It seems that every time you turn around,
you are required to provide yet another notice to the
participants in your company's retirement plan. While
plan-related notices are not a new phenomenon, the Pension
Protection Act (PPA) took the concept to a different level
by mandating a host of new notices.
Sponsors of 401(k) plans face the task of providing as
many as 40 or more different notices. Some apply to all
defined contribution (DC) plans and others are plan-design
or event driven. While opinions differ on the most effective
method to help employees understand this deluge of
information, the focus of this article is how to satisfy the
regulatory notice requirements to keep your plan in
compliance.
Notices Required for all DC Plans
All ERISA-covered, DC plans must provide certain notices
regardless of the provisions they contain.
Summary Plan Description (SPD) and
Summary of Material Modification (SMM)
The SPD is a "plain English" summary of a plan's
provisions. All SPDs must describe the following:
- Eligibility;
- Contributions;
- Vesting;
- Distributions; and
- Plan contact information.
The SPD must be distributed within:
- 90 days of initial eligibility;
- 120 days of the plan becoming subject to ERISA; and
- 30 days of receipt of a written request.
Sponsors must generally update their SPDs at least once
every five years. For amendments between updates,
participants must receive an SMM describing the change.
Although the deadline for the SMM is the 210th day of the
year following the year the amendment is adopted, it is a
best practice to notify participants of the change as soon
as possible.
The Department of Labor (DOL) can assess a sponsor
penalty of up to $1,100 per day if an SPD/SMM is late to a
single participant. Failure to provide an SPD/SMM within 30
days of a participant's written request may entitle the
participant to up to $110 per day.
Summary Annual Report (SAR)
The SAR provides a snapshot of the financial schedules
attached to Form 5500. The SAR advises participants of their
rights to additional related information and how to contact
DOL if they have further questions. The deadline to
distribute the SAR is two months following the due date
(with extensions) for filing Form 5500.
Participant Benefit Statement
The participant benefit statement summarizes activity in
a participant's account for a given time period. Generally,
each statement must include the following information:
- Beginning account balance;
- Contributions and/or distributions;
- Investment gain or loss;
- Ending account balance;
- Vesting;
- Statement regarding importance of diversification;
- Description of each asset in which funds are invested;
and
- DOL website for more information.
Plans that allocate profit sharing contributions using
permitted disparity must include a detailed description of
the allocation method.
A plan's investment arrangement dictates the frequency
with which statements must be provided. If any portion of
the plan has participant-directed investments, statements
must be provided within 45 days of the close of each
quarter. For trustee-directed plans, the statement is due
annually by the deadline for filing Form 5500. The penalty
for late statements is $100 per day per participant.
Some participant-directed plans are valued only once each
year. Such plans are still required to provide quarterly
statements based on the most recently available information.
That may result in participants receiving the exact same
statement four times throughout the year.
Beneficiary Designation Forms
While not officially notices, beneficiary designation
forms are extremely important plan documents. A number of
beneficiary disputes are litigated each year in the federal
Circuit Courts of Appeals. To lessen the chance of this type
of litigation, sponsors should ensure all participants
complete beneficiary designation forms and update them any
time they experience a "life event" such as a marriage,
divorce, etc.
Fee Disclosure
Congress and DOL have recently focused attention on fee
transparency in retirement plans. While there is no formal
requirement at this time, it is anticipated that in the near
future, plans will be required to distribute notices
describing the fees allocated to each participant's account
each quarter.
Provision-Specific Notices
A plan can include provisions that subject it to
additional notice requirements. For example, 401(k) plans
must provide information related to salary deferrals while
non-401(k) plans do not.
Automatic Enrollment Notice
Plans that include automatic enrollment must notify
participants of:
- The default deferral rate;
- Their right to defer a different amount or not at all;
and
- The default investment to be used if they do not make
an investment election.
The notice is due 30 to 90 days prior to initial coverage
by the automatic enrollment feature and 30 to 90 days before
the start of each subsequent plan year. Plans that provide
eligibility on date of hire or very shortly thereafter can
provide the notice on an employee's hire date.
