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Insight 401(k) Plan Notice Issues of Which to Be Aware (or Beware)

By John C. Hughes,

It is a frustrating burden, but the fact of the matter is that most 401(k) plan sponsors (that is, the employers, not the plan service providers) are required to provide plan participants with several notices before the beginning of the next plan year.  There are detailed laws and regulations regarding the content and when/how the notices are delivered. 

For most plans, the next plan year will begin on January 1, 2019, which means that December 1 is generally the last date by which those notices may be provided. The following discussion touches on some bigger picture issues for an employer’s attention as we enter notice season. The article will generally touch on the following notices briefly described as follows:

QDIA Notice.  This notice protects plan fiduciaries when they are required to make decisions for participants about how and where to invest their plan accounts. That is, when investment in a default fund is required because participants do not take the opportunity to choose their own investments. For example, if they are automatically enrolled or if profit sharing contributions are made.

Automatic Enrollment/Escalation Notice.  Many plans now utilize automatic enrollment features.  Participants are required to be furnished with information describing how those features work

Safe Harbor Notice.  Some plans are designed to avoid annual “ADP/ACP” discrimination testing (and thus allow highly compensated employees to max out their own contributions). This design generally requires a 100% vested employer contribution and the delivery of an annual notice to participants.  The notice describes the safe harbor contributions and other plan characteristics.

404a-5 Disclosures.  These are annual disclosures that must be made to plan participants generally describing the plan’s fees, expenses, and investment options.

402(f) Special Tax Notice.  This is not an annual requirement.  It is a notice required to be provided to participants when they take a distribution.

Of course, any particular plan may or may not have obligations relative to each of these notices; it will depend on the plan.  Additionally, there are several other notice requirements applicable to 401(k) and other types of retirement plans such as blackout notices, mapping notices, ERISA Section 204(h) notices, etc.).

Select issues of which to be aware (or beware):

  • As with all plan matters, it is critical to recognize involved parties’ respective roles in the process.  Plan sponsor employers have likely received drafts/samples of the above-mentioned notices.  It is important to recognize that when the notices are furnished to participants, the information is coming from the employer, not the third party administrator or recordkeepier that may have provided the sample to the employer.  It is the employer and the other plan fiduciaries who must ensure that the notices contain the required information, and that they are appropriately delivered.
  • The following is a common example of a communication from a recordkeeper to the plan sponsor – “The attached notices have been created based on our plan records and are provided as samples for your records: . . . .  The attached documents are being provided with the understanding that [large well known financial institution] is not rendering legal advice.  Plan Sponsor (Plan Administrators) should consult their attorneys about the application of any law to their retirement plans.”  This is great advice from the recordkeeper – Don’t take legal advice from nonlawyers; particularly, with regard to highly complex legal issues where there are potentially substantial adverse consequences for noncompliance.
  • Often, the notice preparation and delivery process from the service provider’s perspective is extremely automated and not at all customized.  Accordingly, it is compelling that the employer review the notices to ensure that the required content is included, and that the information is accurate and complete.  In many cases, a sample notice will overlook a plan’s customized provisions, arrangements, or charges.  For example, a plan might impose an across the board 0.25% charge against participant accounts; the 404a-5 notice must specifically advise of that charge.  It is not enough to simply state that some charges may be applied.
  • Some of these above-mentioned notices may be combined in one document.  Consideration should be given to striking the right balance in terms of combining notices.  For example, combining the QDIA, safe harbor, and automatic enrollment notices in a single notice might prove to be overload, while combining QDIA and automatic enrollment might make sense and strike a good balance.
  • Even if not combined in a single notice, separate notices may be included in the same envelope and delivered together.  This is the reason that changes were made to the regulations regarding the annual 404a-5 disclosures, which is now required to be delivered every 14 months.   This allows employers to reset their schedules in terms of delivering those disclosures.
  • ERISA and the Internal Revenue Code permit electronic delivery; however, it is not as simple as shooting out an email or making the information available on the internet.  There are specific regulatory conditions that must be satisfied.  Many service providers deliver notices on behalf of plan sponsors, but do not fulfill the necessary conditions. The Department of Labor is yet to revise its regulations regarding electronic delivery, and continues to remind sponsors and practitioners that the old rules still apply for now.
  • The above issue spills over a bit into lost/missing participants.  Efforts should be undertaken to deliver paper notices that are returned as undeliverable.  Suffice it to say, there are varying consequences for not providing the required information, which is arguably the result if the electronic delivery rules are not followed or a participant does not receive a mailing.
  • Despite the burden, these notices actually provide helpful information to participants.  Accordingly, as a practical matter, employers should provide information that is accurate and complete.
  • Don’t waste your time preparing, reviewing, and delivering notices that are unnecessary.  Several times I have encountered situations where a service provider advised a client to send a QDIA notice to hundreds or thousands of participants when the plan at issue did not have any defaulted participants.
  • Speaking of the QDIA notice, there is a common misconception that sending that notice provides the employer with the desired protections.  That is not correct.  There are other regulatory conditions that must be fulfilled to get the plan fiduciaries off the hook when the plan fiduciaries are forced to direct a participant’s investments.
  • The content of automatic enrollment and automatic escalation notices frequently conflict with the plan terms relative to those features, as well as the actual practices/operations.  It is critical that the notice provisions, plan provisions, and actual practices are aligned.   Those errors could prove very costly, but they are easy to avoid with the appropriate level of attention.  For example, a plan might state that all participants will be automatically escalated by 1% each year, while the notice might say (and the practice might be) to only escalate participants who were automatically enrolled in the first place.
  • The summary plan description (“SPD”) is not an annual requirement, but it is important that it is accurate and understandable.  Attention should be paid to “sample” SPDs (that is, they should be reviewed, just as other plan related communications).
  • The IRS recently revised its model 402(f)/special tax notice (IRS Notice 2018-74) to reflect changes in the law.  Plan sponsors should confirm that revised notices are being used in connection with plan distributions.

In summary, plan sponsors are charged with many duties and obligations under ERISA and the Internal Revenue Code.  Some of those duties and obligations involve providing specified notices at specified times.  It is advised that such processes be handled with the appropriate level of oversight and attention.

John C. Hughes is a member of the firm’s employee benefits practice group. John’s practice is focused in the complex area of ERISA/employee benefits. John counsels clients nationwide relative to a wide variety of issues involving all kinds of employee benefit plans including 401(k), nonqualified deferred compensation/409A, profit sharing, pension/defined benefit, 457, 403(b), “ESOP”, governmental, 125/cafeteria, and health and welfare plans.

If you would like further information concerning the matters discussed herein, please contact a member of our Employee Benefits Group.

This Employment Blog is provided by Hawley Troxell Ennis & Hawley LLP for educational and information purposes only. It is intended to notify our clients and friends of certain events or issues in corporate law. It is not intended to be, nor should it be, used as a substitute for legal advice regarding specific factual circumstances. © Hawley Troxell Ennis & Hawley LLP all rights reserved. For more information, please visit our website, hawleytroxell.com.

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