What's In a Name?

What’s the most used and least understood/appreciated acronym in the retirement plan industry?

Well, for my money, it’s “TPA”—short for “third-party administrator.” It’s a term that is widely bandied about, but I think misunderstood by many.

The origins are plain enough—“administrator” in the sense that a TPA deals with plan administration process and issues. The issues and process, it bears noting, that ERISA (not to mention the IRS and DOL) presumes are the responsibility of the plan fiduciary. We’re talking about things like ensuring that the terms of the plan document are adhered to, that non-discrimination tests are properly applied, and that contributions are timely deposited. 

Where things seem to get confused is the “third party” reference. At its simplest, it’s merely an acknowledgement that the entity performing those vital plan administration functions is someone other than the entity responsible under the law. They are, quite simply, a party external to that legal circle. They are legally an extension of the plan sponsor/administrator, and though it’s hard to imagine it these days, it harkens back to a time when the plan sponsor/employer actually did all that work in-house, often on 12-column pads and calculators. 

Over time the role of TPA has been diminished in the eyes of many. Sure, they deal with a lot of technical “minutiae”—we’re talking deep in the “weeds” here. The classic reference is you ask what time it is, and they (some, anyway) first want to explain to you how a watch is made. That said, the role of plan administrator—perhaps a better label would be compliance administrator—is essential—critical—to the smooth, effective and efficient running of a plan—and on aspects that, odds are, your recordkeeper (another critical role, but one often focused on other things) isn’t always.

Here’s a partial list—bearing in mind that every plan has to do these things, ask yourself—and your plan sponsor clients—who is making sure that:

1. All eligible workers are included in the plan—as required by law—and ineligible workers are not unduly credited with benefits?
2. 
   Compensation used as the basis for contributions and/or eligibility is accurate, in accordance with ERISA and IRS limits, both with regard to amount (how much) and individuals (who)?
3. The plan’s allocation of benefits meets legal requirements and the correct individuals receive the correct amount(s), thus preventing the need for corrective measures and penalties? 
4. The amount(s) allocated to individual participant accounts match the actual dollars deposited into the plan/trust. Additionally, to ensure that contribution deposits are made to the plan/trust in accordance with legal requirements, forestalling legal fines and penalties?
5. The appropriate plan notices are timely delivered to the applicable individuals in accordance with legal requirements, providing them with important plan information and instructions (and preventing the application of penalties for failing to do so)?
6. Employees are properly categorized as to their status as highly compensated employees (HCEs), key employees (for top-heavy testing) and spousal/familial relationships so that the allocation of benefits and eligibility is appropriate and consistent with legal requirements?
7. The tax filings related to the plan (Form 5500, 8955, 5330, etc.) are filed accurately and on time in order to comply with the legal requirements regarding the plan, and thus avoid fines and penalties?
8. The amounts distributed as loans or distributions are consistent with the vesting schedule of the plan, in accordance with plan parameters and legal limits—and that the needed authorizations are obtained?

And perhaps most critically, who is there to help ensure that problems with regard to plan operation—perhaps relating to any/all of the items above—are promptly and accurately corrected in accordance with government platforms and processes to minimize the pain, time—and financial penalties—involved?

These are questions to which prudent fiduciaries—and those who support them—should know the answer(s).

Trust me—the IRS and DOL expect that you do—and ERISA expects nothing less.

- Nevin E. Adams, JD

Why Your Recordkeeper Might Not Be an Automatic Enrollment Fan

I recently wrote about what’s wrong with automatic enrollment. Turns out there’s more – and it has to do with when things actually go “wrong” with automatic enrollment.

See, it’s one thing to say that eligible employees should be automatically enrolled – and yet another to actually get them enrolled automatically. Even the Internal Revenue Service (IRS) goes so far as to acknowledge that two common errors found in 401(k) plans are: (1) not giving an eligible employee the opportunity to make elective contributions; and (2) failing to execute an employee’s salary deferral election.

Now, as it turns out, both are “fixable” – through the Employee Plans Compliance Resolution System (EPCRS). But that’s only the start of things. See, in both of those situations you’re looking at a corrective contribution of 50% of the missed deferral (adjusted for earnings) for the affected employee. And then fully vesting the employee in those contributions – contributions that are subject to the same restrictions on withdrawal that apply to elective deferrals.

The only difference in the correction for the two situations outlined is the calculation of the amount of the missed deferral. In the case of an erroneously excluded employee, the missed deferral is based on the average of the deferral percentages (ADPs) for other employees in the employee’s category (for example, non-highly compensated employees), whereas if the error involves failing to implement an employee’s election, the missed deferral is based on the employee’s elected deferral percentage, or in the case of missed automatic contributions, the automatic contribution percentage. For plans with automatic contributions, however, the corrective contribution for the missed deferrals is reduced to 0% or 25% of the missed deferrals, depending upon how soon the error is corrected.

Your head starting to hurt?

Hold on – those corrective contributions also need to be adjusted for earnings – from the date that the elective deferrals should have been made through the date of the corrective contribution.1 In all cases the employer must contribute any missed matching contributions, adjusted for earnings.

‘Tell’ Tales

Now, in addition to the regular array of plan notices that will now be required for those new participants, automatic enrollment has its own special set of notices. While most larger plans rely on what is called an eligible automatic contribution arrangement (EACA), smaller programs may have in place what is called a qualified automatic contribution arrangement (QACA), a type of automatic enrollment 401(k) plan that automatically passes certain kinds of annual required testing (generally referred to as a safe harbor plan). A QACA must include certain features, such as a fixed schedule of automatic employee contributions, employer contributions, a special vesting schedule and specific notice requirements.

The automatic enrollment notice details the plan’s automatic enrollment process and participant rights. The notice must specify the deferral percentage, the participant’s right to change that percentage or not to make automatic contributions, and the default investment. The participant generally must receive the initial notice at least 30 days, but not more than 90 days, before eligibility to participate in the plan or the first investment. Subject to certain conditions, the notice may be provided, and an employee may be enrolled in the plan, on the first day of work. An annual notice must be provided to participants and all eligible employees at least 30 days, but not more than 90 days, prior to the beginning of each subsequent plan year. And guess what happens if those notices don’t go out when they are supposed to?

So, it’s not as though you just have to flip a switch on payroll and you’re done.

Even When It Works

There are, of course, issues, even if there are no processing missteps. Cost, particularly as it relates to the match – which may have been designed to encourage workers to sign up, and which, with automatic enrollment, may no longer need to – and which may have been budgeted for a 70% participation rate that, thanks to automatic enrollment, may be more like 95%. Turnover can leave behind smaller 401(k) balances, which incur additional recordkeeping costs, and which can prove to be a real administrative burden with ongoing notice and communication requirements. Which again, if those notices aren’t going out when they should…

The bottom line is that automatic enrollment is an important component of helping more Americans save, and save effectively. But as is often the case, it’s not as easy as it sounds, and plan sponsors looking to embrace this design – and advisors who tout it – should do so with a full awareness and appreciation of all the implications.

For some other issues, see “Why Doesn’t Every Plan Have Automatic Enrollment?”

Nevin E. Adams, JD

1. Not that that’s not an improvement from how it used to be. Under Rev. Proc. 2015-28, if the error is detected within 9½ months after the year of the failure, no corrective qualified non-elective contribution (QNEC) is required to an affected participant’s account for the missed deferral opportunity, as long as the person is enrolled within the 9½ month period (or earlier if the affected employee notifies the employer of the mistake).