One of your fiduciary duties as the plan sponsor is to ensure that the plan is for the sole benefit of the participants in the plan and their beneficiaries. But who is a participant? Hint – it is not just the current staff you employ.
Once an employee obtains eligibility and enters the plan, she or he is a participant in the plan until they 1) no longer work for you and 2) have removed their account balance from the plan. Inevitably, employees will leave your employment. If you sponsor a retirement plan, your interaction with them may not be over. Commonly, retirement plan documents allow for participants to withdraw their funds after their employment ceases. However, they can choose, inmany cases, to leave those funds in the plan. Traditionally, participants will request a distribution either online or via a paper form. They should receive notification of their options including the tax implications of the choices they make. Most plan sponsors outsource this to a record-keeper or a third-party administrator (TPA).
With the passing of the Economic Growth Tax Relief Reconciliation Act., retirement plans could adopt a provision that required former employees who have
a remaining vested account balances in your plan of less than $5,000, to remove their funds. If their vested balance is over $1,000, and the participant does not initiate withdrawal upon receiving instruction to do so, that balance must be rolled over to an Individual Retirement Account (IRA) in the participant’s name. The participant must be notified and given an election period to decide what to do with their funds prior to the cash-out or rollover to an IRA. Record-keepers and TPAs generally assist plan sponsors with this procedure but if this is a provision in your document you should ensure that it is being done on at least an annual basis.
Participants with vested account balances over $5,000 who are not current employees would be able to keep their balances in the plan indefinitely. Those participants are still due annual notices including notice of qualified default investment if they do not have an affirmative investment election, summary annual report of the prior year’s 5500 filing, 404(a)(5) fee disclosure, notices of fund changes and summary plan descriptions. All these documents have delivery deadlines. Again, most record-keepers and TPAs can assist you with these notices but you still have the fiduciary obligation to ensure those participants are notified.
Once a terminated participant reaches a certain age, required minimum distributions (RMDs) are required to be made. Prior to 2020, that age was 70 ½; after the passage of the Setting Every Community Up for Retirement Enhancement Act of 2019 or SECURE Act, that age is now 72. Beginning April 1 after reaching those specified ages, terminated participants must begin to take a minimum amount out of their retirement accounts. As a side note, current employees who have ownership in the company of over 5%, also must begin taking required minimum distributions at those ages. The Coronavirus Aid, Relief, and Economic Security Act of 2020 or CARES Act did suspend this requirement for the 2020 tax year. In other years, the failure to begin to take RMDs or to take them in subsequent years can have implications both for the plan and for the participant involved.
In addition to former employees, there is yet another group of employees to consider: beneficiaries. In the event of the death of a participant, the beneficiary election on file will dictate who is entitled to the remaining balance in the plan. It is important to ensure that every participant maintains a beneficiary election. It is also highly recommended that they have a contingent or secondary beneficiary as well. If participants are married, they must either choose their spouse as the 100% beneficiary in their account, or they must obtain the written, notarized consent of their spouse to split it a different way. Reminding participants to review their beneficiary elections on an at least an annual basis is a recommended practice.
Lastly, a beneficiary can also obtain an account balance as a result of a domestic relations order or DRO. A DRO is written by an attorney and assigns benefits to an alternate payee to receive all or a portion of a participant’s account balance. Typically, this happens when two parties divorce and a former spouse is awarded a portion of the participant’s account balance. It is important to review those DROs prior to the state authority, generally a court, issuing the judgement or court order. The DRO cannot provide a form of benefit not authorized by the plan, cannot provide an increased benefit to the alternate payee or a benefit that has already been assigned to someone else.
Should you find that you have questions regarding any of the situations above, ML&R Wealth Management is ready to assist you. ML&R Wealth Management serves both as an investment advisory fiduciary in the 3(21) or 3(38) capacity and as an administrative fiduciary in the 3(16) capacity for our clients. Please contact us with any questions.