To assist employers correctly administer their 401(ok) plans, in 2022, Foley & Lardner LLP is authoring a collection of month-to-month “401(ok) Compliance Verify” newsletters. This text discusses a number of the insurance policies which can be essential for the correct administration of 401(ok) plans.
In June’s 401(ok) Compliance Verify, we regarded on the significance of understanding your 401(ok) plan’s definition of compensation and what to do when you had been making use of your definition incorrectly. This month we’ll check out 5 insurance policies or procedures which can be essential for correct 401(ok) plan administration.
Why is that this Subject Vital?
401(ok) plans are required to take care of a few of these insurance policies both by ERISA or below Division of Labor (DOL) steerage, and others, whereas not essentially required by regulation, are useful within the occasion of a DOL audit or participant litigation. Having clear insurance policies and procedures in place additionally helps workers concerned in plan administration do their job extra effectively by mapping out acceptable steps to take when varied conditions come up.
Usually, you possibly can acquire these insurance policies or procedures from varied plan distributors, similar to your 401(ok) plan administrator or your plan’s funding advisor. However, with respect to a few of these insurance policies, such because the cybersecurity coverage, you might want to achieve out to certified authorized counsel for help.
1. Mortgage Coverage
Why you want it: The prohibited transaction guidelines below ERISA and the Inner Income Code prohibit loans from a 401(ok) plan to plan contributors until the loans meet particular necessities. Sometimes, 401(ok) plan paperwork don’t embody all these necessities, so a separate mortgage coverage is required. This mortgage coverage then turns into part of the “plan guidelines” from a authorized perspective.
What’s usually included: Mortgage insurance policies are usually pretty detailed and complete, and usually cowl the next gadgets (amongst others):
- Guidelines relating to mortgage eligibility
- Mortgage charges
- Minimal and most loans quantities
- Permitted mortgage sources
- Variety of permitted loans
- Occasions constituting a mortgage default
2. QDRO Procedures
Why you want it: Beneath ERISA, each 401(ok) plan is required to determine written procedures for (1) figuring out whether or not a home relations order meets the definition of a professional home relations order (“QDRO”) below ERISA, and (2) administering distributions below QDROs. These procedures have to be utilized by the plan administrator to manage QDROs and a duplicate have to be offered to contributors and alternate payees after the plan’s receipt of the home relations order; nonetheless, it’s the DOL’s view that offering a duplicate of the procedures to the participant and alternate payees earlier than submitting a home relations order higher facilitates the purpose of well timed, environment friendly, and cost-effective QDRO administration.
What’s usually included: The DOL recommends together with no less than the next gadgets in a plan’s QDRO procedures:
- Listing of paperwork associated to the plan which can be out there to help in drafting a QDRO (for instance, SPD, plan doc, mannequin QDROs)
- Any cut-off dates set by the plan administrator for making QDRO determinations
- What steps the administrator will take to protect retirement belongings whereas making a QDRO willpower (for instance, will profit funds be delayed or suspended throughout this era?)
- How and when plan belongings shall be segregated for the participant and alternate payee
- The processes for interesting the plan administrator’s willpower as as to whether an order is a QDRO
3. Cybersecurity Coverage and Procedures
Why you want it: Cybersecurity has grow to be a current focus of DOL plan audits ever for the reason that DOL launched its cybersecurity steerage in April 2021. Throughout an audit, the DOL now asks plan sponsors to offer “all paperwork referring to any cybersecurity or data safety packages that apply to the information of the Plan.”
What’s usually included: The next is a non-exhaustive checklist of things that, primarily based on audit inquiries, the DOL expects a plan’s cybersecurity coverage to cowl:
- Entry controls and id administration for on-line techniques
- The processes for responding to a cybersecurity breach
- Diligence course of for assessing service supplier data safety protocols
- Cybersecurity consciousness coaching
- Encryption of delicate data transmitted, saved, or in transit
4. Lacking Participant and Uncashed Verify Procedures
Why you want it: Like cybersecurity, the DOL has positioned loads of give attention to lacking contributors and uncashed checks in current audits (see 401(ok) Compliance Verify #5), so you possibly can count on that the DOL will ask for these procedures in case your plan is audited. The DOL considers it a “pink flag” that the plan might have a lacking participant downside if a plan sponsor doesn’t have sound insurance policies and procedures for finding lacking contributors and dealing with uncashed checks.
What’s usually included:
- Procedures to stop lacking contributors, similar to a requirement that sure paperwork (similar to all SPDs and SMMs) embody an announcement reminding contributors to tell the plan of any modifications of their contact data
- Steps the plan will take to find lacking contributors (ex: first verify different employment information, second attain out to participant’s beneficiary, third use free digital search instruments, fourth use industrial locator service)
- Frequency that the corporate will rerun searches for contributors initially recognized as lacking
- Frequency that the corporate will audit participant census data and proper information errors
- Directions on the right way to report and monitor uncashed checks
- Procedures for reclaiming stale uncashed checks
5. Funding Coverage
Why you want it: Prior to now a number of years, there was an explosion of ERISA class actions claiming breaches of fiduciary duties associated to charges related to, and underperformance of, funding options in 401(ok) plans. This highlights the necessity for a 401(ok) plan’s funding committee to have clear procedures for choosing plan funding options and monitoring these decisions (together with charges) to assist keep away from, or defend in opposition to, claims that the plan’s funding options have been improper.
What’s usually included:
- Standards to think about when first deciding on a fund
- Standards to think about when deciding to exchange a fund
- Procedures for figuring out a professional default funding different
- Course of for monitoring funding fund and funding service supplier prices
- Proxy voting coverage
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