The Headliner

A periodic round-up of what’s happening in the Retirement Plan Industry

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Upcoming Deadlines for calendar-year Plans

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Cash Balance Plan Spotlight

This time of year, we often find ourselves especially intentional about retirement Plan design consulting – businesses may be contemplating the discontinuation of their SIMPLE in favor of a 401(k), those with an existing Plan may be amending a Safe Harbor provision or considering profit sharing…but nearly all Plan Sponsors we encounter are [already] thinking about their tax bill.

It’s not surprising, then, that in 2016, Cash Balance Plan popularity outpaced that of traditional 401(k) Plans 15 to 1! According to the same 2018 Kravitz study, companies with Cash Balance Plans contribute nearly 50% more to their employee’s retirement when compared to those with a 401(k) Plan alone – so not only can this advanced strategy provide a business owner with up to 4x more tax deduction and savings opportunity, it might just help their employees retire on time, too! Sounds like a win-win to us…

Still, quantifying the value is important – for most, it’s not a “win-win” until its proven in dollars and cents. (We think that’s the fun part!) And since now may be the perfect time to consider graduating from a SIMPLE or SEP arrangement, we’ve included a case study highlighting the value-for-cost of an advanced Plan option.

(This study is summarized with totals. The full version is available upon request.)

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	SIMPLE with 3% Match	401(k) Safe Harbor Match & Profit Sharing Plan + Cash Balance Plan
Owner’s Maximum Annual Savings:	$19,588	$373,500
Owner’s Deductible Deferral Contributions:	$16,000	$26,000
Deductible Employer Contributions to Owner:	$3,588	$347,500
Deductible Employer Contributions to Staff:	$10,063	$87,999
Total Deductible Employer Contributions:	$13,651	$435,499
Grand Total of all Deductible Contributions by Owner:	$29,651	$461,499
Hypothetical Tax Savings on Deductible Dollars at 38%:	$11,267	$175,370
Less contributions required to Staff:	($10,063)	($87,999)
Net Position:	$1,204	$87,371
Plan Design Efficiency:	66.06%	80.93%
	New Dollars Contributed:	$431,848
	New Dollars to Owner:	$353,912
	Efficiency of New Dollars:	81.95%

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Electronic Delivery Could Save Billions

On May 21, 2020, the U.S. Department of Labor and the Employee Benefits Security Administration (EBSA) announced the publication of a final rule that will allow employers to communicate the required retirement plan disclosures and other plan information electronically.

The rule finishes a 2018 DOL initiative aimed at reducing administrative burdens and costs associated with the delivery of retirement plan disclosures. EBSA projects that electronic delivery could save retirement plan sponsors an estimated $3.2 billion over the next 10 years by eliminating significant materials, printing, and mailing costs associated with furnishing printed disclosures.

As businesses face economic and logistical challenges due to the COVID-19 National Emergency, the rule brings much needed relief to plan sponsors and service providers while making disclosures more readily accessible and useful for America’s workers.

“A 2018 study concluded that 93% of households owning defined contribution accounts had access to, and used, the internet in 2016.”

Peter Swire and Debra Kennedy‐May, “Delivering ERISA Disclosure for Defined Contribution Plans: Why the Time has Come to Prefer Electronic Delivery – 2018 Update (April 2018)

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The rule allows two methods for delivering retirement plan disclosures electronically:

1. Website posting. Referred to as the Notice and Access model, administrators may post participant disclosures on a website if an appropriate Notice of Internet Availability (NOIA) is furnished to the electronic addresses of covered individuals. These documents must remain on a website until superseded by a subsequent version but never for less than one year. The NOIA must include a description of the covered document(s), the electronic address (or hyperlink to the address) where the individual can access the document, and a required statement that advises individuals of their right to opt out of electronic delivery and to receive free paper copies along with the administrator’s or a designated representative’s phone number. The NOIA must generally be provided each time a new covered document is available for review on the website. However, the final rule permits an annual NOIA to include information about multiple covered documents instead of requiring that plan sponsors provide multiple NOIAs throughout the year.
2. Email delivery. Alternatively, administrators may send required disclosures directly to the email addresses of plan participants. Required documents must be sent to participants’ email addresses no later than the date by which the document must be furnished under ERISA.

“A 2019 survey found that 90% of U.S. adults use the internet, representing a substantial increase from 2000 when 52% of adults reported using the internet.”

