Scared vs. Prepared: Conducting an Operational Compliance Review

Well, it arrived.  On your desk is a white envelope with a return address to the Federal Government. Are you prepared for this day?  Are your procedures up-to-date? 

Fortune Favors the Prepared

No one likes finding out that they are being audited by the Internal Revenue Service (IRS) or Department of Labor (DOL). But the fact of the matter is that all qualified retirement plans (defined benefit and defined contribution) may be audited. Prudent plan sponsors are proactive, have up-to-date procedures and guidelines, and periodically conduct an operational compliance review, or self-audit. Taking the initiative to do a self-review can help you avoid added costs and liabilities down the road.

Plan sponsors have a fiduciary responsibility to ensure their plans are operating according to the law and governing plan documents. This includes everything from documentation, to benefit calculations, to the day-to-day administrative processes. No matter what type of retirement plan you have, or whether it is administered in-house or outsourced to a professional recordkeeper, you should consider conducting an operational compliance review every few years.

Bonus: It’s also the perfect time for plan sponsors to locate and organize all plan documents, Summary Plan Descriptions, administrative manuals, third-party service agreements, and meeting minutes.

A particularly good time to conduct a review is when a merger or acquisition takes place. If you are considering merging one plan into another, it is beneficial to correct errors in each plan before merging. Once the plans are merged, it is harder to isolate when and where the problem started and to calculate any corrections needed.

Start to finish, a self-audit can last from six weeks to six months depending on the size of the plan, depth of review, and findings. The review may be broad, focusing primarily on plan documents, annual filings, and compliance testing. It may be very detailed, structured to encompass everything from internal payroll processes down to spot checking select records or transactions from the recordkeeping system.

How Do We Make Sure We’re Prepared?

When considering an operational compliance plan review, it’s tempting to think, “Nothing has changed with our plan, so we’re good.” However, just because your plan hasn’t changed in your eyes doesn’t mean you shouldn’t review. New tax laws, legislative updates, and organizational restructure all affect retirement plans. Use these eight questions to help you pinpoint areas that may need to be addressed in your review:

  • How long ago was the last internal review completed?
  • Are there any recent laws or regulation changes affecting your plan, your company, and your employees?
  • Does your plan document reflect the way the plan is currently being administered?
  • When was the last time your benefits and payroll teams reviewed the wage types to confirm that they align with the plan document?
  • Is there a committee that meets to discuss and make decisions regarding the retirement plan?
  • Are the retirement plan committee decisions documented in meeting minutes?
  • Have there been tax laws or internal company changes which may impact the plan’s operation?
  • Has your company made any acquisitions or changes in payroll systems?

Where Is the Most Exposure?

The DOL and IRS periodically publish lists of the most common compliance issues they find when reviewing retirement plans. The most common issues include:

  • Definition of compensation
  • Updates to the plan documents for tax law changes
  • Employee eligibility
  • Loans
  • In-service distributions
  • Minimum required distributions
  • Nondiscrimination testing
  • Vesting
  • Timing of payroll deposits
  • IRC 410(b) coverage testing
  • Qualified domestic relations orders
  • Target date funds
  • Revenue Sharing and 12b-1 fees
  • Plan committee meetings
  • Blackout participant notices

This list is not exhaustive; however, it is a good reference and cheat sheet for areas of focus for your plan review. Most recently, the DOL has been focused on the diligence of plan sponsors in locating missing participants.

In Perspective

The day that letter arrives doesn’t have to be scary.  Performing an operational compliance plan review every few years can keep your plan up-to-date and compliant. Questions? If you would like to learn more about conducting an operational compliance review of your plan, please contact the Findley consultant you normally work with, or contact Amy Kennedy at, 419.327.4102, or Beth Mattimoe at , 419.327-4416.

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Posted March 6, 2019

IRS Issues Proposed Regulations on Hardship Distributions

Just in time for 2019, the IRS has complied with a directive it was given by Congress in the Bipartisan Budget Act of 2018 (BBA 2018) and provided needed guidance on changes to 401(k) hardship withdrawal rules. These changes increase a participant’s access to hardship withdrawals and eliminate some burdensome administrative requirements. The guidance was issued in the form of proposed regulations. However, given the need 401(k) plan sponsors have to address these issues, it is reasonable to assume that the final regulations will not change much. Below is a summary of the guidance.

