Time to Issue Annual Retirement Plan Notices
It is again time for plan sponsors to finalize and issue their annual notices to participants. We have experienced many legislative and economic changes since this time last year, so plan sponsors might have more to consider and update in this year’s annual notice outside of the normal changes to plan COLAs and investment expense ratios. 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).
The SECURE Act made significant changes to safe harbor nonelective contribution 401(k) plans. Prior to this year, safe harbor nonelective contribution plans had to be in place as of the first day of the plan year and were subject to the safe harbor notice requirements. Effective beginning January 1, 2020, not only can a 401(k) plan be converted into a safe harbor nonelective plan at any time during the plan year or even during the following plan year, but the notice requirement has also been eliminated.
But plan sponsors of all safe harbor plans should still consider issuing notices so they can provide a “maybe not notice.” Generally, 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” (i.e., a statement in the plan’s annual safe harbor notice that the safe harbor contributions might be reduced during the year). Earlier this year, as a result of the economic downturn created by COVID-19, the IRS issued temporary relief from this limitation on suspensions. Many employers wanted to reduce safe harbor contributions this year, but were not positioned to do so (i.e., the employer could not satisfy the economic loss test and did not provide a maybe not notice) until the IRS granted relief. Even the healthiest employers should retain flexibility when possible, and providing a maybe not notice provides much more certainty of flexibility than relying on the IRS to grant future relief. Plan sponsors of safe harbor matching contribution plans can retain the flexibility to reduce future contributions by issuing “maybe not” language in their annual 401(k) safe harbor notice. In addition, plan sponsors of safe harbor nonelective contribution plans should consider issuing a safe harbor notice, even though no longer required, so that they can also provide the “maybe not” language and retain 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 fiduciary protection 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 arrangement 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.