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Participant Notices: A Quick Overview

Retirement plans exist to provide retirement savings for participants. As a result, the participants need to be informed about plan provisions and their rights at various times. Sometimes it’s when they become eligible for the plan, before the start of a new plan year, or after the end of the plan year. Certain variables affect which of these may apply, such as plan provisions, plan type, and investment provider. Here are some items that may be prepared by your service providers for distribution to your plan participants:

Participant Fee Disclosure:
- Pertains to participant-directed accounts.
- Provides certain plan information as well as fees that may apply.
Investment Comparative Chart:
- Pertains to participant-directed accounts.
- Provides plan investment information such as past performance, expense ratio, and fees.
Automatic Enrollment Notice:
- Pertains to 401(k) plans that include automatic enrollment provisions.
- Provides the default deferral rate that will apply unless they make a different deferral election and the instruction for how to do so.
Safe Harbor Notice:
- Pertains to plans with Safe Harbor contribution provisions.
- Provides information about contribution and vesting provisions.
Qualified Default Investment Alternative (QDIA) Notice:
- Pertains to plans that allow for participant direction and utilize a qualified default investment for those participants who don’t make an election.
- Provides information about the investment option that will be used for their contributions if they do not make an investment election.
Universal Availability Notice:
- Pertains only to 403(b) Plans.
- Provides information regarding the opportunity to contribute to the 403(b) Plan.

While these notices are provided to participants when they become eligible for the plan, they also need to be provided on an annual basis. Other notices are due following certain events:

Summary Plan Description (SPD):
- This is a simplified version of the plan document provisions which needs to be provided within 90 days of when the employee becomes eligible for the plan.
- Updated copies must be provided every 5 years if there are changes to the plan. Every 10 years if no changes are made.
Summary Annual Report (SAR):
- Summarizes the plan information on Form 5500 for the participants, such as total plan contributions, distributions, fees, plan asset balance, and participant count.
- Distributed within 2 months after the Form 5500 filing deadline, including extensions.
Annual Funding Notice (AFN):
- Pertains to defined benefit plans, including cash balance plans, that are covered by the Pension Benefits Guaranty Corporation (PBGC).
- Due 120 days after the close of the plan year for large plans and the earliest of the day that the Form 5500 or the date that it’s due, including extensions, for small plans.
Summary of Material Modifications (SMM):
- Provides information regarding changes made to plan provisions by a plan amendment.
- Due no later than 210 days after the close of the plan year for which the modification was adopted.

This list does not cover all possible notices that are required for your plan participants, but being familiar with the terminology of these common notices will help you understand the information that is being shared with participants. As plan design changes take place, your notice requirements will too, so it’s important to understand what information is required to keep your participants informed.

This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.

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Effective Communication with Participants

A recent survey found that 59% of workers thought that they were contributing to their 401(k) plan and saving for retirement when they weren’t.

The Retirement Security Survey, conducted by Principal, asked participants why they weren’t enrolled in the plan and a surprising number thought they were. Even though plan provisions such as automatic enrollment and employer matching have a positive effect on plan participation, communication can also be a powerful tool.

The Department of Labor (DOL) and Internal Revenue Service (IRS) require a variety of information be shared with plan participants, but some eligible employees can be intimidated by the language in the material and decide that participation is too complicated. Others believe they are automatically enrolled in the plan because they were auto enrolled at a past employer.

If possible, one-on-one meetings are a great way to make sure that an employee understands what is being offered. When an employee is hired, they may receive an email with multiple files attached, including instructions to log onto a website and enroll in the 401(k). Starting a new job is often overwhelming and enrollment can be overlooked.

Enrollment meetings involving both Human Resources and the plan’s investment advisor are a great way to boost communication and participation. Taking the mystery out of available investment options, as well as showing the financial benefits of saving for retirement, helps the participants feel confident in their choices. Enrollment meetings can be done in person or by video meeting, depending on the location of the employees.

If it’s available to you, a retirement readiness report will show each participant their retirement age, current balance, current deferral percentage, current income and what retirement will look like for them. It can be quite an eye-opener for many participants.

