For 401(k) plan sponsors, the end of the year is the perfect time to review their current plan, ensuring that it is still working for them and their employees. It also gives a head start on gathering information for the upcoming plan audit, which can be a daunting task without proper planning and preparation. Below are a few helpful tips that plan sponsors should consider during their end-of-year plan checkup.
Educate Employees About Their Retirement Benefits
If a new plan is rolling out on January 1, 2024, educate employees now; let them know how and where they can participate. For existing plans, remind employees about the retirement benefits available to them. The deadline for contributions to 401(k) accounts for 2023 is fast-approaching – generally December 31 for employer-sponsored retirement plans. For 2023, the 401(k) employee contribution limit is $22,500 ($30,000 if age 50 or over) and a combined $66,000 for employee and employer contributions. Encourage employees to contribute as much as possible within those limits. Also, if applicable, try to persuade employees to meet the employer match. Finally, it should be pointed out to the team that contributing more to their retirement plan can help them reduce their taxable income. Or that it adds more money into their Roth 401(k) balance, where the earnings are tax-free on withdrawal after specific requirements are met.
Review Employee Information
Employees’ information should be audited, including gaps or changes (e.g., mailing and email addresses, phone numbers, and plan statuses for new or former employees). It is also prudent to review participant accounts for missing beneficiary information, as this is an item that’s often overlooked during enrollment.
Send Required Plan Information and Notices
Plan sponsors are required to provide certain notices to employees about their plans, including participant fee disclosure information, participant benefit statements, and a summary annual report. Also, depending on the type of plan offered, one may have to provide additional annual notices by early December, such as a safe harbor 401(k) notice, a Qualified Default Investment Alternative (QDIA) notice, and/or an automatic enrollment notice.
Ensure 401(k) Contributions Have Been Deposited by the Required Deadlines
Timely deposit of employee contributions is a key fiduciary duty of the plan sponsor. Late deferrals can result in penalties, additional taxes, and/or an unplanned audit. A plan’s Form 5500, a federal compliance tool, asks if there were any late deposits of participant deferrals for the year. The DOL requires employee contributions and loan repayments to be deposited into the plan as soon as they can be reasonably separated from the employer’s general assets.
Gather the Plan’s Pertinent Documents and Records
During an end-of-year checkup, one will need to collect their plan’s documents. ERISA requires employers to keep records for at least 6 years. At a minimum, plan sponsors must maintain the following: summary plan descriptions, participant notices and documentation of the dates and methods of delivery, participant elections (both deferral and investment), payroll records, and employment history. Keep in mind that during an audit, one will also need to provide nondiscrimination test results, copies of Form 5500 (including attachments), and participant distribution forms, including special tax notices, election forms, and 1099-R forms. Documents such as the plan documents, amendments, and IRS determination letters must be kept for the life of the plan and at least 6 years past the plan’s termination date.
Think About Profit-Sharing Contributions
Consider providing profit-sharing contributions, which can boost employees’ retirement savings without increasing their annual taxable income. Profit-sharing contributions have many employer benefits, as well, in that they are tax-deductible, benefit all employees (even those not actively contributing), and may be discretionary/changed from year to year depending on the company’s performance.
Review the Plan’s Fees
Plan sponsors have a fiduciary responsibility to only pay reasonable plan fees and expenses from plan assets. After all, even small excessive fee amounts each year can substantially reduce a participant’s nest egg over decades of saving. Establish and follow an objective process to make sure the plan’s fees and expenses are both reasonable and in line with benchmarks (e.g., other 401(k) providers and industry averages).
Perform an Overall Assessment of the Plan
An end-of year checkup should include an overall assessment of whether a plan is still a good fit for one’s company. Providing a competitive retirement offering is often essential to attracting and retaining employees. Focus on the measurable criteria below.
- Plan costs, including fees;
- Participant engagement;
- Investment performance;
- Fiduciary and compliance support;
- Employee and administration services; and
- Service level of your 401(k) provider.
If something seems amiss, it may be time to consider implementing changes.
Please contact us if you have questions about the information outlined above, our seasoned and experienced employee benefit plan professionals are here to help. You can also learn more about our Employee Benefit Plan Audit services by visiting our website.