Combo Plan Design Considerations

A 401(k) plan with a new comparability profit sharing feature is a great way to contribute to retirement savings. But what if you want to contribute more than the legal limit available in a defined contribution plan? A combination of a 401(k) and a cash balance plan can be a potent tax-advantaged savings vehicle. But there are some considerations to be aware of.

If you have a 401(k) plan that uses a safe harbor match, you may want to consider changing it to a safe harbor non-elective contribution. In a combo plan, all NHCEs must generally receive a "gateway minimum" contribution of up to 7.5% of compensation. The safe harbor non-elective contribution counts towards this gateway minimum, but the safe harbor matching contribution does not. Therefore, a sponsor who wishes to minimize the total contribution for NHCEs may prefer the SHNEC.

It simplifies administration for both plans to have the same normal retirement age. In a 401(k) plan, the attainment of normal retirement age as defined in the plan entitles a participant to full vesting and usually to a distribution of their account. For a cash balance plan, however, the choice of normal retirement age can affect the amount that may be accrued in the plan and is therefore vital to the overall plan design. If the definition of normal retirement age in the 401(k) plan does not match with the normal retirement age desired in the cash balance plan, the 401(k) plan should be changed. Note that if the change would result in a later normal retirement date for any participants, any rights to vesting or distributions must be preserved.

Under the SECURE 2.0 Act, long-term part-time employees must be allowed to participate in their employer's 401(k) plan. Although they do not need to be covered by the profit sharing or match portions of the plan, some employers may choose to cover them anyway, to simplify plan administration. If your plan covers or excludes certain classes of employees, consider whether those exclusions should or shouldn't apply to the cash balance plan as well.

These are only some of the many considerations that should be taken into account when adopting a new cash balance plan. For more information, contact your plan consultant. Or come hear our own Corey Zeller, MSEA, CPC, speak about this topic at the ASPPA Annual Conference in Orlando, FL on Sunday, October 20!

Revved Up Like a Fiduciary: Do Be a Prudent Bee, Don’t Be a Breacher Bee

Who and What is a Fiduciary?

The dictionary defines a fiduciary as “a person or organization that acts on behalf of another and has a legal and ethical duty to put the client’s interests first.” Retirement plans require attention in many areas to make sure they provide intended benefits to participants.

With regard to retirement plans, the Department of Labor issued complex and controversial regulations on April 23, 2024 that outline precisely who has fiduciary responsibility in specific situations. Although the new regulations make some changes that expand the definition of a fiduciary1, there are some general principles that apply:

• If you have discretionary authority or control regarding the plan assets or investments, you are a fiduciary.

• If you have discretionary authority over the administration of the plan, you are a fiduciary.

• If you render investment advice regarding the plan for a fee or other compensation, you are a fiduciary.

A party can be a fiduciary by being so named in the plan, trust, or other documents, or they can be a “functional fiduciary,” meaning they are a fiduciary by virtue of their actions even if they are not so designated. A functional fiduciary cannot avoid a fiduciary role by disclaimer.

Fiduciaries typically include the plan sponsor and its officers, the retirement plan committee, named trustees, directed trustees2, 3(16) plan administrator3, 3(21) investment advisor3, 3(38) investment manager3, and anyone else named as a fiduciary. Fiduciaries generally do not include recordkeepers, pension administration firms, law firms, accountants and auditors, and employees of the plan sponsor who perform tasks such as submitting information to the above parties, or processing contributions or benefits from the plan that have been approved by fiduciaries.

General Guidelines Fiduciaries Must Follow

RISA contains several general rules that apply to all retirement plan fiduciaries.

• Exclusive Benefit Rule: Fiduciary actions must be for the exclusive benefit of participants.

• Prudent Person Rule: A fiduciary must act with the care, skill, and diligence that a prudent expert would use in similar circumstances.

• Duty of Loyalty: In acting in the best interest of participants, a fiduciary must avoid having a personal interest in transactions, and not use their role for personal gain.

• Duty of Care: A fiduciary must act in a way that will not cause harm to the plan or its participants. 

Fiduciary Duties Regarding Plan Assets

Qualified retirement plan assets must be held in a Trust, and the Trustee is generally responsible for the investment and monitoring of plan assets. Assets should be properly diversified, be reasonably priced, and consider the risk tolerance and objectives of plan participants. Factors such as past performance, expense ratios and fees, risk profiles, and fund managers’ track records are all part of the prudent process for evaluating plan assets. Reviews should be documented on an ongoing basis. 

