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Monday, March 6, 2017

Why Use a TPA?


With the aging of baby-boomers, longer life expectancies, and a volatile investment market, employee retirement planning is more important than ever.  Among other things, that means having a good plan, properly invested and properly run. To achieve this, many employers should consider using a third-party administrator (TPA).

A TPA provides certain services to a plan.  Usually, use of a TPA is a good idea when the plan’s sponsoring employer is not large enough to have dedicated tax/ERISA personnel devoted to oversight of the plan.  This includes most employers with fewer than 5,000 employees.

A plan could also use a “bundled” provider.  With that model, the record-keeper/investment provider also does some of the administrative work (primarily testing, Form 5500 and tracking of vesting). Alternatively, with use of a TPA, the recordkeeping function is separated from the administrative function.  This prevents errors from going undiscovered, thereby being potentially worsened. 

In general, a bundled provider will do only what is required of a plan by its terms or the law.  When a good TPA is involved, however, they will also do what is prudent considering the situation.

Although cost should never be evaluated without looking at the extent and quality of services provided, fees are not necessarily higher when using a TPA.

In conclusion, as a plan representative, you are generally better off using a TPA instead of a bundled provider. A good TPA “bridges the gap” in plan knowledge for sponsoring employer personnel and is your watchdog in assuring that the plan is operated in a compliant manner.

Here is what you can expect a quality TPA to do:

  1. Provide thoughtful, appropriate and well considered plan design help
  2. Consider whether the sponsoring employer is part of a controlled group or affiliated service group
  3. Provide plan documentation that subsequently belongs to the sponsoring employer, rather than the investment provider
  4. Fill the gap in knowledge created by lack of trained plan personnel at the sponsoring employer by proactively pointing out plan issues
  5. Answer questions from the sponsoring employer’s personnel responsible for plan operations regarding the plan’s provisions and applicable law
  6. Scrutinize client-submitted data to make sure mistakes are minimized
  7. Facilitate routine plan transactions, such as participant loans and distributions
  8. Allocate contributions to participant accounts pursuant to terms of the plan document
  9. Track participant vesting
  10. Test the plan and apply required limitations:
    1. Actual deferral percentage (ADP) and actual contribution percentage (ACP) tests if the plan has 401(k) features, to determine whether deferral and matching contributions to highly compensated employees can be sustained
    2. General discrimination testing for any employer contributions required to be tested
    3. Coverage testing, if not all employees are covered by the plan
    4. Compensation ratio testing, if a modified definition of compensation is used under the plan’s terms
    5. Top-heavy testing, to determine whether minimum contributions and faster vesting are required
    6. Apply alternate methods of testing when results are not optimal
    7. Monitor limitation on participant deferral contributions ($18,000 or $24,000 if over age 50)
    8. Monitor limitation on allocations of contributions and forfeitures to an individual; generally $54,000 in a defined contribution plan, like a 401(k)
    9. Consult with the sponsoring employer regarding its tax deductibility of amounts contributed to the plan
  11. Prepare and facilitate filing of the plan’s annual report (Form 5500 series)
  12. Provide information to the independent auditors for the plan, if it is required to be audited
  13. Prepare other related tax forms, when necessary (such as Form 5330, Form 1099-R, etc.)
  14. Represent the client before the Internal Revenue Service and the Department of Labor when inquiries or examinations arise

For more information on using a TPA, or for general inquiries about compensation and benefits planning, contact your local Armanino expert.

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