Top Ten Considerations for Employee Benefit Plans and Procedures

1. Check Eligibility Conditions. Plan eligibility errors include both failing to enroll employees who are eligible and allowing ineligible employees to participate. To avoid eligibility errors, know the eligibility requirements specified in your plan documents and carefully monitor each employee’s employment status, age, and service. Give special attention to plan eligibility provisions in the event of an acquisition or merger that brings new employees to your business, and make certain that the terms of your plan documents correctly reflect your intention to include or exclude those employees from benefit plans. Revise plan provisions as needed to give credit for pre-acquisition service.

2. Rethink/Understand Compensation. Whether an item of compensation is included, and for what purposes, under a benefit plan should be carefully considered. Contributions and benefits can be easily miscalculated due to the improper inclusion or exclusion of certain types of compensation. Note that there may be multiple definitions of compensation used within a single benefit plan. For example, while a retirement plan may exclude overtime payments from the compensation figure used to calculate employer contributions to the plan, overtime payments must be included in the compensation figure used to identify highly compensated employees and to run IRS-required nondiscrimination tests for the plan. Common compensation errors involve the treatment of bonuses, overtime, nonqualified deferred compensation, or stock options, as well as paid leave. There are also specific IRS rules regarding the treatment of severance payments. Align your practice with the plan’s terms and ensure payroll codes are properly designated.

3. Watch for Delinquent Contributions. Employee 401(k) deferrals must be contributed to the 401(k) trust as soon as they can be reasonably segregated from the employer’s general assets each payday. If you have a welfare trust, amounts withheld from paychecks for welfare benefits also must be contributed to that trust as soon as reasonably segregated. Automate your deferral contribution process to the greatest extent possible, but understand no process can be completely automated. Assign responsibility for manual aspects of thedeferral contribution process to a suitable person (e.g., benefit specialist, controller, etc.), with a secondary person assigned to cover work absences.

4. Process 401(k) Hardship Distributions Properly. The rules governing hardship distributions from 401(k) plans are changing. Beginning in 2019, plan sponsors can choose to make additional funds available for hardship distributions, remove the requirement that a participant take any available plan loan before taking a hardship distribution, and/or eliminate the suspension of deferrals following a hardship distribution. In 2020, plans will no longer be allowed to suspend deferrals automatically following a hardship distribution (though participants still can elect to stop deferrals). Plan sponsors will need to work closely with their internal and external 401(k) and payroll service providers during this transition period to determine if and when these optional changes will be adopted, as well as to ensure that operations, plan documents, and information provided to participants are consistent and up-to-date. In addition, IRS guidance allows participants seeking a hardship distribution to self-certify that a hardship event occurred if the employer receives adequate information from the participant. Review the list of IRS requirements for self-certification and remind participants that they must be able to produce documentation about the hardship event if requested by the IRS.

5. Create a Prudent Process for Selecting Investments. Plan fiduciaries must make prudent investment decisions for plan assets, continuously monitor plan investments, and make adjustments when appropriate. For 401(k) plans that allow participants to direct the investment of their accounts, plan fiduciaries retain responsibility for making appropriate investment choices available, informing participants about the available choices and about the process for directing investment of their accounts, and determining the default investment alternative to be used if a participant does not provide investment direction. Establish a prudent process for regularly monitoring investments, hire experts as needed, consistently adhere to adopted investment policies and procedures, and carefully document investment decisions.

6. Protect Plan Data from Cybersecurity Risks. Data breaches are commonplace occurrences, even for employee benefit plans. Plans and plan service providers can hold identifying employment, financial, and health information. Plan fiduciaries have responsibility to safeguard plan data, whether held in paper or electronic files. Plan cybersecurity policies and procedures should be vetted and certified by cybersecurity experts. Employees who have access to plan data should be trained to protect data privacy and security. Define security obligations in writing with your service providers, including security measures, rules for sharing threat information, automatic breach notifications, and mitigation protocols if a data breach occurs.

7. Monitor Benefits for Employees on Leave. An employee’s leave of absence can raise a host of benefit issues. Employee benefit plan documents often include special provisions to address paid and unpaid leaves, and those provisions may vary based on the type of leave. For example, a military or educational leave may be treated differently than a leave covered by the Family and Medical Leave Act (“FMLA”). The FMLA includes requirements for continuation of medical coverage and special rules for pre-tax deferrals when an employee takes an FMLA-qualified leave. Insurance policies may include “actively at work” requirements that limit coverage. A 401(k) plan may provide for suspension of plan loan repayments during a medical leave or a qualified distribution during a military leave. Benefit terminations due to leaves of absence may trigger COBRA notices for group health plans and conversion options for life insurance benefits. These and other leave-related provisions can create a compliance minefield. Review leave policies and leave provisions in benefit plan documents to make certain that they are consistent with your practices and comply with applicable laws and regulations. Confirm that information provided about benefits for employees taking (or extending) a leave of absence is correct and complete.

8. Document Your Cafeteria Plans. A cafeteria plan enables participants to pay premiums, and possibly contribute to medical reimbursement, health savings or dependent care accounts, on a pre-tax basis. One important, and sometimes overlooked, requirement for a cafeteria plan is the requirement of a written plan document. Without a written document, there is no cafeteria plan and additional income and employment taxes apply. Likewise, penalties for failing to properly report and withhold such taxes apply. The written cafeteria plan document may need to be amended if the menu of available benefits or the approach to paying for those benefits changes. Confirm that you have a written document that accurately reflects the pre-tax premium and contribution options offered to your employees.

9. Analyze Your Severance Arrangements for ERISA and Section 409A Risks. Legal requirements for severance arrangements vary depending on the nature, scope, and structure of benefits provided. Severance arrangements requiring ongoing administration or sufficient employer discretion are subject to ERISA’s requirements for a written plan document, participant disclosures, annual governmental filings, claims procedures, and fiduciary duties. Severance arrangements also may be subject to Section 409A of the Internal Revenue Code. When Section 409A applies, payments must be fixed and generally may not be accelerated or delayed without triggering significant penalties. Understand which requirements apply to your existing severance arrangements, and consider the ERISA and Section 409A requirements when you implement a new severance agreement.

10. Assess Employment Taxes for Nonqualified Deferred Compensation Properly. A special timing rule provides that nonqualified deferred compensation is subject to employment tax upon vesting, regardless of when payment occurs. If this rule is properly implemented, subsequent earnings are not subject to employment tax. An employer’s failure to properly apply the special timing rule can unnecessarily increase employment tax liability for both the employee and the employer. Review any deferred compensation arrangements and make certain employment taxes are applied when benefits vest.

Employee benefit plan operations and plan documents require continued attention to stay in compliance with the applicable laws and regulations. By proactively reviewing their benefit plans, plan sponsors can avoid, or if necessary correct, plan errors and mitigate potential penalties.