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Friday, January 15, 2016

Employee Benefit Plans: 5 Considerations


With 403(b) employee benefits plans, things can get complicated in a hurry. The rules are complex and ever changing, and the IRS and U.S. Department of Labor (DOL) cut nonprofits no slack for noncompliance, even unintentional errors.

With that in mind, consider these common problem areas that may require some extra scrutiny on your part:

1. Delays in Remitting Employee Contributions. According to the DOL, employee contributions must be remitted by “the earliest date that is reasonably possible to segregate the contributions from the employer’s general assets, but no later than the 15th business day of the following month.” Yet, for plans with greater than 100 eligible participants, some plan administrators mistakenly treat the “15th business day” rule as a safe harbor. The DOL warns that when contributions can reasonably be segregated in a shorter time period, a delay in forwarding the contributions—even a delay that does not exceed the maximum time period under the regulation—may result in a prohibited transaction.

2. Incorrect Definition of Compensation. Eligible compensation is thoroughly defined in the plan document, but problems occur when deferrals are not calculated in accordance with the definition of eligible compensation, such as not calculating deferrals on bonuses when the plan document defines eligible compensation as W-2 wages. This can happen when a third-party administrator or payroll processor is not up to speed on the plan’s definition of eligible compensation, or when the plan’s definition of eligible compensation is amended but the third-party administrator or payroll processor is not notified.

3. Not Providing Universal Availability. Under the “universal availability rule,” the types of employees who may legally be excluded from a 403(b) plan are much more limited than with a 401(k) plan. For example, a nonprofit cannot impose a minimum age or service requirement in order to make deferrals.  In addition, as the plan sponsor, you are ultimately responsible for notifying eligible employees of their ability to make or change an election to contribute to the 403(b) plan at least once per calendar year.

4. Failure to Benchmark Fees. As the plan sponsor, you have a fiduciary responsibility to determine the reasonableness of all fees paid to outside service providers (e.g., a third-party administrator or investment advisor), including investment fees. This entails benchmarking or otherwise comparing those fees against industry norms. You will need to also evaluate the need to make a change in your service provider relationships if fees are too high.

5. Confusion Over “Orphan Accounts”. An orphan account is a 403(b) account held by an employee, former employee, or beneficiary that was not a part of your organization’s 403(b) plan as of January 1, 2009. These are typically employee accounts held by investment providers—such as an annuity contract with an insurance company. Starting in 2009, 403(b) plans are subject to the same financial reporting rules that apply to 401(k) plans. However, for purposes of the plan's annual reporting (IRS Form 5500) and related audit requirements, if certain requirements are met, these accounts do not need to be treated as part of the plan or as plan assets.

The Buck Stops With You
Many nonprofits rely on outside service providers to maintain their employee benefit plans. Unfortunately, outsourcing the operation of your retirement plan does not relieve your organization of liability for noncompliance. The bottom line is that the plan sponsor is always responsible for the plan’s operation.

For more information on how we can address your nonprofit’s 403(b) employee benefits plan questions or concerns, contact your local Armanino nonprofit expert.

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