The plan sponsor/employer is ultimately responsible for ensuring that its retirement plan complies with the law in both form and operation. Accordingly, the plan sponsor should:
- communicate frequently with the plan’s service provider to ensure that all relevant data is provided timely and accurately,
- review the plan document annually to ensure the plan is operating according to its terms,
- make the service provider and other relevant parties aware of any changes to the plan right away, and
- develop a communication mechanism for exchanging information with the service provider.
The service provider should also timely communicate with the plan sponsor to confirm the data is current, accurate and complete.
What does the employer need to provide to the service provider?
The employer needs to give the service provider accurate information regarding the retirement plan. It’s important to share any changes made by plan amendments or restatements. For example, if the plan’s definition of compensation is changed, the employer should communicate this amendment to the service provider and the people determining deferral amounts, performing nondiscrimination tests or allocating contributions. The employer also needs to provide the payroll information that relates to the compensation definitions in the plan document. The service provider can’t deliver the correct reports if they don’t have accurate participant compensation amounts. Using incorrect compensation for a participant can affect many plan operations and correcting these errors can be costly.
What are some reports plan sponsors may receive and how could they be used?
The service provider and employer should meet and discuss the reports needed for the plan. The plan sponsor should communicate with the service provider to discuss these reports. The service provider may deliver reports on:
Contributions. Plan sponsors should have procedures in place to spot check plan provisions in operation, such as confirming that compensation and deferral limits are not exceeded.
Participant loans. This report shows outstanding participant loans and whether loan payments are current and lists loans in default. The plan sponsor would have to take action on any loans in default. The employer should also spot check new loans to ensure the participant’s account balance was adequate to support the loan and the payroll deduction repayments commenced timely.
Hardship withdrawals. Employers should use this report to verify they have the necessary documentation to support the withdrawals in the plan records. Sometimes the service provider handles the hardship withdrawals. In these situations, the plan sponsor should periodically ask the service provider for copies of the hardship withdrawal documentation. The plan sponsor should also use this report to monitor payroll systems to ensure the employee who took a hardship withdrawal doesn’t make elective deferrals for six months.
Required minimum distributions. Employers should receive a report from their service provider indicating the participants approaching their required beginning date for commencement of required minimum distributions.
What about updates to the plan document – what, if anything, does the plan sponsor need to do?
Plan sponsors can help themselves avoid plan document failures by establishing a practice of contacting their plan document provider to determine if any plan amendments are required. This contact should take place 2-3 months before the end of the plan year. To further avoid mistakes, make sure the plan document and Summary Plan Description match.
What should plan sponsors do if they find an error?
Plan sponsors should alert their service provider of the error. Most plan mistakes can be corrected using the Employee Plans Compliance Resolution System (EPCRS) - the sooner the mistake is corrected.