Sham Employment Terminations and Plan Distributions
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In This Issue - Headlines Compliance and Regulatory
Fiduciary and Plan Governance Insight: Studies, Research, Analysis, or Papers
Items of Special Interest to Advisers or Other Service Providers Automatic 401k Plan Features
Court and Legal
Cyber and Plan Security Article Summaries Compliance and Regulatory Sham Employment Terminations and Plan Distributions To receive a distribution from a qualified retirement plan due to severance of employment, a participant must have a genuine termination of their employment. Sham terminations can create compliance issues for the plan. Usually, qualified retirement plan assets can't be distributed until a specific distribution triggering event occurs, as defined in the plan document. Severance of employment is a common triggering event. However, processing a distribution based on a sham termination can lead to operational failures, risking the plan's qualification and potentially resulting in negative tax consequences for both the participant and the employer. Source: Retirementlc.com Early Preparation Tips to Streamline Your Employee Benefit Plan Audit Plan sponsors should consider their organization's employee benefit plan audit well in advance. Typically, audits cannot commence until spring, when recordkeepers supply the necessary audit package containing detailed reports on the plan's operations for the year. Here is a list of items auditors will require over the coming months, along with steps plan sponsors can take to prepare. Source: Withum.com Employee Benefit Question: Are Summary Plan Descriptions Supposed to Be Easy to Read? Navigating the intricacies of employee benefit plans can lead to questions that you may be reluctant to ask -- perhaps they seem too fundamental, or you're unsure how to start. This series addresses some of the most frequently encountered inquiries regarding employee benefits, empowering you to tackle the details with assurance. This article answers the question, "Are summary plan descriptions supposed to be easy to read?" Source: Employeebenefitslawreport.com Document Retention is an Employer's Duty, Not the TPA's It's crucial to clarify your third-party administrator's document retention practices, as they may not keep signed copies of plan documents, older versions, or those prepared by previous TPAs. Understand the scope of retention covered in your contract with the TPA and your ultimate responsibilities under ERISA. TPAs are responsible for document compliance from their engagement until they disengage, which includes drafting required restatements every six years, handling interim amendments, and any discretionary amendments the Plan Sponsor chooses to implement. Source: Klblawgroup.com The tax code for 401k plans includes non-discrimination tests to ensure that retirement plans do not disproportionately benefit Highly Compensated Employees over Non-Highly Compensated Employees. The testing process begins with the coverage test, as outlined in IRS Code section 410(b). If the coverage test is passed, or if adjustments are made to pass it, the Average Deferral Percentage test follows. The ADP test uses mathematical comparisons of participation and contribution rates between HCEs and NHCEs to assess potential discrimination in favor of HCEs. This article provides a basic review of the test. Source: Legacyrsllc.com New 401k Plan Requirements End Pre-Tax Catch-Up Contributions for High Earners On January 10, 2025, the IRS issued proposed regulations regarding age-based catch-up contributions for retirement plans. These contributions, which are available to participants aged 50 or older in 401k plans, allow for additional contributions beyond regular deferrals, regardless of other limits on elective deferrals. The proposed regulations are based on changes made by the SECURE 2.0 Act of 2022 and affect retirement plan participants, beneficiaries, employers, and administrators. Plan sponsors need to consider necessary design or operational changes, consult with plan administrators and recordkeepers for administrative updates, and seek advice from benefits counsel regarding implementation and required amendments to their plans. Source: Quadecircle.com »» Click here for more Compliance and Regulatory Material Fiduciary and Plan Governance "America First Investment Policy" Calls for Updated Fiduciary Standards The Trump administration issued a policy memo on February 21 directing the Secretary of Labor to establish updated fiduciary standards regarding investments in companies deemed as "foreign adversaries," particularly highlighting concerns about Chinese firms potentially using U.S. investments to develop technologies that could threaten national security. The memo instructs the DOL to revise fiduciary standards under ERISA concerning investment in public market securities of these foreign adversary companies, to safeguard U.S. investors' savings and promote American economic growth. Source: Napa-net.org »» Click here for more Fiduciary and Plan Governance Material Insight: Studies, Research, Analysis, or Papers How America Saves 2025 Preview: Five Key Takeaways Today, Vanguard offered a preview of its highly anticipated "How America Saves" research for 2025, with the full report set to be released this June. In 2024, participant outcomes showed impressive resilience, largely due to plan sponsors adopting automatic solutions and capitalizing on human inertia to guide decision-making. This is just one of several trends highlighted in the upcoming 24th edition of this annual analysis of retirement saving behaviors. This article reviews some key insights from the early release of the study. Source: 401kspecialistmag.com Study Reveals 401k Plans Boost Employee Retirement Engagement and Contributions The BrightScope/ICI Defined Contribution Plan Profile (2022) highlights the importance