Time Running Out to Issue Plan Notices
It is again time for plan sponsors to distribute their annual notices to participants. Outside of the normal changes to plan COLAs (which we expect to be announced anytime) and investment expense ratios, plan sponsors will want to consider and incorporate any changes made to their plan in the past year into this year’s annual notice. As a reminder, the 401(k) safe harbor, qualified default investment alternative (“QDIA”), and automatic enrollment notices must all be sent to plan participants between 30-90 days before the beginning of the plan year (i.e., no later than December 2nd for calendar year end plans), and may be combined into a single document.
401(k) Safe Harbor
Plans that include a 401(k) safe harbor feature are designed to avoid annual ADP and sometimes ACP compliance testing by providing for specific employer contributions. Prior to the SECURE Act, all plan sponsors of 401(k) safe harbor plans were required to issue an annual written notice of the employee’s rights and obligation under the plan to each eligible employee (not just current plan participants). Secure Act changes were made by Plan Sponsors in last year’s notices, so the 2022 plan year annual notices should remain consistent as long as no major revisions to the plan were made.
As a recap, the SECURE Act eliminated the safe harbor notice requirement for safe harbor 401(k) plans that only make nonelective contributions. However, plans that use the ADP safe harbor nonelective contribution but also permit a discretionary matching contribution still must provide an annual safe harbor notice if the employer wants to use the ACP safe harbor. In addition, safe harbor plans can make a mid-year reduction or suspension of a safe harbor contribution, but only if the employer is either: (1) operating at an economic loss; or (2) had already provided a “maybe not notice.” Plan sponsors of safe harbor nonelective contribution plans should consider issuing a safe harbor notice, even if not required, so that they have the flexibility to reduce future contributions.
A QDIA is a default investment option that is selected by the plan sponsor for participants that have contributions in their retirement accounts but have not directed where those contributions should be invested. If the default fund satisfies certain requirements, the fund will qualify as a QDIA and the plan sponsor will have protection from possible fiduciary liability over the selection of that default fund. If your plan contains a QDIA, you must provide an annual notice to all participants who were defaulted, or may be defaulted, into the QDIA in order to retain this fiduciary protection (although most plan sponsors choose to send the notice to all plan participants to ensure that they don’t miss anyone).
Plans that include an automatic enrollment feature are designed to automatically enroll an eligible employee in the employer’s plan at a specified elective deferral contribution percentage unless the employee affirmatively elects otherwise. If your plan has an automatic enrollment feature, you must send an annual notice describing the automatic enrollment feature to all participants who have been, or will be, automatically enrolled into the plan and haven’t made an affirmative election to change their deferral percentage. This notice requirement applies to traditional automatic enrollment plans that want ERISA preemption from state wage withholding laws as well as plans that are designed as eligible automatic contribution arrangements (“EACAs”) or qualified automatic contribution arrangements (“QACAs”).
If you have questions about any of these plan features or need help drafting your annual notice, please reach out to any Graydon attorney in our Employee Benefits Group.