Safe Harbor Notice
There are four types of safe harbor 401(k) plans and all
are required to notify participants 30 to 90 days prior to
the start of each plan year. The notice must describe the
plan's contribution, distribution and vesting provisions.
Failure to timely provide the safe harbor notice is an
operational failure that can subject the plan to
disqualification.
Investment Disclosures
Defined contribution plans allowing participants to
direct the investment of some or all of their accounts must
provide notices that inform and educate participants on the
options available to them.
Qualified Default Investment
Alternative (QDIA) Notice
Participant-directed plans must specify the investment
option to be used as the default when a participant does not
make an election. Plan sponsors selecting a QDIA as their
default must inform participants of the fund selected and
notify them of their right to select a different option. The
notice must be provided at least 30 days before the initial
default investment and 30 days prior to the start of each
subsequent year.
Diversification of Employer
Securities
Certain publicly traded companies that include employer
stock as an investment option must notify participants of
their right to diversify their accounts and the importance
of maintaining a well-diversified portfolio. This notice is
due 30 days before a participant becomes eligible to
diversify. Delinquent notices are subject to a penalty of
$100 per day per participant.
404(c) Disclosures
Fiduciaries that seek to avail themselves of the ERISA
404(c) safe harbor must provide additional participant
disclosures including:
- List of investment options including general
description of risk/return characteristics;
- List of investment managers;
- Description of fees;
- Limitations on the exercise of voting rights; and
- Contact information for a responsible plan fiduciary.
Event-Driven Notices
Some notices are required on the occurrence of certain
events or transactions.
Distribution Notices
When participants request distributions, there are
several documents that must be provided before and after the
date of distribution.
- Rollover Notice and Special Tax Notice: describes
participants' rights and the tax implications of electing
a rollover in lieu of cash. Due 30 to 180 days prior to
the date of actual distribution.
- Form 1099-R: Due by January 31st of the year following
the year of distribution.
Although the IRS recently updated its sample Special Tax
Notice, it does not include the rollover notice. Plan
sponsors should either incorporate the mandatory rollover
language or provide a separate notice to satisfy this
requirement.
The pre-distribution paperwork for plans providing
automatic IRA rollover of vested balances under $5,000 must
notify employees of the financial institution and investment
option to be used as well as any associated fees.
Participant Loans
In order to qualify for the prohibited transaction
exemption for participant loans, the plan must provide the
following items when a participant requests a loan:
- Participant loan program (if not included in the SPD);
- Loan application;
- Promissory note;
- Amortization schedule;
- Irrevocable pledge; and
- Truth-in-lending disclosure (not required for loans
issued after July 1, 2010).
Blackout Notice
A blackout period occurs when participants' access to
their accounts is restricted for more than three consecutive
business days. In response to several corporate scandals
involving 401(k) plans, a notice is now required at least 30
days prior to the start of the blackout. The notice must
identify the beginning and ending week, explain rights and
investments affected and advise as to the prudence of a
diversified portfolio.
There is a penalty of $100 per day per participant for
failure to give notice, and the failure must be reported on
Form 5500.
It's Not Easy Being Green
Many companies are making efforts to "go green" by using
electronic communication in lieu of paper. The IRS and DOL
permit electronic delivery of most notices to employees who
access the electronic delivery system as part of their jobs.
Since participant disclosures must generally be "pushed" to
employees rather than posted in a common location, providing
kiosks to access notices does not satisfy this requirement.
Participants without job-related access can follow a
detailed process to consent to e-delivery. Employees not
fitting into one of these categories must receive hard copy
notifications.
Conclusion
These are only a few of the many notices plan sponsors
and participants must juggle. There are additional notices
for plans that map investments when changing service
providers, request a determination letter from the IRS or
permit distributions in the form of annuities. Several
industry organizations are working with the government
agencies to identify more efficient and effective methods to
communicate retirement benefits to employees. In the
meantime, your participants are on a need to know basis…and
they need to know!
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