Communication is the key to successful plan participation. It also helps your participants have a more positive attitude toward your reirement plan and their retirement future. Feeling like their employer cares about their future leads to a higher level of job satisfaction and feeling appreciated

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Upcoming Compliance Deadlines for Calendar-Year Plans

May 15th

Quarterly Benefit Statement – Deadline for participant-directed plans to supply participants with the quarterly benefit/disclosure statement, including a statement of plan fees and expenses charged to individual plan accounts during the first quarter of 2024.

June 30th

EACA ADP/ACP Corrections – Deadline for processing corrective distributions for failed ADP/ACP tests to avoid a 10% excise tax on the employer for plans that have elected to participate in an Eligible Automatic Enrollment Arrangement (EACA).

July 28th

Summary of Material Modifications (SMM) – An SMM is due to participants no later than 210 days after the end of the plan year in which a plan amendment was adopted.

July 31st

Due date for calendar year end plans to file Form 5500 and Form 8955-SSA (without extension).Due date for calendar year end plans to file Form 5558 to request an automatic extension of time to file Form 5500 and Form 8955-SSA.

Note: The RMD deadline mentioned on the Winter calendar should have referenced age 73 during 2023.

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New Questions on the 2023 Form 5500

The IRS Form 5500 is an annual return that is filed for most qualified retirement plans. Here are a few new items you may notice on the form for plan years that began in 2023.

Participant count has been expanded for defined contribution plans.

The large plan audit requirement is now based on the number of participants with account balances at the beginning of the plan year, rather than the total number of participants, which includes participants without balances. This change will likely reduce the number of plans that require an independent accountant’s audit report to be filed with the Form 5500. This information is reflected on the following line items:

Form 5500 (used by audited plans and plans with non-qualified assets):
- Line 6g is now 6g(1) and 6g(2)
Form 5500-SF (the short form for plans that meet exceptions due to size and investments):
- Line 5c is now split into 5c(1) and 5c(2)

IRS Compliance Questions have been added.

The first question asks if the plan was combined with another plan to pass coverage or non-discrimination testing. Most plans pass individually, but a plan might be combined with another plan based on ownership, business lines or if the plan sponsor maintains another qualified retirement plan.

The second question, specific to 401(k) plans, asks how the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) testing was performed. These tests compare the average deferral percentage or match percentage for the highly compensated employees (HCE) to the average percentage for the non-highly compensated employees (NHCE). Generally, this comparison is made between the current year percentages for HCEs and current or prior year percentages for NHCEs, although testing may not be necessary based on plan design or other factors, such as a plan having no HCEs.

The third question, which asks about an IRS Opinion Letter, is used to ensure that the plan document is up to date.

This information is reflected on the following line items:

Form 5500, Schedule R:
- Line 21a, 21b, 22
Form 5500-SF:
- Line 14a, 14b, 15
Form 5500-EZ (plans that cover the owners of the company and their spouses only):
- Line 12 (the first two questions do not apply)

Administrative expenses for large plan filings have been expanded.

This change provides more detailed reporting of plan expenses—particularly those related to service providers—including fee categories related to contract administration, recordkeeping, audit fees, investment advisory and management, trustee and custodial, actuarial, legal, valuation/appraisal and other expenses. This information is reflected on the following line item:

Form 5500, Schedule H:
- Part II, Line 2i

Information provided on the Form 5500 series is used by federal agencies such as the Department of Labor (DOL), Internal Revenue Service (IRS), and Pension Benefit Guarantee Corporation (PBGC) to understand plan operations, funding, and investments. It is also a source of information disclosed to plan participants through the Summary Annual Report (SAR) or Annual Funding Notice (AFN). As reporting needs change over time to adjust to shifting trends, these forms are updated to assist in painting the most accurate picture.

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A Refresher on RMDs

Although required minimum distributions (RMDs) are now mandatory components of tax-deferred retirement plans, this was not always the case. RMD rules began to apply to qualified plans following the Tax Reform Act of 1986, after policy makers noticed that retirement account holders were saving the funds for their beneficiaries rather than their own retirement spending. A plan retains qualification by following rules designed to delay taxation until the participant’s retirement. However, required minimum distributions require participants to start withdrawing funds from retirement plans and IRAs at a certain age so that the deferred taxes can be recouped.

