How Important Are Proper Termination Dates for Retirement Plan Compliance?

“We are a large, complex health care system that sponsors a 403(b) plan for all the 501(c)(3) members of our controlled group, of which there are many. We have some issues with recording the proper dates of termination of employment for retirement plan purposes. One problem is that the process of reporting termination dates is a manual one, and some of our managers are simply more efficient at it than others. In addition, since it is not a payroll item, termination dates are not fed to our recordkeeper each payroll as part of our remittance feeds, but instead as a separate, less-frequent feed from our HRIS system. Finally, we have a lot of rehires, as well as employees who transfer between employer in our controlled group. This has resulted in our recordkeeper failing to capture some termination dates.

Kimberly Boberg, Taylor Costanzo, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

You are certainly asking the correct question here, as there are varying levels of importance of retirement plan elements. For example, if you were having great difficulty tracking down lifetime employee contributions for 15-year catch-up purposes, the Experts might suggest not tracking that down and eliminating the 15-year catch-up election as an alternative.

But dates of employment are far from a minor element of a retirement plan; in fact, they are absolutely critical to retirement plan compliance. Termination of employment date is a key date for so many retirement plan provisions, such as small balance cashouts, eligibility for distributions, break in service rules for eligibility and vesting, required minimum distributions, post-employment 403(b) employer contributions, etc. Plan sponsors who don’t ensure that termination of employment dates are 100% accurate run the risk of disqualification or significant sanction upon audit.

Thus, the termination of employment date issue should be a high priority, and you should work with your IT department and your recordkeeper to ensure 100% accuracy. If that is not possible, you may wish to consider hiring a Third-Party Administrator, or TPA, to address termination date accuracy.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice. 

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