Welcome to Ask an Adviser, EBN’s new weekly column in which benefit brokers and advisers answer (anonymous) queries sent in by our readers. Looking for some expert advice? Please submit questions to askanadviser@arizent.com.
This week, we asked Amy Ouellette, SVP of retirement services at Vestwell, to weigh in on the following: The package of tests performed on our retirement plan each year is overwhelming, and the results contain a lot of technical information. How can I do a better job of understanding what's important and what changes should possibly be made?
Each year, your plan must be reviewed to ensure it meets IRS requirements to maintain its qualified (tax-preferred) status. These requirements include a number of tests that review whether the plan is offered to a sufficient population of your team, and that there is not a significant disparity between the benefits provided to different classes of employees. You hire someone to perform these tests, but there are a number of areas you can focus on to make the most of this process.
Let’s start with an accuracy review. Testing is performed based on data you submitted with every payroll to the recordkeeper at year-end — a full census request — or a combination of the two. Take a moment to understand whether the test package reflects:
Demographic data
Compared to your payroll, did testing consider all employees that performed services for the year? Are company owners and officers correctly reflected for the year? Even if not eligible for the plan, everyone needs to be considered when performing the testing.
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Compensation and contributions
Do totals align to your payroll system? Depending on your plan’s definition of compensation, comparing totals against your W3 and final payroll report with YTD figures can be a helpful place to start.
From there, consider: Is it clear from the package whether you need to take action? If not, ask! Failed tests require refunds or additional contributions in most cases, but if it’s not clear from the package you receive, you could miss some important deadlines. Be sure to focus on or do the following:
Approvals or submissions
Are there refunds that require you to approve them, or submit a form to process? If you have contributions to make, do you have the information you need on how to submit those (amounts, sources, process, deadlines)?
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Informing staff
If refunds are required, it helps to notify your employees about upcoming withdrawals from their account. Your provider may have template verbiage to explain why money is being returned and how it will be taxed.
Design changes
If any of the refunds or additional required contributions were unexpected, ask if there are design changes you might consider. Safe harbor contributions are a fixed expense that allow you to bypass certain tests, but require a commitment to the budgeted amount, typically 3-4% of eligible payroll. Are there exclusions in your plan (i.e., holding out certain employees) that are causing failures? To reduce complications, consider re-designing the plan to a less intricate one.