Fast-forward to the current day, where the RMD rules have continued to evolve as a result of the SECURE Act of 2019 and SECURE 2.0 Act of 2022. To help keep you informed, this article will discuss the most important aspects of RMDs in their present form.

Who needs to take an RMD?

An RMD must be taken in the year the participant reaches age 73. Your plan document may have an exception for participants who continue to work after age 73. This exception, however, does not apply to individuals with more than 5% ownership, including attributed ownership, of the company that sponsors the plan.

When must an RMD be taken?

RMDs are due by the end of the calendar year to avoid paying an excise tax. The participant’s first RMD can be delayed until April 1st of the following year; this is called the required beginning date. The taxation of the first RMD should be considered when deciding whether to take the money by the end of the year or delay it until the following year. If the first RMD is delayed, two taxable distributions will be made in the same year.

How much is distributed as an RMD?

For a defined contribution plan, the RMD amount is calculated by taking the account balance (as of the end of the preceding calendar year) and dividing it by a value which estimates life expectancy. The IRS provides tables to determine this value based on the beneficiary’s age and the age of their spouse, if applicable. Prior to 2024, both pre-tax and designated Roth accounts were part of this calculation; beginning in 2024, however, designated Roth accounts are not subject to the RMD rules while the account owner is still alive.

An RMD can’t be rolled over, so it is not subject to the mandatory 20% Federal Income Tax withholding. Instead, the default tax withholding rate for an RMD is 10%. The participant can choose to withhold more or less than this 10%, or even elect to waive the withholding. However, even if the withholding is waived, the amount distributed will still be considered taxable income for the participant.

What happens if an RMD isn’t taken?

The excise tax for failing to take an RMD used to be 50%. SECURE 2.0 lowered this to 25%; however, the excise tax may be further reduced to 10% if a correction is made within two years. This excise tax is paid by the participant, but there may be additional consequences for the plan as a whole. If the RMD isn’t taken on time, the plan could be considered disqualified. Disqualification means that the plan is no longer tax exempt, and funds held by the trust are immediately taxable.

If the participant has an account balance in more than one plan, RMDs must be taken from each plan. Also, taking an RMD from an IRA does not satisfy the requirement to take the RMD from a plan. The RMD for each plan is calculated independently.

Although RMDs are a taxable distribution to the participant, as the plan sponsor, you can help ensure they are issued timely by verifying that dates of birth are correct on the year-end census. In addition, if your plan document has an exception for individuals over 73 who are still employed, dates of termination are critical for those participants. If a question arises regarding when a certain employee is required to receive a distribution, a closer look at age, employment status, and ownership information can help determine the correct answer.

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Is Automatic Enrollment Required for Your Plan?

An automatic enrollment provision can be a useful tool to drive employee engagement in plans, particularly for participants who otherwise have not yet considered their retirement situation.

These provisions allow an employer to withhold deferrals from the employee’s pay without the employee making an election. By utilizing automatic enrollment, an employer can boost participation while simultaneously simplifying the enrollment process.

Although commonplace, these provisions have historically been entirely optional. Now, due to the SECURE (Setting Every Community Up for Retirement Enhancement) 2.0 Act of 2022, automatic enrollment provisions will be mandatory in certain cases. While some plans are considered to be “grandfathered” into their current provisions, others will need to be updated to comply with the new requirements starting in 2025. To find out if these new requirements apply to you, consider the following questions:

Is your plan a 401(k) or 403(b) plan?
Was your plan adopted after December 29, 2022?*
Does your business have more than 10 employees?
Have you been in business for more than three years?

* Please note, if your plan was part of a merger, there are certain exceptions that may apply that are not addressed in this article. We can take a closer look together.

If you answered “Yes” to all of these questions, your plan must include the following automatic enrollment provisions beginning January 1, 2025:

The default deferral percentage must start between 3% and 10% as determined by the plan.
On the first day of each new plan year following enrollment, the deferral amount will increase by 1% until it reaches a cap of 10-15%, again determined by the plan. This increase, called auto-escalation, is not required if the initial default rate is set to 10%.
You will need to choose a Qualified Default Investment Alternative (QDIA) that meets criteria for transferability and safety per the Department of Labor’s (DOL’s) standards. While a QDIA was optional in the past, SECURE 2.0 provisions require it.

