Plan Sponsors Ask...Q4 2018

Q: What are the risks of losing track of a plan participant? There are a few people who remain “on the books,” in spite of trying many times to reach them.

A: That’s an important question because there are serious potential consequences. Losing track of a participant can be considered a breach of fiduciary duty, according to a 2014 Field Assistance Bulletin from the Department of Labor. Plan sponsors must be diligent in their attempts to contact participants with a vested account using a variety of tools, including certified mail, checking all plan and employer records, sending an inquiry to the designated beneficiary, and using free electronic search tools. In cases where the participant remains missing, the plan must consider additional methods of locating them, such as a commercial locator service, crediting reporting agencies, and investigation databases. If the plan fails to locate a participant and hasn’t taken proper steps to do so, there is a potential for the plan to be disqualified. We suggest you read more on this topic in the DOL’s Field Assistance Bulletin mentioned above (https://tinyurl.com/DOL-FAB-201401) in this IRS Employee Plans Memorandum (https://tinyurl.com/IRS-EP-memo), and in this letter to the DOL from the American Benefits Council (https://tinyurl.com/ABC-DOL-letter).

Q: We had two participants leave our company this year with outstanding 401(k) plan loans. We’ve heard the tax law passed in December 2017 may impact those loans. What can you tell us?

A: You heard right; there is a provision in the Tax Cuts and Jobs Act passed December 22, 2017, that affects plan participants who terminate employment with an outstanding loan. Before passage of the law, the loan would have been due immediately. Former employees who could not repay the loan within 60 days would have the outstanding balance deducted from their account balance and treated as a taxable distribution. The Tax Cuts and Jobs Act included a provision extending the repayment due date. Now, to avoid inclusion of the outstanding balance in taxable income, the loan must be repaid by the date the participant’s federal income tax is due. There are a few important housekeeping items associated with this change. If your plan allows loans, be sure to update the plan document, the plan’s loan policy and the required notice of rollover eligibility so they reflect the update.

Q: Sometimes employees ask us for advice about how much of their income they should be saving for retirement, how much they should already have saved, and how much they will need. Of course, we don’t give blanket answers. But we would like to pass along some resources, either directly or through our plan communications, so they can educate themselves. Can you suggest some?

A: We’re glad that you aren’t trying to give one-size-fits-all answers to these important questions, and that you’re interested in helping participants learn more. There are some great resources available online, and you may want to share them with your participants as you communicate about the plan. Be cautious in your communication, though, because the ideas presented by one provider or expert can vary widely when compared to another source. You do not want it to appear that you are endorsing any particular source — unless you have the backing of the plan’s counsel and a full understanding that that’s what you’re doing.

In a quick online search, we turned up resources from www.investopedia.com, www.nerdwallet.com, money.cnn.com, www.aarp.org, and The Motley Fool, among many others. Your plan provider likely has calculators available for participants, along with a variety of other tools. Take advantage of them. Even the IRS has resources that can help, at https://tinyurl.com/IRS-resources.