Administration June 13, 2022

PSNC 2022: Innovative Ideas for Plan Design

Creative plan design ideas can help retirement plan participants accumulate more savings and improve their overall financial wellness.

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Sometimes a participant request or special circumstance requires plan sponsors to be creative with plan design.

This was the case for ASM Research, as described by Tammy Lassiter, the firm’s human resources administrator, during the 2022 PLANSPONSOR National Conference in Orlando. Lassiter explained that a Muslim employee presented ASM Research’s retirement plan committee with an issue: The Islamic faith does not allow for interest to be earned on funds, and thus those who follow Shariah cannot participate in most 401(k) plans.

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The new employee was very concerned that she was automatically enrolled in the company’s 401(k). While it was an easy fix to change her deferral rate to 0%, there was no way for her to waive the employer discretionary contribution. With the help of its plan adviser, Sagemark Consulting, ASM Research made two plan changes: a religious exemption was added to the plan document to allow non-participation in the plan, and a Shariah-compliant fund was added to the fund lineup. This second change ensured that Muslim employees can participate in the plan and benefit from company contributions.

While these plan design changes were prompted by an employee’s specific issue, plan sponsors can also proactively adopt innovative ideas for plan design to help participants with accumulating retirement savings or overall financial wellness.

Led by Judy Faust Hartnett, managing editor of PLANSPONSOR magazine, Lassiter and Neal Stamper, corporate retirement director, financial wellness director, vice president and financial adviser at Graystone Consulting, a business of Morgan Stanley, discussed the following plan design options:

  • Directing participant contributions into an individual retirement account once they have reached the IRS limits placed on annual tax-advantaged plan deferrals;
  • Auto-enrolling employees into an emergency savings account;
  • Auto-enrolling participants making less than $40,000 a year into making Roth deferrals instead of a pre-tax deferrals;
  • Auto-enrolling employees into financial literacy education;
  • Implementing a waiting period after a retirement plan loan is paid back before a participant is allowed to take another loan; and
  • Adding a Roth conversion, or what is called a “backdoor Roth,” feature.

Stamper told conference attendees that they need to be cautious about directing participant contributions into an IRA once they have reached the IRS limits on elective deferrals because there are limits on individual income related to amounts that can be contributed to IRAs. “But, if participants want to contribute more, plan sponsors can suggest they put money into an IRA,” he said. “Those contributions might not be tax-deductible due to the income limits.” Stamper added that directing contributions in excess of the statutory limits to an IRA is a good idea if the plan sponsor doesn’t offer a nonqualified deferred compensation plan.

Regarding auto-enrollment into emergency savings accounts, Stamper said some recordkeepers allow for the plan sponsor’s payroll provider to send contributions to savings accounts that are not part of the retirement plan.

Stamper explained that the reason plan sponsors might want to auto-enroll participants making less than $40,000 into Roth deferrals is because of Roths’ tax advantages, which get less valuable the more income a participant makes.

Stamper said even if plan sponsors auto-enrolled employees into financial literacy education, participants might not engage. He suggested offering incentives to get them to use the education.

Implementing a waiting period after a retirement plan loan is paid back before a participant can take another loan helps to slow “revolving door” loans and stop the debt cycle for participants, the panelists explained.

A Roth conversion, or “backdoor Roth,” allows participants to convert savings that were contributed on a pre-tax basis to an after-tax account that will not be taxed in the future. This is especially helpful for high-income participants who are restricted by the IRS income limitations for contributing to Roth accounts. The IRS has no income limits on Roth conversions.

The panelists suggested that plan sponsors offer the backdoor Roths to the non-highly compensated employees first to determine whether they should offer them to highly compensated participants. Low use by NHCEs could affect nondiscrimination testing results for the plan.

On a final note, Stamper told plan sponsors that if their adviser or recordkeeper suggests an “automatic” plan feature, sponsors should consider the costs. In addition to costing the plan sponsor more in contributions—as auto-enrollment does—there could be additional sales costs for some automatic features. “It’s not necessarily a bad thing, just something sponsors should be aware of,” he said.