If you are not required to include automatic enrollment provisions in the plan, you may choose to add them anyway. In this case, you have more flexibility in your options as you don’t need to fulfill the above requirements. As such, there are various types of automatic enrollment provisions to consider:

The automatic contribution arrangement (ACA) is the most basic type of automatic enrollment. Employees are enrolled when they become eligible for the plan unless they opt out of deferrals or elect to defer at a different rate.

The eligible automatic contribution arrangement (EACA) builds onto the ACA. Instead of applying only to new participants, the EACA also includes any existing participants who have not yet made an election. A participant who elects to stop automatic deferrals within the first 90 days may withdraw the amount deferred, plus any earnings. EACAs also have an additional notice requirement, meaning that certain details must be communicated to employees prior to enrollment, as well as on an annual basis once enrolled.

The qualified automatic contribution arrangement (QACA) is a variant of the EACA which can be used for safe harbor plans, meaning it has stricter requirements. This includes a default deferral percentage that is at least 3%—but not more than 10%—of compensation. Auto-escalation is also required, increasing this default deferral by at least 1% per year until it reaches a cap set between 6% and 15%. Auto-escalation is not required if the initial default rate is set to 6% or more. Your plan document will state the percentages.

Since this pertains to safe harbor plans, one of the following employer contributions is required:

A 100% matching contribution on deferrals up to 1% of compensation, plus a 50% match for deferrals between 1% and 6% (a maximum of 3.5%), or
A non-elective contribution of 3% of compensation for all participants.

The safe harbor matching contribution for a QACA is less than the traditional safe harbor plan, which is 4%. In addition, while the employer contribution must be immediately vested in a traditional safe harbor plan, a QACA allows contributions to be 100% vested after two years.

Regardless of the reason the provisions are included in your plan, automatic enrollment is a beneficial feature that helps employees save for retirement, as they no longer need to opt in to begin deferring. Employees who delayed or ignored their initial enrollment will still have their deferred funds to fall back on later. Choosing the initial default deferral rate and the maximum rate after auto-escalation are important plan decisions. While SECURE 2.0 sets the minimum requirements for plans, there may be a certain combination of provisions that best suits your plan (how complex will it be to administer year after year?) and your participants (what percentage will help them save for retirement without drastically impacting their take-home pay?). A discussion with us can help you find the right fit.

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Upcoming Compliance Deadlines for Calendar-Year Plans

February 28th

IRS Form 1099-R Copy A – Deadline to submit Form 1099-R Copy A to the IRS for participants and beneficiaries who received a distribution or a deemed distribution during the prior plan year. This deadline applies to scannable paper filings. For electronic filings, the due date is April 1, 2024, as the typical March 31 deadline falls on a weekend.

March 15th

ADP/ACP Corrections - Deadline to process corrective distributions for failed ADP/ACP tests without a 10% excise tax for plans without an Eligible Automatic Contribution Arrangement (EACA).

Employer Contributions - Deadline for employer contributions for amounts to be deducted on 2023 S-corporation and partnership returns for filers with a calendar fiscal year (unless extended).

April 1st

Required Minimum Distributions - Normal deadline to distribute a required minimum distribution (RMD) for participants who attained age 72 during 2023.

April 15th

Excess Deferral Correction - Deadline to distribute salary deferral contributions plus related earnings to any participants who exceeded the IRS 402(g) limit on salary deferrals. The limits for 2023 were $22,500, or $30,000 for those age 50 and over if the plan allowed for catch-up contributions.

Employer Contributions - Deadline for employer contributions for amounts to be deducted on 2023 C-corporation and sole proprietor returns for filers with a calendar fiscal year (unless extended).

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Reminder: Long-Term, Part-Time Employee Rules Effective January 1, 2024

As part of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), part-time employees who worked at least 500 hours each year in 2021, 2022, and 2023 qualify as Long-Term, Part-Time (LTPT) employees. LTPT employees were eligible to make elective deferrals on January 1, 2024.

What happens if you missed enrolling one of these employees?

