6,000 Annual additions limit (employer and employee contributions) - $53,000 Compensation Limit - $265,000 Payroll systems may have automatic limits, but many employers have manual system that require updating annually 60

61 COMMON OPERATIONAL ERRORS ELIGIBILITY AND ENROLLMENT 61

62 Common Operational Errors Common Error #1 Failing to offer 401(k) enrollment to every employee as soon as he/she completes the plan s eligibility requirements. 62

63 Common Operational Errors Required Correction for Error #1 - Fully vested employer contribution for all affected employees equal to: Compensation for the omitted period multiplied by the missed deferral opportunity % Applicable match based on missed deferral Lost investment earnings on all the above Missed deferral opportunity % = 50% of the missed deferral 63

64 Common Operational Errors Required Correction for Error #1 (IRS sanctioned correction procedures) Missed Deferral is determined: For non-safe harbor 401(k) plans The actual deferral percentage (ADP) of the employee s applicable group (HCE or non-hce). For safe harbor 401(k) plans --the greater of: 3% or The highest % the Plan matches at 100%. For example: Safe harbor 401(k) plans that match 100% of deferrals up to 4% of Pay would have missed deferrals of 4%. 64

65 Common Operational Errors Best Practices to Prevent Error #1 Make sure everyone involved in operating the plan (HR, payroll, etc.) knows the exact eligibility rules of the plan. Always refer to the plan document for eligibility rules, not just the Summary Plan Description. Remember that the plan document--not the Co. policies--determine who participates in the plan Part-time employees may be eligible under the plan, even if the company has a policy of not providing benefits to part-timers. 65

66 Common Operational Errors Common Error #2 Incomplete records of employees salary deferral elections i.e., no proof that employees who were not making deferrals were actually offered the opportunity to do so. (Fill out, sign and date for 0 elections) Note: This issue may arise during an IRS or DOL audit; during annual CPA plan audit; or due to a complaint from an employee who states that he/she was never told about the opportunity to participate in the 401(k) plan. 66

67 Common Operational Errors Required Correction for Error #2 Same as corrective contributions in Error #1. Best Practices to Prevent Error #2 Insure every employee completes a salary deferral election, including those who elect not to defer (indicate 0% of pay or $0 as the salary deferral amount) WHY is this so important proof election given Follow up in writing with employees who do not complete a deferral election (either on paper or on-line) Retain copies of memos or s sent to employees who had not made a deferral election, as documentation that their elections had not been received 67

68 Summary You own it Know it Understand your Plan s provisions for eligibility and enrollment Follow the provisions of your Plan Be consistent in applying Plan provisions Maintain good records An ounce of prevention is worth a pound of cure Apply your Plan s rules to avoid costly operational failures Consult with your TPA or plan consultant if you have questions If an error occurs, correction must be timely 68

69 Questions? Contact: 69

70 Thank You! 401(k) Boot Camp Webinars: November 12, Part 2 Getting Money Into The Plan November 19, 2014 Part 3 Getting Money Out Of The Plan 70