EMPLOYEE BENEFIT PLAN RESOURCES
Newsletter by Hawkins Ash CPAs
In this Edition
May 20, 2021

Be on the Lookout for Partial Employee Benefit Plan Terminations

Tracking Plan Participants

Cybersecurity - What to Consider When Selecting a TPA
Be on the Lookout for Partial Employee Benefit Plan Terminations


As a plan sponsor, administrator, or trustee of an employee benefit plan, you are considered a fiduciary. Plan fiduciaries are subject to certain responsibilities which must be carried out in a prudent manner. One such responsibility of plan fiduciaries is to ensure that the plan is complying with the plan document, which serves as the foundation for plan operations. Failure to follow these basic standards of conduct could result in personal liability to restore any losses to the plan that are deemed to be the result of misconduct or failure to follow the plan document.

All qualified plans are required to include a provision in their plan document stipulating that upon full or partial termination of the plan, the rights of affected parties accrued to the date of such event and amounts credited to employees’ accounts are nonforfeitable. Although a complete termination of a plan is fairly obvious, a partial plan termination may not be so evident. If a partial plan termination occurs, all “affected employees” must be fully vested in their account balance or their accrued benefits, to the extent funded, as of the date of the partial plan termination. This includes becoming 100 percent vested in all employer contributions regardless of the plan’s vesting schedule. Now more than ever, this issue has become important as employers may have unknowingly created a partial plan termination due to cut jobs during the ongoing COVID-19 pandemic. 

A partial plan termination occurs when there is a substantial employer-initiated turnover of employees. This may be the result of a significant event, such as a plant or division closure or as a result of adverse economic conditions or other events that are outside the employer’s control. In Revenue Ruling 2007-43, the IRS established that a 20 percent or greater turnover rate during a plan year (or longer if there are multiple terminations over a period of time-related to a particular event) creates a rebuttable presumption that a partial plan termination occurred. The determination of whether a partial plan termination has occurred is a legal matter, and the IRS ultimately determines whether a partial plan termination has occurred with regard to all facts and circumstances in a particular case. In some cases, a partial plan termination may occur even when the turnover rate is lower than 20 percent, such as in the case of a division closure that results in less than this percentage.

Determining whether a partial plan termination has occurred, turnover rate, applicable period, and affected employees can be very complex. It is highly recommended that ERISA counsel be contacted when it appears that a partial plan termination may have occurred. Additionally, plan fiduciaries should consider the following safeguards:

  • Obtain a general understanding of partial plan terminations and the related rules
  • Become familiar with the plan document
  • Establish a written policy governing procedures for periodically monitoring employee turnover and reasons for turnover that may be indicative of partial plan terminations
  • Implement protocol for delaying the allocation of forfeitures if it is suspected that a partial plan termination may have occurred
  • Document the processes used to evaluate possible partial plan terminations, the conclusions reached, and any applicable action plans

The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, provided some relief from the partial plan termination rules during the COVID-19 pandemic. During any plan year which includes the period beginning on March 13, 2020 and ending on March 31, 2021, a plan shall not be treated as having a partial plan termination if the number of active participants covered by the plan on March 31, 2021 is at least 80 percent of the number of active participants covered by the plan on March 13, 2020.

In summary, plan fiduciaries need to be aware of their fiduciary responsibilities; including partial plan terminations in order to avoid the pitfalls that can result from such unforeseen circumstances.

Contact: Randy L. Juedes, CPA
Direct: 715.748.1346
Tracking Plan Participants

As a plan sponsor or plan administrator, you have a fiduciary obligation to ensure plan participants are receiving the benefits they had earned during their tenure. Participants often move, change contact information, or simply cut ties with their colleagues after retirement or terminating their employment status. This tends to exacerbate the difficult task of maintaining accurate contact and beneficiary information for the plan sponsor. The Employee Benefits Security Administration (EBSA) has taken serious action to ensure retirement plans remain in compliance with their fiduciary obligations in regards to dislocated participants. In 2020 alone, EBSA investigators aided in locating missing and non-responsive participants totaling $1.4 billion dollars in retirement benefits.
 
The plan sponsor is ultimately responsible for everything related to the Plan; taking additional steps to locate a participant may be necessary. However, it is important to make note of the participants’ account balance to determine the cost vs. benefit of locating the missing participant(s).