of automatic enrollment and employer contributions in 401k plans for encouraging retirement savings. Over one-third of large 401k plans utilize automatic enrollment, while nearly 90% provide employer contributions, which collectively help employees save more effectively. Sarah Holden, ICI Senior Director, notes that these features help overcome barriers to saving and support workers in building their retirement funds. The report also indicates that employers typically offer a diverse range of investment options in their 401k plans, with the average plan providing 29 investment choices, including domestic and international equity, as well as domestic bond funds. Source: Ici.org »» Click here for More Studies, Research, and White Papers Items of Special Interest to Advisers or Other Service Providers Plan Sponsors Driving 401k Industry Consolidation The Harvard Business Review article "The Consolidation Curve" highlights the trend of consolidation in fragmented industries, which is becoming evident in the defined contribution industry. As plan sponsors become more proactive, they are increasingly focusing on advisor due diligence and the request for proposals, leading to further consolidation among advisors, similar to the earlier trend with recordkeepers. Advisors that have been vetted and possess scale, technology, marketing, and branding capabilities will gain more influence as they are better positioned to compete for participant services against recordkeepers. Source: Wealthmanagement.com Automatic 401k Plan Features IRS Issues Proposed Regulations Regarding Mandatory Auto-Enrollment Under SECURE 2.0 The IRS has issued proposed regulations regarding the mandatory automatic enrollment requirements under the SECURE 2.0 Act of 2022, which builds on previous interim guidance from IRS Notice 2024-02. Starting with plan years after December 31, 2024, new 401k and 403b plans established after December 29, 2022, must include an eligible automatic enrollment arrangement. The recently proposed regulations clarify that a plan is considered established on the adoption date, irrespective of its effective date, and also provide guidance on how these automatic enrollment requirements will affect plan mergers and spin-offs. Source: Ktslaw.com Mandatory Automatic Enrollment Is Here Employers have long had the option to automatically enroll employees in their 401k or 403b plans to boost participation and encourage retirement savings. Due to the success of these automatic enrollment strategies, Congress has decided to make them mandatory. Starting in 2025, many plans that allow participants to make deferral elections will be required to automatically enroll their participants. This article reviews the key points regarding the new requirements. Source: Ferenczylaw.com »» Click here for more on Automatic 401k Plan Features Court and Legal An ERISA Journey for ESG Via American Airlines by Way of Utah? In 2025, U.S. district court decisions highlighted the ongoing debate over the permissibility of integrating environmental, social, and governance goals into ERISA-governed investing. Supporters of ESG investing can reference "State of Utah v. Micone," which upheld the Department of Labor's 2022 "tiebreaker" approach favoring ESG considerations. Conversely, opponents might cite "Spence v. American Airlines," which determined that the defendants violated their duty of loyalty by allowing proxy votes that supported ESG initiatives not focused on the financial interests of plan participants. Although both cases involve similar legal principles, they emerged in distinct contexts, with private litigation likely having a more significant influence on future fiduciary practices than the litigation surrounding the DOL's regulatory stance. Source: Wagnerlawgroup.com In late October 2024, the Eleventh Circuit Court of Appeals ruled in Romano v. Hancock Life Insurance Company that foreign tax credits generated from 401k plan investments in accounts owned by John Hancock Life Insurance Company are not considered "plan assets" under ERISA. Consequently, the Court determined that JHLIC was not a fiduciary under ERISA and did not violate any fiduciary duties or prohibited transaction rules by failing to pass these foreign tax credits on to its 401k plan clients. Source: Erisapracticecenter.com Court Greenlights ERISA Forfeiture Case Against Clorox The U.S. District Court for the Northern District of California has decided not to dismiss a class action complaint against The Clorox Company and its employee benefits committee concerning the 401k Plan. The plaintiff accuses Clorox of violating ERISA fiduciary duties by using plan forfeitures to offset non-elective contributions instead of lowering administrative costs for participants. The court previously dismissed the initial complaint but found the amended complaint adequately alleged breaches of loyalty and prudence under ERISA. The court noted that the plaintiff's claims of self-interest and lack of a reasoned decision-making process were plausible, allowing for an inference of liability based on motivations for loyalty and the thoroughness of decision-making for prudence claims. Source: Millerchevalier.com »» Click here for more Court and Other Legal Issues Cyber and Plan Security Cybersecurity and Your Retirement Plan The DOL has provided guidance on best practices for cybersecurity in retirement plans. While this guidance is not legally binding, it is essential for plan sponsors and fiduciaries to take it seriously. By implementing a robust data security and privacy protection policy, plan sponsors can significantly enhance the safeguarding of plan assets and create a strong defense against claims of negligence in protecting the plan and its participants. This article reviews a few key considerations to keep in mind. Source: Gct.law »» Click here for more on Cybersecurity Issues
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