Tag Archives: Safe Harbor

New “Notice And Access” Safe Harbor Allows Employers To Ditch Paper Disclosures For Retirement Plans

On October 22, 2019, the Department of Labor (“DOL”) released proposed regulations updating the electronic disclosure rules for ERISA notices. Given the significant advances in technology over the last decade, employers have long-awaited a meaningful update to the current, outdated electronic disclosure safe harbor. Although employers may continue to provide paper notices to employees, the DOL anticipates that most employers will migrate to the new, proposed safe harbor for electronic disclosure of ERISA notices. The new safe harbor is expected to create efficiency, increase participant awareness, and result in cost savings for employers. The only downside¾the safe harbor does not apply to health and welfare plans.

What disclosures are impacted by the rule?

The new safe harbor can be used for any ERISA notices required to be distributed to pension benefit plan participants, other than those documents only required to be furnished upon request. In other words, pension benefit statements, Safe Harbor Notices, QDIA Notices, fee disclosures, summary annual reports, and other documents required to be furnished solely because of the passage of time may be disclosed electronically under the new safe harbor. However, disclosures such as the plan document, terminal report, trust agreement, and other documents that only need be to be furnished upon request cannot utilize the new safe harbor for disclosure.

Curiously, the safe harbor only applies to pension benefit plans, as defined in ERISA Section 3(2), including defined contribution (e.g., 401(k) plans) and defined benefit (e.g., pension) plans. The safe harbor does not apply to “employee welfare benefit plans,” which means that group health plans, disability plans, and other health and welfare plans must continue to rely on the old electronic disclosure regulations. The DOL expressed concern about the safe harbor as applied to group health plans, given the special considerations relating to issues such as pre-service claims review, access to emergency health care, and more.

Who can receive retirement plan disclosures electronically?

Participants, beneficiaries, or other individuals (“Covered Individuals”) entitled to ERISA notices can receive the notices electronically if: (1) they provide the employer, as a condition of employment or at the beginning of plan participation, with an e-mail address or smartphone telephone number; (2) they are assigned an e-mail address by the employer; or (3) they are given an internet-based mobile computing device by the employer.

Internet-based mobile computing devices include smartphones with data plans, laptops, tablets, or similar devices. The DOL does not want to specifically limit the regulations to any particular devices, as technology changes quickly over time and they want to avoid ending up with outdated regulations.

What are the notice and access requirements?

The “notice and access” safe harbor requires just that: delivery of a specific notice of internet availability and compliance with certain minimum standards concerning the availability of and access to the notices. A notice of internet availability must comply with certain content requirements and must be furnished electronically to the Covered Individuals no later than the time the notice is available on the internet/website. In other words, if a notice is due to participants on January 1st and is uploaded to the company website on such date, the notice of internet availability must be provided to Covered Individuals on January 1st. For an employer that chooses to provide all notices at the same time each year, the notice of availability must only be provided each plan year, and no more than 14 months following the date the prior plan year’s notice was furnished.

The “access” prong of the safe harbor requires that employers comply with the following requirements: (1) the employer must ensure the existence of an internet website at which a covered individual is able to access covered documents; (2) the notices must be available on the applicable, required dates; (3) each notice must remain available on the website until it is superseded by a subsequent version of the notice; (4) the notice must be presented on the website in a manner calculated to be understood by the average plan participant (must be “readable”); (5) the notice must be presented in a widely-available format or formats that are suitable to be both read online and printed clearly on paper, and must be “searchable”; (6) the notice must be presented on the website in a widely-available format or formats that allow the covered document to be permanently retained in an electronic format; and (7) the website must protect the confidentiality of personal information relating to the Covered Individuals.

Can a Covered Individual opt out?

Yes.  The safe harbor includes a “global” opt out provision. Covered Individuals may elect to opt out of electronic disclosure and receive all notices in paper. Covered Individuals may also maintain electronic disclosures, but request that the employer furnish them, free of charge, a paper copy of a notice (or all of the notices) as soon as reasonably practicable. For individuals that opt out, the employer must establish and maintain reasonable procedures governing requests or elections for paper copies.