Compliance June 13, 2022

Understanding the IRS’ New Pre-Audit Letter Program

Attorneys say plan sponsors have a couple of strong incentives to identify and correct any compliance failures upon receiving a pre-audit letter under a new IRS program.

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At the beginning of June, the IRS announced a new pre-audit compliance program for retirement plans, under which its auditors will send a pre-audit letter to plan sponsors whose retirement plans have been selected for upcoming reviews.

Upon receiving such a letter, the plan sponsor has 90 days to identify and correct any compliance issues with their plans—and to notify the IRS of the corrective actions taken. Attorneys who have reviewed the terms of the pre-audit program say it presents plan sponsors with an important opportunity to self-correct issues in advance of their plan’s review.

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According to commentary shared by Peter Daines and R. Sterling Perkinson, attorneys with Kilpatrick Townsend, plan sponsors have “a couple of strong incentives” to take action to identify and correct any compliance failures upon receiving a pre-audit letter.

“The IRS’s announcement indicates that if a plan sponsor does not respond to the pre-audit letter within 90 days, it will move forward with scheduling an audit,” the pair explain. “But if a plan sponsor responds to the pre-audit letter, the IRS will assess whether to issue a closing letter or to conduct a limited or full scope audit.”

As Daines and Perkinson point out, the IRS has not actually provided guidelines as to how it will make this assessment, but it appears to the attorneys that plan sponsors will have some ability to avoid or limit a potential audit by responding to the pre-audit letter “in a way that demonstrates a commitment to voluntary compliance.”

“The IRS has indicated that it will assess sanctions for any compliance failures corrected under the pilot program (other than failures eligible for self-correction) based on the user fees for its Voluntary Correction Program (VCP), which currently has a maximum user fee of $3,500,” Daines and Perkinson explain. “VCP is not available to plan sponsors once they have received verbal or written notification of a pending audit.”

Ordinarily, the attorneys note, compliance issues discovered under audit, other than “insignificant” operational failures, are subject to sanctions under the IRS’ Audit Cap Program. The level of such sanctions will depend on the IRS’ assessment of the “nature, extent and severity of the failure.” According to the Kilpatrick Townsend attorneys, in any case, these sanctions tend to be significantly higher than VCP user fees.

“As a result, plan sponsors that receive a pre-audit letter should begin the process of assessing any compliance failures, taking any appropriate corrective actions, and preparing a summary of any compliance issues for the IRS,” they conclude.

Dannae Delano, a partner with the Wagner Law Group, shares a similar perspective regarding the pilot program. She notes that, under the pilot program, the IRS will send an initial letter to plan sponsors whose retirement plans have been selected for upcoming audits. This letter will explain that the plan has been identified for audit and that the sponsor has 90 days to identify and voluntarily correct any compliance issues with the plan and notify the IRS of the corrective actions taken.

“This is a welcome departure from the longtime voluntary correction principle that allowed voluntary correction only until the IRS had identified the plan for audit,” Delano says. “The IRS will evaluate whether to continue the program and/or include it in its EPCRS program at the end of the pilot program, the date of which wasn’t disclosed.”

Delano says the program, at least as described in the announcement, provides some powerful incentives to encourage plan sponsors to voluntarily comply in the 90 days following receipt of the initial letter. As noted by the Kilpatrick Townsend, the first of these is a potentially substantial reduction in the sanctions involved in the audit process.

“The announcement also indicates that if a plan sponsor responds to the initial letter, the IRS will determine whether to issue a closing letter or to conduct a limited or full scope audit,” she adds. “How it will make that determination has not been disclosed, but it appears that plan sponsors may have some ability to limit an impending audit or avoid an audit completely by responding to the initial letter in a way that demonstrates full compliance.”

According to Delano, plan sponsors that receive an initial letter should immediately contact their retirement plan advisers to begin the process of identifying compliance failures, taking any appropriate corrective actions and preparing a summary of the compliance issues and corrections made for the IRS.

“In addition, operational and plan document errors discovered by a plan sponsor should receive priority for timely correction to ensure any compliance issue can be resolved within 90 days of the receipt of an initial letter,” Delano concludes.

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