ARTICLE | September 16, 2021 | Authored by RSM US LLP
When an employer sponsors a retirement plan for its employees, it must carefully consider, and continually monitor, the plan provisions. Employers need to step back periodically, perform a plan checkup and ask if the plan is accomplishing their goals while maintaining compliance with all regulations. Is the plan working for the employer as plan sponsor, as well as for the participants?
Evaluation of several areas can help determine the health of the plan:
If the answers to these questions are less than optimal, a variety of options can help boost participation and savings levels:
Auto-enrollment and auto-escalation: With this option the plan automatically enrolls newly eligible participants at a stated rate for deferring compensation, then automatically escalates that rate at a specific interval—for example, by one percentage point at an anniversary. Participants may also opt out of these features.
Strategic use of technology: Utilizing current technology can help employees enroll, readily access information, communicate with the plan sponsor and stay informed about the plan’s benefits.
Tools for financial literacy and wellness: Providing employees with tools for budgeting, saving for emergencies and education expenses, basic financial planning, etc., can increase interest in the retirement plan as well.
Higher employer match threshold: A plan sponsor can motivate eligible employees to increase their participation and deferral rate by offering a higher employer match contribution. An employer match may also be a tool to boost employee retention and hiring.
Simplified investment options: For employees uncertain about how to invest, there is value in simplicity. Simplified investment options, like target date funds, can help participants feel more comfortable with a retirement plan.
Diversification: Target date funds are also popular because they enable participants to determine the appropriate mix of investment options. An increasing number of contributions and elective deferrals are going into these funds, which can be a great way to diversify plan assets and provide adjustability as participants move closer to retirement.
Enhanced plan design: Utilizing plan limits to maximize benefits for targeted personnel can be an effective tool for rewarding key staff and attracting talent. Benefits might include advanced profit sharing options and coordination with defined benefit and executive compensation plans.
The IRS uses compliance tests to make sure a plan does not favor highly compensated employees (HCEs) over non-highly compensated employees (NHCEs).
One example is the coverage test, which looks at how many HCEs are benefiting under the plan compared to NHCEs. Does the plan cover enough of the latter group?
The plan can exclude certain classifications, such as union (collective bargaining) employees and non-U.S. residents, without affecting its coverage test results. However, if the plan excludes other classifications of otherwise-eligible participants, the plan sponsor must show that it still passes the coverage test. The actual deferral percentage test and actual contribution percentage test are additional annual compliance tests that may apply as well.
Among the options that can satisfy the nondiscrimination requirement, while also motivating individuals to participate, is the safe harbor contribution. This contribution can take the form of either a mandatory employer match or a nonelective contribution, in which the employer contributes at least 3% of an employee’s compensation regardless of whether the employee makes contributions.
Three regulatory agencies provide oversight of retirement plans: the IRS, the U.S. Department of Labor and the Pension Benefit Guaranty Corporation. Because retirement plans must comply with a long list of rules under these agencies, administrative errors sometimes occur.
Types of errors commonly discovered in retirement plans include:
The IRS may disqualify a plan from tax-exempt status if it fails to comply with the rules. Plan disqualification results in all of the following:
The IRS may disqualify the plan retroactively from the plan’s inception or another specified date, or for a specific number of years.
In general, correction of a plan error requires repositioning participants and the plan as they would have been had the error not occurred. The IRS Employee Plans Compliance Resolution System (EPCRS) allows plan sponsors to correct plan errors under the Self-Correction Program, the Voluntary Correction Program or the Audit Closing Agreement Program.
Best practices to follow include:
By adopting these best practices and committing to regular plan checkups, an employer can comply with all regulations while optimizing plan benefits for employees.
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This article was written by Eric Carroll and originally appeared on 2021-09-16.
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