The proposed regulations require employers to send an initial notification of default electronic delivery and the right to opt out to ensure that all participants and beneficiaries accustomed to receiving paper notices are aware of the new method for electronic disclosure and have the opportunity to choose to continue to receive paper copies.

Effective Date

Generally, the proposed regulations will be effective 60 days after publication of a final rule in the Federal Register. The DOL has proposed the new safe harbor apply to employee benefit plans as of the first day of the calendar year following the publication of the final rule. The Department has requested comments with regard to providing an earlier effective date.

Questions?

For more information on the details of the proposed regulations and implementing the safe harbor going forward, including special rules for severance of employment and other circumstances, please contact Caroline Nelsen at 402-633-9575 or e-mail her at cnelsen@mcgrathnorth.com

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401(k) Plans: Time To Restate And Perhaps Revise

401k

The Internal Revenue Service maintains procedures designed to assist plan sponsors in preserving the tax qualified status of their retirement plans. With respect to prototype and volume submitter plans, the IRS procedures require that such plans be restated every six years. Under the current cycle, such plans must be restated no later than April 30, 2016. As a result, the majority of plan sponsors should review their qualified plans within the upcoming months, if they have not already done so, and make decisions regarding plan provisions.

The upcoming April 30, 2016 deadline for the restatement of prototype and volume submitter documents provides not only the occasion for plan sponsors to update their plans in accordance with legal requirements, but also an opportunity to consider possible changes to their plans’ provisions. This article sets forth some considerations for plan sponsors when presented with updated prototype documents by their plan document vendors. These considerations represent common trends and best practices and are not intended to be an exhaustive list of the changes a plan sponsor might consider.

Automatic Enrollment and Escalation

Automatic enrollment is a popular development in the 401(k) industry. Through automatic enrollment, new or current participants may be treated as having enrolled at an established contribution percentage. The participant must be provided a notice describing the terms of the automatic enrollment feature and offered the option to change the automatic percentage or elect no contribution at all. If the automatic enrollment feature is designed to be an “Eligible Automatic Contribution Arrangement”, participants may be offered the option to withdraw the amounts automatically deferred from their pay within the first 90 days after the date of the first contribution. In addition, a plan may include a “Qualified Automatic Contribution Arrangement” or “QACA” and, in so doing, avoid the 401(k) nondiscrimination testing provided certain requirements are met. This form of automatic enrollment requires an initial 3% automatic deferral rate, and automatic escalation of the default rate for each of the following three years.

More recently, plans have trended toward providing automatic escalation regardless of whether the plan is intended to comply with the QACA requirements. Automatic escalation can further serve to assist participants with accumulating retirement savings by “smoothing” the increase over time to a meaningful contribution rate. Regardless of the form of automatic enrollment chosen, automatic enrollment, through the power of inertia, can significantly increase participant retirement savings.

Vesting Revisited

Over the past several years, plan sponsors have generally shortened their plans’ vesting periods. The law permits plans to either provide for a graduated vesting schedule for employer contributions of not more than six years or no vesting for three years, with all employer contributions being vested at the end of the three-year period. One reason plans have trended toward shorter vesting schedules is to offer benefits consistent with competitors and attract talented employees. Another reason is that many plans are “safe-harbor” plans. A safe-harbor plan avoids non-discrimination testing and the potential limitation of the amount that highly compensated employees and owners can contribute provided that the plan meets the safe-harbor employer contribution requirements. Safe-harbor employer contributions must be fully vested.

The trade-off for shorter vesting schedules, or no vesting schedule, is that employers lose the benefit of forfeitures. When a participant who is not fully vested terminates employment, his or her non-vested account balance is credited to a forfeiture account. Forfeiture amounts are generally allocated to the remaining active participants or used to pay plan expenses that would otherwise be paid by the employer or charged directly to participant accounts. Forfeitures are also commonly used to offset the employer’s contribution to the plan. There are limitations on the extent to which an employer can lengthen the vesting schedule with respect to current participants. However, there is no prohibition on changing the vesting schedule for new participants.

