Anyone responsible for the administration of a 401(k) retirement plan probably has a “to-do” list that never ends. For example, as soon as a plan administrator files the Annual Report Form 5500 for the prior year, it is time to start planning to distribute the Summary Annual Reports and annual fee and QDIA notices to participants. As the end of the calendar year approaches, here is a list of action items you might want to consider taking now to ensure they are addressed by year-end.
- Change in Ownership – Talk to your employee benefits counsel about any changes to the ownership of the plan sponsor or related companies. This includes if the plan sponsor or any member of its controlled group, trades or businesses under common control, or affiliated service group (as defined under Internal Revenue Code (IRC) Section 414) (aggregated group) has undergone any acquisitions, mergers, addition of new subsidiaries, or sales of any group members. Such changes may require the plan sponsor to take action by year-end. While it is possible for businesses that are part of an aggregated group to maintain separate 401(k) plans, each plan must demonstrate that it covers a nondiscriminatory group of employees by passing one of the coverage tests found in IRC Section 410(b).
- Plan Amendments – Determine if any plan changes were adopted during the calendar year that need to be incorporated into a formal plan amendment by year-end, or plan changes intended to be effective as of January 1, 2024. While it may be too late in the year for your record keeper to schedule a year-end plan merger, it may be possible to amend the surviving plan so that employees of the merging plan may participate in the surviving plan as of January 1, 2024, and merge account balances in 2024. Be sure to save an executed and dated copy of any plan amendment in your plan’s permanent records and share a copy with your benefits counsel.
- Terminated Participants – Cash out terminated participants with vested account balances under $5,000. Current Department of Labor rules provide that plans that have less than 100 participants with account balances at the beginning of a plan year are not required to file an auditor’s report with Form 5500. Staying below the 100-participant threshold may become easier next year when the cash-out limit increases to $7,000. Depending on the terms of your plan, this change may be automatic. Check with your advisors to see if a plan amendment is necessary.
- Forfeitures – Decide how forfeitures will be used. Earlier this year, the IRS issued proposed regulations formalizing its requirement that forfeitures be used within 12 months following the close of the plan year in which the forfeiture occurred. Your plan document will list permissible usages of forfeitures, which may include paying plan administrative expenses, reducing employer contributions, or reallocation to other participants’ accounts. Recently, four lawsuits were filed in California alleging that plan administrators breached their fiduciary duties when they used forfeitures to reduce employer matching contributions instead of paying administrative expenses otherwise paid by plan participants, notwithstanding that reducing employer contributions was allowable under the plans’ terms. If your plan includes significant forfeiture amounts, talk to your benefits counsel about these cases and how they may impact your business
- Named Decision Makers – Consider who is making discretionary decisions concerning your 401(k) plan, and confirm that those individuals have been delegated that authority by the company or the plan’s administrative committee. See my earlier blog about potential consequences of a decision made by someone who is not the designated decision-maker.
The above list reflects items that may require time to complete by year-end and is not intended to be all-inclusive. For a list of welfare benefit issues to be considered as part of open enrollment, see Cyndi Moore’s blog, “10 Important Issues for Employers During the 2024 Open Enrollment Season.”
About the Author:
Deborah Grace is a Member in Dickinson Wright’s Troy, Michigan office, where she advises business owners, human resources professionals, and plan fiduciaries on the complex laws that impact the design and administration of their retirement and welfare benefit plans. She has extensive experience advising clients on the employee benefits aspects of business transactions and fixing inadvertent errors in plan administration. She can be reached at 248-433-7217 or email@example.com, and you can visit her bio here.