Tag Archive for: Notice

Print Friendly Version Print Friendly Version

Special Notice Requirements for 401(k) Discretionary Matching Contributions

“Can you explain the special written disclosure rules that apply to certain 401(k) plans that use a discretionary matching contribution formula?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Minnesota is representative of a common inquiry related to a discretionary matching contribution in a 401(k) plan.

Highlights of the Discussion

Sponsors using pre-approved plan documents for their 401(k) plans that apply a discretionary matching contribution formula must satisfy special notice requirements in years a match is provided. This requirement came about as a result of the Cycle 3 Restatement in 2022.

For businesses that elect to apply a fully discretionary matching contribution formula (i.e., where the rate or period of the matching contribution is not pre-selected) in their pre-approved plans, the IRS has made it clear that such plans still must satisfy the “definitely determinable benefits” requirement of Treasury Regulation Section 1.401-1(b)(1)(I). According to the regulation, a plan must provide a definite predetermined formula for allocating the contributions made to the plan. Consequently, any pre-approved document with discretionary matching contributions will have to have language that complies with the definitely determinable mandate, and adopting employers will have to

1. Provide the plan administrator or trustee written instructions no later than the date on which the discretionary match is made to the plan describing

  • How the discretionary match formula will be allocated to participants (e.g., a uniform percentage of elective deferrals or a flat dollar amount),
  • The computation period(s) to which the discretionary matching formula applies; and, if applicable,
  • A description of each business location or business classification subject to separate discretionary match formulas.

2. Provide a summary of these instructions to plan participants who receive an allocation of the discretionary match no later than 60 days following the date on which the last discretionary match is made to the plan for the plan year.

Example:

ABC Inc., has a calendar year, pre-approved 401(k) plan with a completely discretionary matching formula. For the 2023 plan year, ABC has decided to make a fully discretionary matching contribution on April 1, 2024. In this case, if ABC carries through with its intended matching contribution, the deadline to notify the plan administrator is April 1, 2024, and then the deadline to provide the participant communication is May 30, 2024.

Note that these requirements do not apply to pre-approved 403(b) plans as they are subject to a separate pre-approval process (Cycle 2) (See Q&A 11 of Q&As for 2nd Cycle Preapproved 403(b) Plan Providers).

As part of a prudent governance process, plan sponsors should work with their pre-approved document providers and recordkeepers to review their procedures surrounding their plans’ matching contributions to ensure compliance with these requirements. Some pre-approved document providers have sample communication language available for plan sponsors who give discretionary matching contributions.

Conclusion

Employers that use a pre-approved 401(k) plan and give discretionary matching contributions must satisfy additional administrator and participant communication requirements to satisfy the definitely determinable benefit requirement of treasury regulations.

© Copyright 2024 Retirement Learning Center, all rights reserved
Print Friendly Version Print Friendly Version

SIMPLE IRA Plan Annual Notices

What are the annual notice requirements for a SIMPLE IRA plan?

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans.  We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in New Hampshire is representative  of a common inquiry involving SIMPLE IRA plans.

Highlights of Discussion

By November 1 of each year, an employer that sponsors a SIMPLE IRA plan must provide eligible employees with two important notices:

  1. the Summary Description; and
  2. the Annual Deferral Notice (IRS Notice 98-4).

The Summary Description must include the following information:

  1. The name and address of the employer and the trustee or custodian;
  2. The requirements for eligibility for participation;
  3. The benefits provided with respect to the arrangement;
  4. The time and method of making employee elections with respect to the arrangement; and
  5. The procedures for, and effects of, withdrawals (including rollovers) from the arrangement.

If a plan sponsor established the SIMPLE IRA plan using either IRS Form 5305-SIMPLE or 5304-SIMPLE , he or she can fulfill the Summary Description requirement by providing eligible employees completed copies of pages one and two of those forms. If a plan sponsor used a prototype SIMPLE IRA plan document, then the information is obtained from the forms vendor.

The Annual Deferral Notice must include the following information:

  1. The employee’s opportunity to make or change a salary deferral choice under the SIMPLE IRA plan;
  2. The employee’s ability to select a financial institution that will serve as trustee of the employee’s SIMPLE IRA, if applicable;
  3. The plan sponsor’s decision to make either matching contributions or nonelective contributions and the amount; and
  4. Written notice that an employee can transfer his or her balance without cost or penalty if he or she is using a designated financial institution.

IRS Forms 5305-SIMPLE and 5304-SIMPLE have model Annual Deferral Notices that a plan sponsor can use to satisfy this requirement.

If the employer fails to provide one or more of the required notices he or she is liable for a penalty of $50 per day until the notices are provided.

Notification failures of this sort may be eligible for correction under the IRS’ Employee Plans Compliance Resolution System (EPCRS).

Conclusion

Sponsors of SIMPLE IRA plans must ensure compliance with the annual notification requirements for eligible employees or, potentially, face IRS penalties.

 

© Copyright 2024 Retirement Learning Center, all rights reserved