Pew Research Center, “10% of Americans don’t use the internet. Who are they?” (April 22, 2019)

Covered Individuals

The final rule allows the use of electronic media to furnish retirement plan disclosures to “covered individuals.” Covered individuals include plan participants (employees or former employees covered by the plan), beneficiaries (e.g., spouses and dependents covered by the plan), and other persons entitled to documents under Title I of ERISA who have provided the plan administrator or other appropriate designee with an email address or smartphone number. Electronic addresses previously provided to the plan administrator may be used without verifying the address if such reliance is in good faith and otherwise complies with the new safe harbor rule.

Covered individuals must be able to globally opt out of electronic delivery and receive paper copies at no cost to the individual. For administrative ease, the plan sponsor may continue to provide electronic copies in tandem with paper delivery. When a participant who has elected electronic delivery terminates employment, administrators must “take measures reasonably calculated to ensure the continued accuracy and availability” of electronic addresses used to deliver required documents, or take steps to obtain new, valid electronic addresses from plan participants.”

Additionally, the plan administrator must have a system for identifying bounce backs or delivery attempts to a covered individual that have been returned as “undeliverable.” If a bounce back is received, the plan administrator must promptly take reasonable steps to cure the problem by sending the NOIA or email to a secondary electronic address on file, obtaining a new valid and operable electronic address, or treating the covered individual as having globally opted out of electronic disclosures and distributing paper notices from that point forward.

Pre‐existing Electronic Delivery Rule

The new safe harbor is an additional option for electronic disclosure and does not replace the prior DOL e-disclosure rule that allowed for electronic delivery to those employees that were “wired at work.” The new safe harbor rule only applies to retirement plans (and is voluntary) and not employee welfare benefit plans, such as plans providing group health or disability benefits.

IRS Issues Additional Pandemic Relief

On June 29, 2020, the IRS issued Notice 2020-52 in response to the COVID-19 pandemic providing welcome relief to plan sponsors who are considering suspending safe harbor contributions and also to those who may already have regardless of whether the employer is suffering an economic loss. The notice is significant in that it permits employers who sponsor 401(k) plans to reduce or suspend their safe harbor contributions and redirect those funds to other, more urgent needs.

As a general rule, regulations require a plan’s safe harbor provisions to remain in effect for an entire 12-month plan year and prohibit mid-year plan amendments to those provisions that would reduce or suspend contributions. However, there are two exceptions:

1. If the employer is operating at an economic loss, or
2. If the plan’s safe harbor notice (due 30 days prior to the beginning of the plan year) includes a statement that the plan may be amended during the plan year to suspend or reduce safe harbor contributions (sometimes referred to as a “safe harbor maybe” notice).

In either event, a supplemental notice must be provided to all participants at least 30 days in advance of the effective date of the reduction/suspension. The plan then becomes subject to the normal non-discrimination testing for the year.

Notice 2020‐52 provides guidance in three main areas.

First, it provides relief related to COVID-19, allowing plan sponsors to adopt mid-year amendments between March 13, 2020 and August 31, 2020 to eliminate safe harbor matching contributions or mid-year nonelective contributions for the remainder of the year and be deemed to have satisfied the threshold for “operating at an economic loss” or providing the “safe harbor maybe” notice. The amendment must be adopted no later than the date that the reduction/suspension occurred. It is important to note that this special relief regarding the suspension of safe harbor contributions does not eliminate the requirement that the plan will become subject to non-discrimination testing for the entire plan year.

Secondly, it provides helpful clarification that sponsors can eliminate safe harbor 401(k) contributions for highly compensated employees (HCEs) only and retain the plan’s safe harbor status provided that the safe harbor 401(k) contributions continue to be made for non-highly compensated employees (NHCEs). A revised safe harbor notice should be delivered to the affected HCEs.

Finally, the Notice provides temporary relief to the 30-day advance notice requirement for suspensions or reductions to safe harbor nonelective contributions as long as the updated safe harbor notice is provided no later than August 31, 2020 and the plan amendment is adopted prior to the effective date of the suspension. Plan sponsors should keep in mind that the IRS continues to require at least 30 days advance notice for mid-year suspensions or reductions to safe harbor matching contributions; whether or not these contributions are provided can influence the employee’s decision to make elective deferrals.