It’s best to have an Investment Policy Statement that details the criteria for selecting and monitoring investment performance. Investments that fail to meet the stated criteria should be replaced. Evolving market conditions and regulatory changes can also drive the need to make changes in the plan’s investments.

Cost Management

One of a fiduciary’s important duties is to review plan expenses and ensure that they are reasonable and justifiable. These may include fees that are taken directly from investments by the managers of plan assets. Or the expenses may be paid from plan assets to cover items such as auditing fees, compliance testing fees, preparation of plan documents or government forms, or legal fees. The fees do not have to be the lowest ones available, but they must be reasonable and not more expensive than otherwise available for an identical level of service.

Compliance

Fiduciary responsibility includes making sure that contributions to the plan and benefits to participants are paid timely. Numerous reporting and disclosure rules are imposed on plans to ensure that participants receive notices about their benefits and rights under the plan. An Annual Report must be filed with the Department of Labor each year; the Internal Revenue Service has required filings; and the Pension Benefit Guaranty Corporation requires premiums to be paid by covered defined benefit plans. Numerous operational compliance tests must be met, including coverage tests, nondiscrimination tests, and top-heavy tests. Plan documents and Summary Plan Descriptions must be updated to reflect ongoing retirement plan legislation and regulation on a regular basis. Plan fiduciaries are responsible for making sure all these compliance matters are properly handled and documented.

Educating Plan Participants

In plans where participants direct the investment of their accounts, the fiduciaries must make sure that the participants have enough information to make informed investment decisions. Sufficient investment alternatives must be offered, and other rules must be followed, otherwise the fiduciaries may be exposed to liability for the investment performance of participants’ accounts. Having regular participant education meetings and providing ongoing investment information to participants is advisable in plans with participant-directed accounts.

Monitoring Service Providers and Other Fiduciaries

Fiduciaries may hire various service providers to provide advice and assist in the completion of the required duties noted above. Such services may include accountant and auditors, actuaries, asset managers, attorneys, investment providers, recordkeepers, and many others. However, the fiduciary has not completely delegated their responsibility for that duty. The fiduciaries must use diligence in hiring and monitoring the performance of the service providers. Periodic service reviews are required and benchmarking against other service providers is advisable. If services are found to be deficient or unreasonably priced, the affected service providers should be replaced.

Various fiduciaries are responsible for various different duties. If one fiduciary is aware, or should be aware, that another fiduciary is not fulfilling their duties properly, action must be taken to correct the deficiency; otherwise, both fiduciaries may be liable for the failure.

Fiduciary Breaches

Any fiduciary who breaches their fiduciary responsibilities is personally liable to return any losses suffered by the plan. Further, they must return all profits made through the improper use of plan assets. In appropriate cases, a fiduciary may be removed or even permanently barred from providing services to retirement plans.

Penalties can apply in case of a fiduciary breach. The Department of Labor can assess a civil penalty of up to 20% of amounts recovered by the plan through litigation or settlement.

In certain cases of willful violation of fiduciary responsibility, the violator may be subject to fines of up to $100,000 per person ($500,000 for corporations) and imprisonment up to 10 years.

Co-fiduciary liability may be imposed in certain cases, meaning that one fiduciary may be liable for breaches by another fiduciary. This applies only if:

• They participate knowingly, or act to conceal, a breach by another fiduciary;

• They fail to prudently act in a way that enables the other fiduciary to commit a breach; or 

• They have, or should have, knowledge of another fiduciary’s breach and don’t make reasonable efforts to remedy the breach.

Dealing With Fiduciary Liability

The Voluntary Fiduciary Correction Program (VFCP) is a Department of Labor program that allows for the correction of certain fiduciary duty violations. An application must be submitted and if approved, the fiduciary can avoid civil penalties. Only specific types of violations are covered under the program.

Fiduciaries can purchase a Fiduciary Liability Insurance policy that will provide coverage for certain claims. Different policies cover different risks, but in general these policies cover claims arising from inadvertent or negligent breaches. Willful or egregious violations typically would not be covered.

Conclusion

Retirement plan fiduciary responsibilities are wide-ranging. Failure to be aware of and comply with those responsibilities can have serious consequences. 