Plan sponsors should first identify the problem. If the Plan notices mail/emails coming back as undeliverable or outstanding benefit checks for an extended period of time, it is best practice to develop procedures necessary to correct the issue. To be proactive, plan fiduciaries can start by reviewing census information periodically to determine if any information appears to be incorrect. The Plan can also begin following up with participants, retired or still employed, to ensure that they are reviewing contact and beneficiary information periodically and updating their personnel files with any applicable changes. EBSA has recommended an easy way to remind participants to review their personal information by simply including a contact and/or beneficiary change form in with the next Plan change notification or update. Use simple, plain English to make the objective of any notices clear and concise. Including the original plan sponsors (employer’s) name and listing out the subject in the first couple of sentences may also prevent recipients from prematurely throwing the notice away due to the impression that it is junk mail. It can also be helpful to provide sources that the participant can make use of to update their information, such as toll-free numbers, a participant accessible website or login, and return envelopes for any hard copy documentation. 

If plan administration has identified a participant is no longer reachable with the information on hand, there are a number of solutions EBSA has provided. The first place to check is on other internal documents (with Human Resource or Payroll) to see if they had any more recent changes with those departments. Of course, checking with a close colleague of the missing participant to see if they had remained in touch over the years is always a good option too. Other sources of information could be beneficiaries, emergency contacts, social media, web browser search engines, or even local credit reporting agencies. Remember to document all the steps taken to locate the participant(s), along with any company policies or procedures created to help locate missing participants.

If the Plan has come to a point where it has exhausted all viable options to locate a participant, be sure that documentation of the attempts to contact the participant(s) is kept on file. It is an unfortunate conclusion to all the hard work performed, but it could save the Plan the time and scrutiny of a Department of Labor audit. As always, feel free to contact your Hawkins Ash representative for more information or any assistance you may need with regards to these issues.

Contact: Hunter Drake
Direct: 507.453.5975
Cybersecurity - What to Consider When Selecting a TPA

Plan fiduciaries are tasked with many responsibilities like selecting the best third party administrator (TPA) for the Plan. TPAs could include plan record keepers, trustees, or payroll providers. While each plan fiduciary will use different criteria when selecting the best fit for its plan, all fiduciaries should evaluate the cybersecurity practices for all providers.

On April 14, 2021, the Department of Labor (DOL) issued sub-regulatory guidance addressing cybersecurity practices of plan sponsors, plan service providers, and plan participants. This is the first guidance specifically addressing cybersecurity the DOL has issued. While it is not authoritative at this point, there are still some important factors that should be taken into consideration when selecting a TPA and when evaluating a plan’s current TPA.

The first section of the guidance that was issued includes, “Tips for Hiring a Service Provider with Strong Cybersecurity Practices.” It is recommended that the plan fiduciary or plan sponsor ask the service providers about their security standards and related policies. This could also include requesting and reviewing the TPAs security audit results to ensure they are following the standards and policies they have in place. Additionally, plan fiduciaries and sponsors should inquire about any past security breaches and how they were handled. They should also find out if the TPAs have specific insurance policies that would cover potential losses caused by a cybersecurity breach.

The second section of the guidance that was issued includes, “Cybersecurity Program Best Practices.” While this was specifically targeted to service providers, the DOL recommends plan fiduciaries and plan sponsors use this guidance when evaluating their current TPAs or any potential new TPAs. Some of the best practices listed include having a formal cybersecurity program, conducting annual risk assessments, having an annual third-party audit of security controls, and encrypting sensitive data while it is stored and while it is in transit. When selecting a new TPA or evaluating a current TPA, these best practices will most likely uncover more questions that the plan fiduciaries or plan sponsors should be asking.

The more information plan fiduciaries have when making decisions on their TPAs, the better. As more and more information is housed electronically, cybersecurity incidents are increasing over time. The fact that plans include a significant amount of confidential personal data for plan participants along with high dollar amounts of assets makes them potential targets of cyber-criminals. Plan fiduciaries have a responsibility to do what they can to properly mitigate cybersecurity risk and to protect their participants.

Contact: Rachel Burrow, CPA
Direct: 608.793.3114
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