How About Safe-Harbor?

Since the last prototype restatement cycle, there have been several significant trends with respect to plan contributions. One major trend is the continued proliferation of safe-harbor 401(k) plans. Safe-harbor 401(k) plans offer employers a free pass on the non-discrimination requirements. In translation, this simply means that business owners and highly-compensated employees can contribute up to the maximum contribution dollar limit ($18,000 for 2015 and $24,000 for participants age 50 or older under a plan’s “catch-up” provision) without the threat of having the amount of contribution limited to a lesser amount or returned to them. The trade-off is that eligible non-highly compensated employees must receive either a fully vested employer contribution of three percent of their compensation or a fully vested matching contribution not less than 100% of the first three percent they contribute plus 50% of the next two percent they contribute. Safe-harbor plans are very popular and any employer that has problems with the non-discrimination tests should very seriously consider a safe-harbor 401(k) design.

Roth Continues to Expand

Roth contributions can be very appealing due to the fact that although employee contributions are made on an after-tax basis, such amounts and the earnings attributable to Roth contributions are not taxed upon distribution. In order for a distribution to be a “qualified Roth distribution,” certain requirements must be met including the requirement that the participant maintain a Roth account for a minimum of five years.

Employers may also include an in-plan Roth rollover or conversion provision. Under such a provision, a participant may elect to convert pre-tax accounts, whether or not currently distributable, to Roth accounts. Of course, the participant is required to recognize income on the converted amount. However, future earnings on the converted amount will be distributed tax-free provided the Roth requirements are met. Through IRS guidance, the conversion rules were expanded to allow the conversion of amounts attributable to pretax contributions to be converted to Roth amounts regardless of whether the participant is eligible to receive a distribution of such amounts.

Plan Governance and Fiduciary Practices

The restatement process is also a good time to review your plan’s governance and fiduciary practices. The Department of Labor (the “DOL”) has significantly increased its plan audit activity in recent years. As part of its review process, the DOL is examining fiduciary committees and asking for copies of committee bylaws and/or charters, meeting minutes, information relating to monitoring plan vendors and evidence of fiduciary training to name a few. The DOL will examine whether plan fiduciaries understand and have reviewed the fees paid by the plan. It is highly recommended that plans of all sizes have a committee in place that meets regularly and conducts itself in a manner that satisfies the high expectations of the DOL.

Reconsider and Confirm or Revise

Plan sponsors have grown accustomed to periodic plan updates and restatement cycles. But too often the restatement process is a rubber-stamp ceremony, with little discussion surrounding the existing plan provisions. During this restatement cycle, plan sponsors should take the time and give thought to their plan’s terms and provisions and discuss optional provisions with their advisors. This is also a good time to review your plan’s governance and fiduciary practices. The restatement process can serve as an opportunity for plan sponsors to reconsider existing plan provisions and operation and implement new features that align with their goals and needs and the goals and needs of their employees.

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Year-End Compliance Checklist

Year end complianceIt’s that time of year again—time to cleanup and close-out the 2014 plan year for your ERISA health and retirement plans. The following is an overview of a few compliance items that should be addressed before the close of 2014.

Group Health Plans

This past year was a big year for health plans. With all the changes associated with the Affordable Care Act (“ACA”) and some big announcements by the IRS and the Supreme Court, there are several new items to add to our year-end checklists. Here are a few of the highlights:

  • Health Flexible Spending Accounts.  The IRS recently announced that the health flexible spending arrangement (“Health FSA”) limit for 2015 was increased to $2,550. Additionally, as announced last year, Health FSAs continue to be permitted to offer limited rollovers of up to $500.
  • New COBRA Notices.  COBRA, which stands for the Consolidated Omnibus Budget Reconciliation Act, requires group health plans to provide qualified beneficiaries with an election notice that describes their rights to continuation coverage and how to make an election. The election notice must be provided to these individuals within 14 days of the date the plan administrator receives the notice of a qualifying event. The Department of Labor (“DOL”) recently issued new model COBRA notices that reference the ACA Marketplaces (or “exchanges”). Accordingly, employers should modify their COBRA notices and include this new language going forward.
  • Health Reimbursement Arrangements.  The IRS continues to maintain that certain health reimbursement arrangements which operate independently of group health plans must be re-designed or terminated by January 1, 2014. Employers providing reimbursement for individual health insurance policies or other medical care should review their plan design to ensure the arrangement remains permissible.
  • DOMA.  On June 26, 2013, the Supreme Court of the United States ruled in the well-publicized United States v. Windsor that Section 3 of the Defense of Marriage Act (“DOMA”) was unconstitutional. As a result, the IRS and the DOL declared that employee benefit plans must now treat same-sex spouses in the same manner as opposite-sex spouses. To this end, plan sponsors should review the plan documents and gather information to determine the impact of this guidance. Specifically, plans should update eligibility provisions, adjust imputed income practices and review plan definitions of “spouse” to ensure compliance before year end.
  • HIPAA.  In January 2013, the government released final HIPAA regulations which became effective September 23, 2013. Sponsors of group health plans should review and update their plan’s HIPAA materials as necessary to ensure compliance with the new regulations. This review should include the plan’s HIPAA Privacy Notice, Business Associate Agreements and HIPAA Privacy Policies.

Sponsors of group health plans should continue focus their efforts on getting ready for the full onset of the ACA’s employer mandate. Under the mandate, large employers will be subject to significant penalties if they fail to offer health coverage or fail to offer sufficient health coverage to their full-time employees. Employers should have measurement periods in place and should continue to examine their workforce, particularly part-time and/or seasonal employees, in order to finalize their health care reform strategies for 2015.

Retirement Plans

Although the ACA has dominated the employee benefits news this past year, plan sponsors of retirement plans are equally affected by the Supreme Court’s ruling on DOMA. Additionally, retirement plans are subject to a variety of annual disclosure obligations. Here are a few of the year-end compliance highlights:

  • Safe Harbor 401(k) Plans.  Plan sponsors of safe harbor 401(k) plans must provide all participants an annual notice describing the employer’s safe harbor contributions. This notice must be provided to participants at least 30 days (but not more than 90 days) before the first day of the plan year. For most plans, the notice was due December 1, 2014.
  • Automatic Enrollment Features.  Plans that automatically enroll participants are required to provide participants with an annual notice describing the plan’s enrollment and contribution features. This notice must be provided to participants at least 30 days (but not more than 90 days) before the first day of the plan year. For most plans, the notice was due December 1, 2014.
  • Funding Notice for Defined Benefit Plans.  Defined benefit plans are required to provide participants with a funding notice summarizing the plan’s assets and liabilities, its funding status for the previous two years and certain other information. The notices are due no later than 120 days after the close of the plan year. For most large plans, the notice must be provided by April 30, 2015.
  • Qualified Default Investment.  Where participants are allowed to direct their own investments, defined contribution plans are allowed to select a “qualified default investment” in which participants’ assets will be invested if the participant does not select an investment option. The plan sponsor must give participants notice of the plan’s qualified default investment. This notice must be provided to participants at least 30 days (but not more than 90 days) before the first day of the plan year. For most plans, the notice was due December 1, 2014.
  • DOMA.  Pursuant to the Supreme Court ruling and guidance from the IRS, same-sex spouses must be treated as lawful spouses for purposes of maximum benefit limitations, spousal consent rules, rollovers, death benefits, minimum required distributions, availability of in-service hardship withdrawals and assignment of benefits under qualified domestic relations orders. At a minimum, plan sponsors should review the plan documents, policies and procedures to determine whether additional amendments are needed to reflect these changes.

Complying with the IRS and the DOL notice requirements is an important part of the plan administration process. Furthermore, penalties for noncompliance can be significant. Penalties for noncompliance generally begin at $100 per day per affected participant or beneficiary.

Compliance Assistance

We understand this is a busy time of year for many of our clients and that it’s easy to overlook small details. If you have any questions regarding the above items or have any related compliance questions, be sure to contact your McGrath North attorney.

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