Footnotes

1. https://skadden.com/insights/publications/2024/04/dol-finalizes-investment-advice-fiduciary-rule

2. https://blog.myrawealth.com/insights/directed-vs-discretionary-trustee

3. https://smartasset.com/investing/3-38-fiduciary-3-16-fiduciary-3-21-fiduciary

Form Reform! You Must Conform! Changes to Form 5500 Series!

Background information

Each year, most employee benefit plans covered by ERISA must file a form with the Department of Labor and the IRS known as the Form 5500 Series, or the “Annual Return/Report of Employee Benefit Plan.” It’s called a “series” because there are several different versions of the form. Which version of the form a retirement plan must file depends on the number of participants, as well as the amount and types of assets in the plan. There are also various schedules and attachments that may be required with the form.

Form 5500 Series requires reports on the provisions, operation, and financial condition of the plan. It is generally due by the end of the seventh month following the end of each plan year (1).

For plan years beginning in 2023, several changes have been made to the information requested on Form 5500. This article focuses on a few of the changes that may impact our clients’ plans.

Determining the number of participants for small plan reporting

If a plan covers fewer than 100 participants (2), it’s considered a “small plan” and can file a less extensive version of Form 5500. Importantly, a “small plan” is not required to attach an audit of the plan assets. Audits can be time-consuming and costly, so employers generally wish to avoid them if possible.

In the past, all participants who met the plan’s eligibility requirement were counted, even if they elected not to participate or didn’t have an account balance. Starting in 2023, for defined contribution plans (including 401(k) plans) the determination is based on the number of participants who have an account balance at the beginning of the plan year. In other words, for purposes of determining whether a plan is required to have an audit, a participant does not count unless they have a balance in the plan at the beginning of the year.

New IRS Compliance Questions

Three new questions have been added to the form, which concern the following:

(a) Does the plan use “permissive aggregation rules” to satisfy coverage and nondiscrimination tests? In other words, does the plan pass these tests by using the contributions or benefits provided by more than one plan?

(b) This question applies only to 401(k) plans. It asks how the plan intends to satisfy nondiscrimination tests for deferrals and matching contributions. Specifically, does the plan use a “Safe Harbor” or “Qualified Automatic Contribution Arrangement?” If not, does the plan use the current year testing method or the prior year testing method?

(c) If the plan sponsor is an adopter of a pre-approved plan that received a favorable IRS Opinion Letter, the date and serial number of the Opinion Letter must be entered.

Multiple Employer Plans and Defined Contribution Groups

A new Schedule MEP has been developed to take the place of a previously required attachment for plans that are considered multiple employer plans (i.e., plans that are sponsored by more than one unrelated employer), including pooled employer plans (3).

For plans that are members of a Defined Contribution Group (DCG) (4), a single Form 5500 may be filed for the group. However, each plan must file a separate Schedule DCG. For any large plans which are part of the DCG, the auditor’s report for that plan must be attached to the Schedule DCG.

Expanded Financial Information

Plans that don’t meet the small plan filing exception must include Schedule H, Financial Information. New breakout categories have been added under “Administrative Expenses.” The new categories include audit fees, legal fees, salaries, valuation fees, and trustee fees and expenses.

Defined Benefit Plans

Defined benefit plans (including cash balance plans) must include Schedule SB, Actuarial Information, in the Form 5500 Series filing. Some of the questions on this form have changed. The changes are technical and have to do with the actuarial calculation of the minimum required contribution to the plan.

Whoever files your Form 5500 Series may need additional information to prepare the form. Don’t be surprised if you get a few new questions from your pension administrator this year!

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1. Form 5558 can be filed to extend the filing deadline by 2 1/2 months; i.e., from 7 months to 9½ months after the end of the plan year. Late filing penalties are imposed by both the IRS and DOL and can be extremely large.

2. Plans that cover between 80 and 120 participants on the first day of the plan year can elect to file the same form as the previous year. For example, a calendar year plan that had 90 participants on 1/1/2022 and 110 participants on 1/1/2023 can still file as a small employer in 2023.

3. Employers are unrelated if they are not members of a Controlled Group or Affiliated Service Group. The definition of these terms is complex, but it generally concerns common ownership among the employers (including ownership by certain relatives of the owners); whether the employer is a service organization; and whether the employers perform services for each other. Other employers may be related if they share employees or are members of a Management Function Group.

4. A Defined Contribution Group, sometimes referred to as a “Group of Plans,” consists of more than one employer with separate defined contribution plans, which have the same trustee, named fiduciary, plan administrator, plan year, and investment options.