Mistakes happen. When it comes to a missed deferral opportunity, the key is to correct the failure as soon as possible. This may include withholding the proper deferrals going forward, making an employer contribution to the plan, and providing the participant with a written notice regarding the failure. If you feel as though you missed offering an employee the opportunity to defer, please contact us immediately to remedy the situation rather than waiting until the end of the plan year.

What effect does this rule have on Solo 401(k) (One-Participant) Plans?

If a plan covers a business owner (or owner and spouse) but employees have not met plan eligibility requirements in the past, the new Long-Term, Part-Time (LTPT) rules will have an impact. As the company owner is no longer the only participant, the plan will now be subject to ERISA.
The ability for the employee to defer will not necessarily impact your employer contribution and testing, but it will have an impact on the plan’s filing status. This means that filing a Form 5500 or 5500-SF will be necessary, rather than filing a Form 5500-EZ. These forms require additional information to be reported, and are publicly available after filing, whereas Form 5500-EZ is not made public.
The plan will also need to be covered by a fidelity bond to protect the assets, even if part-time employees make no deferrals.

Keep the new LTPT rule in mind when hiring employees—even if not full-time—as they may have an unexpected impact on your plan. Continue to evaluate the status of your part-time employees as well so that you can be prepared for their eligibility for the plan.

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401(k) deferrals: Don’t exceed the limit!

Excess deferrals occur when a 401(k) participant defers a greater amount than the annual IRS limit permits. The annual deferral limit was $22,500 for 2023 and $23,000 for 2024. For participants 50 years old and older, an additional $7,500 can be deferred.

When this limit is exceeded, excess deferrals and earnings need to be removed from the plan and returned to the participant. Employer matching on this excess likewise must be forfeited if it was calculated and funded during the year. Distribution of these excess funds must occur by April 15th.

Even with payroll software that limits the deferrals, there are several situations in which excess deferrals might occur:

A participant who begins working for you may have made deferrals to a previous employer’s plan during the same calendar year. After meeting any eligibility and entry requirements, they then make deferrals into your plan. Combined, these deferrals may exceed the annual limit, which is individual rather than per-plan. This error is often discovered during the preparation of the participant’s tax return, and correction requests are typically received in the first few months of the year.
When you make a change to your payroll providers or payroll software, deferral limits may be exceeded if year-to-date deferral information is not transferred correctly.
If a participant’s date of birth was input incorrectly into your payroll software, the participant may be inadvertently permitted to make a catch-up contribution, even though they haven’t reached age 50.

You may be asked to perform any necessary corrections regardless of whether or not the error occurred on your watch. The best way to prevent excess deferrals is to be sure that all deferrals are tracked in your payroll and that dates of birth are correct for all participants making catch-up contributions. Most payroll software has a field to input deferrals made outside of that software; if you hire a new employee, ask for their year-to-date deferrals, and ensure that this information is given to your payroll provider or entered into your software. If you make a payroll change during the year, check the year-to-date deferrals and ensure that they are correct for each employee.

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Does My Plan Need an Audit?

The main determining factor in whether your plan needs an audit performed by an independent qualified public accountant is the participant count. An audit will be required if the beginning of year participant count is more than 100. For the plan year that began in 2023, there is a change to how the participants are counted. Prior to this, the count included active participants—regardless of whether or not they had an account balance—as well as terminated participants who had an account balance. Now, participants without an account balance are no longer included in the count. This is exciting news because it means that some plans who required an audit for 2022 may no longer require an audit for 2023.

For plans that hover around the 100-participant mark, there is a rule in place to help stabilize the audit requirements from year to year. The 80-120 rule states that if the participant account is from 80 to 120 participants, the plan may retain the same audit status as the previous year. In practical terms, this means that an audit is not required until the participant count reaches 121. However, once an audit is required, it continues to be required until the participant count drops to 99 or less.