Deemed Immediate and Heavy Financial Need Safe Harbor

In determining whether a participant has incurred a hardship that would permit a withdrawal from a 401(k) plan, most plans follow the IRS safe harbor rules for determining what constitutes a deemed immediate and financial need. The newly proposed regulations modify this safe harbor list of expenses by:

  • adding “primary beneficiary under the plan” as an individual for whom qualifying medical, educational, and funeral expenses may be incurred. This updates the regulations to include a change made by the Pension Protection Act of 2006 that the IRS did not address in previous guidance.
  • modifying the expense listed in existing regulations that relates to damage to a principal residence that would qualify for a casualty deduction under Code Section 165 to eliminate, for this purpose, the new limitations to casualty loss deduction rules added by the Tax Cuts and Jobs Act, which required that the loss be attributable to a federally declared disaster.
  • adding a new type of expense to the list relating to expenses and losses incurred as a result of certain disasters if the participant’s principal residence or principal place of employment is in a federally declared disaster area.

Special applicability rule. Under a special applicability provision, the revised list of safe harbor expenses may be applied to distributions made on or after a date that is as early as January 1, 2018.

Distribution Necessary to Satisfy Financial Need Safe Harbor

Most 401(k) plans follow the IRS safe harbor rules for determining whether a distribution is necessary to satisfy the participant’s financial need rather than relying on the more complicated facts and circumstances test. Before 2019, IRS guidance provided that plans using this safe harbor had to:

  • require a participant first take out any plan loan that was available, and
  • suspend 401(k) contributions for a period of 6 months after a participant’s hardship withdrawal.

BBA 2018 specifically instructs the IRS to eliminate these two requirements from the safe harbor standard. The IRS responded to this directive by replacing the safe harbor and the facts and circumstances tests with one general standard for determining whether a distribution is necessary to satisfy a participant’s financial need. Under this new general standard:

  • a hardship distribution may not exceed the amount of an employee’s need (including any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution);
  • the employee must have obtained other available distributions under the employer’s plans; and
  • the employee must show that he/she has insufficient cash or other liquid assets to satisfy the financial need. A plan administrator may rely on such representation unless the plan administrator has actual knowledge to the contrary. The requirement to obtain this representation only applies to a distribution made on or after January 1, 2020.

Further information on suspensions – Although BBA 2018 makes the elimination of the 6-month hardship suspension effective January 1, 2019, the IRS clearly recognizes the administrative burden that some plans will face to implement system changes. Therefore, the IRS provides plan sponsors some flexibility in implementing the elimination of hardship suspensions as follows:

  • Plans may be amended to eliminate hardship suspensions on or after January 1, 2019.
  • The plan amendment may provide that all suspensions be immediately lifted (including for participants whose hardship suspension began in the second half of 2018). Alternatively, a plan may require that participants under a 6-month suspension have to complete that suspension period.
  • All plans must eliminate the 6-month suspension by January 1, 2020.

Expanded Sources for Hardship Distributions

The proposed regulations expand the sources of contributions that a plan may make available for a hardship withdrawal. After 2019, the amounts available may include QNECs, QMACs, safe harbor contributions, and earnings on all amounts available (including earnings on elective deferrals), regardless of when contributed or earned. This expansion of sources of funds available for hardship withdrawal is not a requirement. Plan sponsors may want to continue to limit the type of contributions available and whether earnings on those contributions are included.

403(b) Plans

The IRS generally extends these new hardship rules to 403(b) plans while noting that BBA 2018 did not actually amend Section 403(b)(11). Since Congress did not change the 403(b) plan rules, the IRS takes the position it has no authority to make certain changes to 403(b) plan rules. This results in a couple of operational differences between 401(k) and 403(b) plans with respect to these hardship changes:

  • Income attributable to 403(b) plans continues to be ineligible for hardship withdrawals; and
  • QNECs and QMACs that are held in a custodial account are not eligible for hardship withdrawal.

Applicability Dates

The proposed regulations generally apply to distributions made in plan years beginning after December 31, 2018. Certain special applicability rules are discussed above for (1) the safe harbor list of expenses and (2) suspensions.

