When it comes to not-for-profit organizations and their retirement plans, enterprise-wide governance and internal controls are critical considerations for senior executives. The ultimate goal is to create and administer retirement plans that offer employees viable savings opportunities and that comply with Internal Revenue Service and Department of Labor regulations. What factors should be considered as you strive to achieve that goal?
I discussed this topic at a recent industry seminar. As not-for-profit retirement plans become more complex, factors such as fiduciary governance, reducing investment and record keeping costs, and meeting compliance requirements are becoming increasingly important. This article addresses the challenges at play for not-for-profit organizations and how you can circumvent risk.
To remain in compliance with regulatory requirements, retirement plan sponsors should establish and maintain internal controls and administrative processes. By introducing standard practices and procedures, not-for-profits can prevent or quickly flag errors before they result in large financial consequences. All of this should be supported by appropriate evidence of checks and balances and retention of records or proof that internal controls have been implemented.
To help keep your retirement plans in check, here’s an outline of the top focus areas identified by the Internal Revenue Service and U.S. Department of Labor.
A. Definition of Compensation - how is compensation defined in the plan document (salary, bonus, etc.)? Compensation is important because it is used to allocate and calculate benefits, ensuring compliance with compensation limits in IRS codes. How compensation is defined also plays a role in nondiscrimination testing and determining whether a plan is top heavy (i.e. more highly compensated individuals), among other factors.
B. Updating the Plan Document - one frequently problematic area is the updating of plan documents, causing organizations to file Voluntary Corrective Plans with the IRS. Organizations should have processes in place to update the plan document periodically, when tax laws change and plans are amended by the plan administrator. Organizations should take great care in reviewing plan documents provided by a third-party administrator, which often contain boilerplate language. Ensure that the summary plan document (SPD) and the plan document match.
C. Employee Eligibility - ensure that the organization is following the plan’s eligibility or enrollment rules as defined in the plan document. The following should be considered: 1) differentiating between full-time and part-time employees, 2) misclassification of independent contractors, 3) adherence to time of service rules, 4) rehired employees, 5) automatic enrollment features and 6) failure to provide complete enrollment package materials.
D. Plan Loans - ensure compliance with plan loan features, including the maximum number and amount of loans that can be taken out and repayment terms which determine when a loan is in default and therefore becomes a withdrawal subject to a penalty.
E. In-Service Distribution Rules - for hardship withdrawals, common features include a clause that participants cannot contribute to the plan for a 6-month period after taking the withdrawal and must provide proof of a valid hardship as defined in the plan document.
F. Benefits - ensure the appropriate paperwork is given to employees that request distributions, obtain any required spousal consent and ensure the proper treatment of small benefit cash-outs under $5,000.
G. ADP/ACP Nondiscrimination Testing - record-keepers should provide organizations with detailed information about how their plan passed or failed the ADP/ACP discrimination testing. If your record-keeper does not provide this information, it is the responsibility of the plan administrator to perform this test or hire an outside consultant to perform it as part of an overall compliance check package.
H. Vesting - ensure adherence to the vesting requirement as detailed in the plan document. Potential problems to consider include (1) failure to provide for one hundred percent vesting at normal retirement age, (2) failure to properly account for vesting for employees with breaks in service, inter-company transfers, and acquisitions, (3) failure to timely sweep forfeitures from terminated participant accounts, whether forfeitures have been timely reallocated to other participants, applied to reduce employer contributions, or used to defray reasonable plan expenses.
I. Minimum Required Distributions - plan participants who have terminated employment and who reach age 70-1/2 must begin receiving a required amount of funds out of their plan accounts.
J. Top-Heavy and Section 410(b) Testing - top-heavy rules apply if sixty percent of the aggregate total account balances belong to ''key employees.'' ''Key employees'' are officers and highly compensated participants in the plan. Also ensure that Section 410(b) testing is performed so that the plan passes coverage requirements.
K. QDRO Procedures - a qualified domestic relations order (''QDRO'') is a court order that is used to divide up a participant's benefits in the event of divorce or legal separation. QDRO procedures should detail what the plan administrator will require in determining whether a domestic relations order it receives is ''qualified.''
L. Target Date Funds - these are funds that are designed to change over time as people get older. Ensure that there is documentation of how target funds were selected.
M. Revenue Sharing and 12b-1 Fees - ensure that (1) the compensation paid to the service provider, including fee offsets from revenue sharing, is reasonable given the services provided to the plan, (2) the plan is being credited with the correct revenue sharing amounts, and (3) the revenue sharing payments are being applied as agreed with the record-keeper and as provided in the plan documents.
N. Consultants and Investment Managers - how plan fiduciaries select and monitor consultants and investment managers should be documented.
O. Late Payroll Deposits - payroll deposits should be turned over to the plan’s trustee as quickly as possible (i.e., as soon as it is administratively feasible to do so – typically no later than the amount of time it takes to make required tax withholding payments). Three days can be used as a guide but by no means is it a safe harbor for large plans (greater than 100 employees). A seven-day safe harbor exists for plans with fewer than 100 employees.
P. ERISA Fidelity Bonds - ensure that the minimum required coverage is maintained. Such coverage is intended to protect the plan from risk of loss due to fraud or dishonesty on the part of persons who handle plan funds or other property.
Q. Blackout Notices - if an investment fund is changed in a plan's investment line-up, and if during the changeover period the participants cannot take a distribution, hardship withdrawal or loan out of that fund, or they cannot move their money into a different fund during that period, that period is referred to as a ''blackout.'' If a blackout period lasts for more than three business days, the plan administrator must provide a notice to the plan participants at least 30 days before the blackout period that meets specific requirements.
R. Investment Policy/Guidelines - ensure that the plan’s investments are in accordance with the policy or guidelines it has adopted. The investment policy should be reviewed regularly with plan investment committee members.
S. Plan Committee Meetings - there should be a plan committee that meets periodically (either quarterly or a minimum of twice a year) and minutes of such meetings should be documented.
T. Changing Record-keepers - when changing plan record-keepers, plan administrators should make sure that the underlying documents and information are transferred from the old record-keeper to the new record-keeper appropriately.