Being a plan trustee comes with a stringent set of responsibilities and necessitates having certain knowledge of the plan document, provisions, administrative operations, IRS filing requirements, and ERISA guidelines. Here are five things that should be considered on an ongoing basis to ensure that your plan trustee is keeping your pension plan in compliance and meeting the best interests of its eligible and active participants:
1. Enrollment Forms
Enrollment forms must be completed by all participants of a pension plan. These forms require the participant to indicate an affirmative election of how much of their compensation they would like to contribute to the plan, how they want their contributions to be invested among the various fund options your plan has, and who they would like to assign beneficiary privileges to. Enrollment forms should be completed once the employee becomes eligible to participate in the plan, as well as when participants would like to make a change to their deferral rate or investment allocation, or if they have a change in beneficiary.
It is becoming increasingly common for plans to have a custodian or recordkeeper that provides online access to participants to administer many plan transactions at the click of a button. If your plan has this feature and participants have the option to make changes to their elections electronically, it is crucial that the plan trustee maintain all notifications of changes from the custodian or recordkeeper and that these changes are then communicated to human resources and whoever is handling payroll. When changes to participant elections are made, they should be applied as soon as possible so that payroll withholdings are consistent with participant elections.
2. Definition of Compensation
When calculating participant and employer contributions to the plan, it is important to know the definition of compensation per your plan document. The plan document will indicate what type of compensation should be used to calculate these contributions, including gross wages, overtime, bonuses, commissions, and fringe benefits or expense allowances. If you notice a discrepancy between what the plan document requires and what is actually happening in the payroll system, then an amendment of the plan document should occur to make the definition of compensation what the plan sponsor desires, or if the plan document is correct, the payroll system should be updated immediately to calculate deferrals appropriately.
3. Summary Annual Report and Fee Disclosure
The Summary Annual Report (“SAR”) is a document that must be distributed to all plan participants within two months following the Form 5500 due date. If you filed an extension to file the Form 5500, then the SAR is due within two months following the extended due date. The SAR consists of a basic financial statement, which discloses plan expenses, the value of the plan’s assets, the amount of plan contributions, and participants rights to additional information. Failure to distribute the SAR could result in Department of Labor (“DOL”) noncompliance and hefty penalties. Delivering the SAR can be as easy as handing participants a hard copy at their workplace, including a copy with the participant’s annual statement or as an addition to a company newsletter, mailing a copy directly to the participant’s personal residence, or sending it electronically, so long as the participant consented to receiving pension-related documentation in this format.
As a plan trustee, you have an obligation under ERISA to carefully select and monitor plan investments and their activity, the options available to plan participants and their beneficiaries, and the service providers of the plan. Understanding the fees that correspond with these administrative tasks is important because plan fees and expenses are required to be “reasonable” and is imperative for participants to make the most informed decisions for their individual accounts. Fees may include plan administration fees for day-to-day operations, investment fees to manage the plan’s investments, and individual service fees for certain individualized transactions, such as taking a loan. These fees can be deducted from investment returns or they can be charged to individual accounts either as a flat fee where everyone gets charged the same amount regardless of their account balance, or as a proportionate fee based on the participants individual account balance as a percentage of the entire plan’s investment balance. It is the responsibility of the plan sponsor to ensure this fee disclosure gets into the hands of each participant of the plan prior to their initial enrollment and annually thereafter. This disclosure may be distributed via any of the same methods as the SAR, as indicated above.
Lastly, participants are entitled to receive a copy of the Summary Plan Description (“SPD”), which lays out all that the plan has to offer and how it operates. Any time the plan is changed, a document called a Summary of Material Modifications (“SMM”) must be distributed to all plan participants notifying them of whatever changes have been made. This notification must occur no later than 210 days after the end of the plan year in which those changes were adopted.
4. Monitoring Eligible Participants
It is the responsibility of the plan trustee to notify employees upon hire and once they have met whatever eligibility requirements the plan has in place. Eligibility requirements are commonly attaining a certain age or working for the plan sponsor for a specified amount of time. Having an auto-enrollment provision in the plan document is a great way for plan trustees to ensure all eligible participants are properly notified. This requires employees to affirmatively decline participation or elect a deferral rate that differs from the auto-enrollment rate, otherwise the employee will begin to automatically receive pension plan contribution deductions from payroll once they have reached eligibility. If the plan document calls for employer contributions, it is important that all eligible employees are included in the employer contributions.
The total number of participants in the plan is what drives the pension plan audit requirement. The number of participants is calculated by adding actively participating employees (those that are making contributions), all eligible employees (whether they have yet to enroll or have elected not to enter the plan), and retired, deceased, or separated employees who still have assets in the plan. ERISA’s general rule indicates that pension plans with 120 or more total participants at the beginning of the plan year are required to obtain an independent financial statement audit to be filed with their Form 5500. Once a pension plan has been audited, the requirement is that the plan receive an audit annually until the total number of participants at the beginning of the plan year falls below 100. An effective way to reduce the total number of participants in the plan and fall below the audit threshold is to ensure that an auto-distribution provision is included in the plan document. This provision is adopted so that participants with account balances under $1,000 or $5,000 are auto-distributed to an individual retirement account (“IRA”). The threshold can be $1,000 or $5,000, but the plan document needs to specify this in order for these distributions to occur.
From time-to-time, plan transactions occur that require distributions to participants, such as a newly adopted auto-distribution provision or a correction of error. It is the responsibility of the plan trustee to ensure that every possible effort is made to locate the individual. The DOL offers some guidance on this topic, stating the minimum steps that must be taken to locate a participant include sending a notice via certified mail, checking the records of the employer, sending an inquiry to the designated beneficiary, and using free electronic search tools.
5. Filing and Reporting Requirements for Forms 945 and 1099-R
The plan sponsor is responsible for timely filing of IRS Form 945. This form is required if federal income tax was withheld from nonpayroll payments during the year. For pension plans, the most common types of payments that would prompt federal income tax withholding, and therefore requiring a Form 945 filing, are periodic distributions, required minimum distributions, and early distributions. The IRS Form 945 is an annual filing due January 31st of the year following the tax year.
The plan sponsor is also responsible for timely filing of IRS Form 1099-R. These forms must be issued for any participant that received a distribution exceeding $10 from the pension plan for the reportable tax year. Similar to the IRS Form 945, anyone who should be issued a 1099-R must be sent their forms by January 31st of the year following the tax year.
Take some time to review your plan document. Are participants’ elected deferral rates per their enrollment form or custodian reports consistent with their payroll withholdings? Are those employee and employer contribution rates being applied to the correct compensation? When was the last time you reviewed the reasonableness of the fees being charged for your plan’s administration? Have you considered an auto-distribution provision? Is your pension plan current on all of its required filings with the DOL and the IRS? These are just a few of the questions you should be considering as a plan trustee.