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Compliance

An introduction to plan compliance requirements.

The links below are intended to provide an introduction to some of those requirements.  Select any of these topics to learn more.

For most employers, the plan is either subject to the requirements of Title I of ERISA, or exempt from those requirements, depending on the type of employer.  Plans maintained by private employers are generally subject to ERISA, with a handful of exceptions.  Learn more about these exceptions on our “Employer Eligibility” sheet.

Participant eligibility can depend on restrictions in the Code and/or ERISA, and restrictions in the design of the plan. 
 

In most cases, only employees are generally eligible to be included in the plan.  However, there are two possible exceptions. Review our “Participant Eligibility” information to learn more about these exceptions and additional participant eligibility guidelines.

Several non-ERISA plan considerations can be very important.  First, these plans are required to comply with applicable requirements of the Code but not ERISA.  When considering a document provided by a third party it is important to confirm that the document does not impose inapplicable ERISA requirements.
 

For additional plan document guidelines, review our “Governing Documentation” sheet.

Plan fiduciary’s responsibilities include helping select funds consistent with the demographics of the group and the investment strategy of the plan sponsor. In addition to selecting the funds offered under the plan, a plan sponsor also selects an investment option the organization uses when an employee fails to make an investment election on their own. This type of fund is called the “default fund” for the plan.

Contributions are generally categorized as employee or employer contributions.


Employee contributions may be pretax or after-tax contributions. Pretax contributions usually consist of matched or unmatched elective deferrals that reduce the current amount of taxable income. After-tax contributions usually consist of contributions to a designated Roth account in the plan and do not reduce current taxable income.


Employer contributions are made on a pretax basis and fall into the following categories:
 

  • Match — matches a percent or dollar amount of contributions made by the employee.
  • Profit sharing — contributions may change based on the operating profits of the plan sponsor.
  • Discretionary — employer can decide within certain limits, on an annual basis whether or not to contribute to the plan.
  • Forfeitures — occur when employees terminate prior to satisfying the plan’s vesting schedule. These amounts are generally used to offset future employer contributions or are reallocated at the end of the year to participants. The forfeitures must be used on an annual basis and should not be carried over from year to year.

There are three basic limits associated with contributions.
 

IRC 402(g) elective deferral limit

  • Statutory limit restricting the amount of employee deferrals an individual can make to a retirement plan.
  • Individuals age 50 or older may be able to defer an additional amount under an age-based catch-up limit.
  • Both limits are declared annually and indexed for COLA.
  • Deferrals in excess of these limits must be refunded by April 15th.

IRC 414(v) age-based catch-up limit

  • Individuals who are age 50 or over at the end of the calendar year can make annual catch-up contributions into 401(k), 403(b), SARSEP, and governmental 457(b) plans.
  • Elective deferrals are not treated as catch-up contributions until they exceed the annual 402(g) limit amount or the ADP test limit of section [401(k)(3) or the plan limit (if any)].
  • Plan participants must make catch-up contributions to a retirement plan via elective deferrals. Catch-up contributions must be made prior to the end of the plan year.

IRC 415(c) annual additions limit

  • Limits the total amount of employee/employer contributions that can be made to a plan sponsored by the employer.
  • Excess amounts must be returned to employees within twelve months after the plan year end date. However, the plan sponsor may be assessed a penalty if excess amounts are not refunded prior to 2½ months after the plan year end.

All three of these limits are indexed for Cost-of-Living Adjustments (COLA) and are declared annually. The contribution limits can be accessed from the IRS website at www.irs.gov.

Distributions are governed by specific rules outlined in the plan document, and generally fall into various categories. Each plan sponsor must determine the type of distributions allowed and stipulate those as specific provisions in the plan document.

                                                      

The “Distribution Restrictions” sheet provides a description of the more common types of distributions available.

Required Minimum Distributions (RMDs) are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that a participant reaches 72 (if born before 7/1/1949, 70½) years of age or, if later, the year of retirement. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 72 (if born before 7/1/1949, age 70½), regardless of whether the participant is retired.

 

The employer is responsible for keeping their plan in compliance.  This includes reviewing reporting to ensure participants have timely started their Required Minimum Distributions and consented to the payments. 

Vesting refers to the portion of the employer account the participant is entitled to receive. Participants are always entitled to 100% of their deferral and other employee contribution accounts. The plan document stipulates the annual requirement employees must meet to be credited with a year of service for vesting. For each year the requirement is not met, the employee does not receive credit for a year of vesting service during that year. It is critical that plan administrators correctly calculate the vested percentage each employee has in employer contributions made on their behalf.


To learn more, review our “Vesting” information.

Vesting schedules are used to determine the amount of ownership rights an employee has to employer contributions. Employees who do not meet the vesting schedule requirements as outlined in the plan document are not fully vested. These unvested amounts are retained by the plan as forfeitures when an employee takes a distribution from his/her employer contribution account. Forfeitures must remain in the plan and cannot be returned to the plan sponsor.
 

The plan document stipulates how forfeitures are managed. Two common options are listed below:
 

  1. Billing credit: allows employers to use plan assets from the forfeiture account to pay for future employer contributions made to the plan and/or pay plan expenses.
  2. Reallocation: provides for the forfeitures to be allocated to plan participants.

One of the fiduciary responsibilities of plan administrators is to properly manage forfeiture account assets. This can be done by:
 

  • Ensuring forfeitures are properly applied each year.
  • Using forfeitures in accordance with the plan document provisions on a timely basis.

The Department of Labor offers extensive educational materials, as well as legislative and regulatory updates, on their website: www.dol.gov/ebsa. It is a useful resource for ongoing education.