No one wants another to-do list, especially at this busy time of year. But if you’re sponsoring a tax-qualified retirement plan for your employees, a little time spent before year-end to make sure the last compliance deadlines of the year are met could prevent a lot of time spent later to correct plan errors. By making a list and checking it twice, you are creating documentation to save in your ERISA fiduciary file to prove that you met your plan administrator responsibilities.
The plan’s recordkeeper or a third-party administrator (TPA) typically provides reports and information to guide plan sponsors through year-end activities. Be sure to review any reports you receive from your plan service providers and follow up on requests for additional information as soon as possible to make sure year-end deadlines are met.
Here are some key year-end deadlines for defined contribution retirement plans, like 401(k) plans.
Distribute Required Minimum Distributions (RMDs)
Plan participants must generally begin taking minimum annual payments from their plan accounts when they reach age 70½. They have until April 1 of the year following the year they reach age 70½ to take the first year’s RMD. (The start date for RMDs may be delayed even further if a participant who is not a 5% or more owner of the company is still employed beyond age 70½.) But all subsequent years’ RMDs must be distributed by December 31 each year. Beneficiaries taking life expectancy payments are also required to take their payment by December 31 each year. The deadline applies whether a plan operates on a fiscal year or a calendar year.
Review RMD reports provided by your service provider and compare them to your employee records to ensure all plan participants and beneficiaries who are required to take a distribution are identified. Make certain you understand your service provider’s timing requirements for processing payments by December 31 and any support it provides in notifying individuals of RMDs due for the year.
If a participant does not provide payment instructions, you have the authority to initiate the RMD payment because failure to distribute RMDs could result in plan disqualification and a loss of the tax benefits to the plan and all participants. If a participant fails to take an RMD, they are also subject to a 50% excess accumulation tax on the portion of the required amount that should have been distributed but remained in the plan.
Use Up Plan Forfeitures
Forfeitures generally must be used for the benefit of the plan or your participants by the end of each plan year.
You may have plan forfeitures if you make employer contributions to the plan and your plan has a vesting schedule. Participants who terminate employment before becoming 100% vested in the employer contributions forfeit the non-vested portion of their account. This money cannot be returned to the employer and is typically stored in a forfeiture account until it can be used up for the year. Your plan document will state how forfeitures must be used, typically to pay plan expenses, to offset future employer contributions, or allocated to remaining plan participants. Any forfeitures allocated to participants must be included in the annual additions limit for the year (100% of a participant’s compensation up to $56,000 for 2019).
Determine Plan Amendment Needs
If you implemented any discretionary plan design changes during the plan year, your plan document must be amended by the last day of the plan year (i.e., by December 31, 2019, for a calendar-year plan). Be sure to work with your document provider as soon as possible so you have time to amend your plan document and deliver any required participant notices.
If you want to change or add certain plan features to be effective for the coming plan year, you may need to amend your plan and provide notice to participants before the start of the new plan year. Check with your document provider on timing requirements for specific plan features (e.g., adding a safe harbor 401(k) feature).
Correct ADP/ACP Testing Excesses from Prior Plan Year
If your 401(k) plan failed the Actual Deferral Percentage (ADP) or Actual Contribution Percentage (ACP) test for the prior plan year, you have twelve months following the end of the plan year to make the correction (i.e., by December 31, 2019, for a calendar-year plan that failed 2018 plan year testing). ADP and ACP testing failures are typically corrected by distributing the excesses to highly compensated employees or by making a qualified nonelective contribution (QNEC).
If You Miss a Deadline
The IRS anticipates that plans will make mistakes from time to time and provides methods for correcting errors in its Employee Plans Compliance Resolution System (EPCRS). This program allows plan sponsors to voluntarily fix mistakes and preserve the tax-favored status of the plan – often without the need to contact the IRS or pay an IRS fee. Many plan service providers offer plan correction support services.