The elimination of suspensions is the only required change made by these regulations and it must be done by January 1, 2020. The other rules that expand access to hardship withdrawals are optional provisions the plan sponsor can choose to change or leave as they are.

Plan Amendments

The IRS expects that if the proposed regulations are finalized as they have been proposed, plan sponsors will need to amend their plans’ hardship distribution provisions. Revenue Procedure 2016-37 specifies the deadline for amending a disqualifying provision. For example, for an individually designed plan that is not a governmental plan, the deadline for amending the plan to reflect a change in qualification requirements is the end of the second calendar year that begins after the issuance of the Required Amendments List that includes the change. A plan provision that is not a disqualifying provision, but is integrally related to a plan provision that is a disqualifying provision, may be amended by the same deadline applicable to a disqualifying provision. The annual Required Amendments List is generally issued each December.

A plan amendment that is related to the final regulations, but does not contain a disqualifying provision, including a plan amendment reflecting (1) the change to Code Section 165 (relating to casualty losses) or (2) the addition of the new safe harbor expense (relating to expenses incurred as a result of certain federally declared disasters), will be treated as integrally related to a disqualifying provision. Therefore, all amendments that relate to the final regulations will have the same amendment deadline.

Proposed Regulations, Subject to Change

This IRS guidance is in the form of proposed regulations that are subject to change. The IRS has requested public comments on the proposed regulations and will schedule a public hearing, if requested in writing by any person that timely submits written comments.

Questions? Contact the Findley consultant you normally work with or John Lucas at, 615.665.5329.

Posted November 30, 2018

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401(k) Student Loan Benefits Still Around the Corner for Most

You would have to be hiding under a rock not to have heard that student loan debt in the United States is a runaway train. Millennials reportedly rank student loan assistance as an employee benefit that would not only attract them to one employer over another, but would keep them there. Employers are looking to their advisors to come up with affordable programs to meet the needs of their current and prospective millennial employees. The Internal Revenue Service (IRS) recently gave employers and their advisors hope that attractive, affordable student loan debt assistance programs are just around the corner.

On August 17, 2018, the IRS published a private letter ruling (PLR) that it had issued in May to the sponsor of a defined contribution plan, reported to be Abbott Laboratories (Abbott). As described in the PLR, Abbott sponsors a defined contribution 401(k) plan that provides that if participants make elective contributions equal to at least 2 percent of their eligible compensation, Abbott makes a matching contribution equal to 5 percent of their eligible compensation.

Abbott proposed to amend the plan to provide an employer nonelective contribution on behalf of any employee who volunteers to participate in the plan and who makes student loan repayments for the pay period that are equal to at least 2 percent of eligible compensation, regardless of whether the employee makes elective contributions. Abbott proposed to make a contribution after the end of the plan year equal to 5 percent of the employee’s eligible compensation for that pay period. If, on the other hand, an employee did not make student loan repayments in the required amount, but made elective contributions equal to 2 percent of their eligible compensation, then Abbott would make a matching contribution after the end of the plan year equal to 5 percent of the employee’s eligible compensation.

To be eligible for either of the contributions, the employee must be employed on the last day of the plan year. Abbott confirmed that all employer contributions would be subject to the same vesting schedule as regular matching contributions under the plan, as well as to all qualification requirements regarding eligibility, vesting, distribution, contribution limit, and nondiscrimination testing.

The IRS approved the proposed amendment, and Abbott announced the program in June 2018. Abbott’s press release about the program and the subsequent publication of the PLR has launched numerous articles proclaiming there is now an answer for employers’ searches to assist their millennial employees with their student loan debt burden. Employers, however, should be cautious.

This PLR, and every other private letter ruling, contains the caution that the letter is directed only to the taxpayer requesting it, and that, by law, it cannot be relied on or cited as precedent by any other taxpayer. In any event, the PLR did not specifically address two circumstances in which many plan sponsors find themselves—adopting preapproved plans and/or sponsoring safe harbor plans.

Plan sponsors will want to keep their eyes open for any generally applicable guidance from the IRS regarding student loan debt programs. Let your trusted advisors know to keep such guidance on their radar for you. For now, there is reason to hope, but no reason to amend your plan, based on this PLR.

Questions? Contact your Findley consultant or Sheila Ninneman, JD at, or 216-875-1927.

Posted September 27, 2018

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