PS Coach | Published in October 2016

Year-End Compliance

Planning ahead to prevent mistakes

By Judy Faust Hartnett | October 2016
Art by Aimee Chang
As 2016 winds down, plan sponsors are tasked with providing required notices to employees, documenting plan administrative changes and ensuring they comply with any new regulations, so as to meet year-end deadlines and remain a qualified plan. According to sources, some of these tasks are now simpler than they once were. “To the extent that there have been fewer legislative directives and developments in recent history, I think that has simplified the year-end compliance process,” says Lisa Barton of Morgan, Lewis & Bockius LLP in Boston.
Whether because of government paralysis or an intentional effort, few congressional regulations or little regulatory guidance has been set forth requiring interim plan amendments of any level of complexity over the last few years, says Jeffrey Robertson, a partner at law firm Barran Liebman LLP in Portland, Oregon.
Year-end compliance has become easier and more plan-sponsor-friendly, Robertson agrees, giving much of the credit to volume-submitted documents.
“We have more volume-submitted documents with a little more flexibility than we used to in the prototype world, where every variation was a challenge. We don’t have as many individually designed documents, and we [can adjust] documents to fit what we need,” Robertson says. “You can practically put out the same form, changing just a few pieces of information each year, rather than creating a new form each year.”
Getting Started
How does the year-end assessment process begin? According to Barton, “It depends on the size of the plan and who is involved. At a minimum, the plan sponsor would check in with its recordkeeper because many of the notices will be recordkeeper-generated. The plan’s attorney often helps with amendments or customizing notices. But the recordkeeper has a handle on all of the timing of the notices, and a record of what has been amended and what has not.”
The plan sponsor is ultimately responsible for keeping a plan in compliance, but if the sponsor is unsure of what it needs to complete, it should carefully review the respective recordkeeper, attorney and adviser agreements. It should clearly outline what each party does. Robertson says, “Oftentimes, plan sponsors have not read their agreements and may assume that a provider covers something that is clearly spelled out; however, the provider isn’t doing it.” The Internal Revenue Service (IRS) has no sympathy for the plan sponsor in that situation, he points out.
Sources remind sponsors of a few areas to keep in mind:
General plan amendments. Discretionary regulations may be adopted at any point during the plan year, but plan sponsors need to check that all amendments introduced in a plan year have been adopted and documented by the end.
If plan design or administrative changes were made, such as adding an automatic feature, or if any plan language has changed, such as the definition of payroll, plan sponsors need to make sure these changes are reflected in all appropriate documentation before year-end to avoid incurring a late amender issue.
Year-end notices. Year-end notices to employees typically need to be distributed at least 30 days before the end of the plan year and no more than 90 days before the start of the new plan year. These would include fee disclosure notices, notices of required minimum distributions, safe harbor notices and qualified default investment alternative (QDIA) notices, if they apply. Some plan sponsors, although not required to, include deferral limit notices for the coming year along with the packet.
Robertson says, “It’s good to bundle the notices together, so [sponsors] don’t have to incur fees [by] sending multiple filings. Most providers are prepared to send them all together.”
On year one of a required distribution, the distribution must generally take place by December 1. For each year afterward, the distribution must generally occur by April 1.
Technically, a summary of material modifications needs to be sent out within 210 days following the end of the plan year in which the change occurred. Often, year-end is not the time people think about summary material modifications, yet most of Barton’s clients prefer to include all notices together to save on distribution/mailing charges.
Annual Year-End Tasks

By the end of the year, plan sponsors need to have made actual deferral percentage (ADP) corrections, if they did not meet the initial March 15 ADP deadline. A 10% excise tax is required for an end-of-year extension.
Check to see that all required distributions have been made and that everything is set for the April 1 distribution, Barton says. “Because many participants go missing, it’s a good time to evaluate and get a head start on looking for them. Better to identify [any of those people or issues] now than in March,” Barton says, advising plan sponsors to check in with their providers.
Not only do all necessary distributions need to be sent to participants, but also plan sponsors need to confirm that the distributions have been cashed out. “The limbo status does not work anymore for the Department of Labor [DOL],” Robertson observes. “The question is: ‘What are plan fiduciaries doing that is prudent in relation to dollars that are sitting in a check?’ We’re not seeing it in guidance, which would be helpful; we’re seeing it in audits and inquiries where the DOL is asking, ‘Does a plan sponsor have a policy in relation to uncashed distributions, and how is that prudent oversight of plan assets?’”
Have plan sponsors made their qualified nonelective (QNEC) contributions, or are there any more contributions they need to make by the end of the year? This depends on how a plan is governed and designed.
If an account balance of a participant no longer working for a company is less than a certain amount—e.g., $1,000 or $5,000—many plans cash out the account or roll it into a safe harbor individual retirement account (IRA). If the plan stipulates this as a rule, and the former employee is not moved out of the plan in accordance with plan terms, this is considered an operational failure. It is important to confirm with the recordkeeper that this is being done at year-end or another specific time of the year.
The timing of implementation of funds that may be on a plan’s watch list may be addressed at year-end.
If a plan change is being considered, most recordkeepers need a 90-day warning. If the sponsor is planning to implement a change first quarter, now is the time to tell its recordkeeper so the provider can build that into its schedule.
If the plan sponsor has acquired one or more companies and it wants to merge the plans, the recordkeeper needs 60 to 90 days’ notice.
Specific to 2016
If a plan sponsor is on cycle for a determination letter filing, this would theoretically be due on January 31, 2017. Revenue Procedure 2016-37, generally effective January 1, 2017, has fundamentally overhauled the determination letter program for tax-qualified individually designed plans and changes the requirements for when plan amendments must be adopted, under Internal Revenue Code (IRC) Section 401(b). Further, Rev. Proc. 2016-3 ends the remedial amendment cycle (RAC) system and replaces it with a new approach to the remedial amendment period. Plan sponsors should plan ahead to ensure they can file on time, as this filing requires an advanced notice to interested parties 24 days before the notice distribution.