In addition to participant count, the type of assets held in the plan may cause the plan to require an audit, even if the participant count is under 100. Small plans are required to have an audit unless the plan fulfills the requirements of one of these exemption waivers:

At least 95% of the plan’s assets are qualifying plan assets. This criterion is satisfied by most small plans. Qualifying plan assets include qualifying employer securities, participant loans, shares issued by a regulated financial institution, registered mutual funds, investments and annuities issued by an insurance company, and certain assets in an individual account of a participant or beneficiary.
Less than 95% of the plan’s assets are qualifying, but a fidelity bond is in effect. This fidelity bond must cover 100% of the non-qualifying assets, or provide coverage based on standard ERISA bonding rules, based on whichever value is greater.

Since a large plan audit count is now based solely on individuals with an account balance, paying out your terminated participants could help to lower your participant count. It may be time to review your cash out limit, plan assets, and the account balances of terminated participants in order to minimize the need for an accountant’s audit in the future.

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Components of Defined Contribution Plan Compliance Testing

Plans must be tested each year to ensure that they are compliant with the laws governing retirement plans. To understand the testing performed for your plan, it may be helpful to review some of the terms that are commonly used. First, let’s examine how your plan’s noteworthy individuals are identified.

Highly Compensated Employees (HCE): There are two factors that determine which employees are HCEs for a plan year:

Ownership: An employee who owns more than 5% of the company in a plan year, or the year preceding it, is an HCE. A spouse, child, parent, or grandparent who participates in the plan will likewise be considered an HCE due to family attribution rules.
Compensation: An employee is considered an HCE in a plan year based on their earnings the preceding year. An employee is an HCE for 2023 if they earned at least $135,000 in 2022; for 2024, the employee must have earned at least $150,000 in 2023. Plan document provisions may further limit this definition to the top 20% of earners.

Key Employees: There are three factors that determine which employees are considered key employees:

Ownership: An employee who owns more than 5% of the company in a plan year, or the year preceding it, is a key employee. A spouse, child, parent, or grandparent who participates in the plan will likewise be considered a key employee.
Owner compensation: An employee who owns more than 1% of the company and earned more than $150,000 in the prior plan year is a key employee.
Officer compensation: An officer of the company is considered key in a plan year based on their earnings the preceding year. In 2023, the officer must have earned at least $200,000 in 2022; for 2024, the officer must have earned at least $215,000 in 2023.

Now that these individuals have been categorized, let’s explore some of tests that might be performed on your plan:

Deferral testing: The average deferral percentage for all highly compensated employees (HCE) is compared to the average deferral percentage for all non-highly compensated employees (NHCE) to ensure the gap between the two groups is not too wide. If this test fails, there are several methods to correct the test, including refunding deferrals and earnings for HCEs or making contributions for the NHCEs. This test is known as the Actual Deferral Percentage (ADP) test. Safe harbor 401(k) plans are designed to pass the ADP test.

Match testing: This form of testing is similar to deferral testing but compares employer match instead of deferrals. This is known as the Actual Contribution Percentage (ACP) test. Safe harbor 401(k) plans are also designed to pass the ACP test.

Maximum deferral testing: An employee’s deferrals cannot exceed a yearly maximum; this limit was $22,500 for 2023 and will be $23,000 for 2024. An additional $7,500 catch-up contribution can be deferred in 2023 and 2024 by participants who are at least 50 years old. If a participant has deferred more than the limit, a corrective distribution of the excess deferrals and earnings must be processed by April 15th. This limit is known as the 402(g) limit.

Maximum individual contribution testing: Similar to maximum deferral testing, the combined amount of a participant’s employee and employer contributions cannot exceed a yearly maximum. This combined limit is the lesser of $66,000 for 2023, $69,000 for 2024, or the participant’s total compensation. Catch-up deferral contributions are not included in this limit. This limit is known as the annual additions limit or 415 limit and is an important factor when calculating a maximum company contribution.

Maximum employer contribution: The employer’s tax deduction cannot exceed 25% of compensation for plan participants. This is known as the 404 limit and is also an important factor in the calculation of a maximum company contribution.

Top-heavy testing: A plan is considered top-heavy if 60% or more of the plan assets belong to key employees. A minimum contribution may be required if the plan is top-heavy. Many safe harbor plans are designed to satisfy top-heavy testing.

When calculating a contribution for a participant or the plan, these are some of the parameters that determine the permitted amount. Understanding this terminology may provide clarity to the contribution options provided for a plan year.