TSC Translator - Summer 2021

Summer 2021

Welcome to our summer issue of the TSC Translator. In this edition you will find information regarding how to handle retirement plan eligibility rules for part-time employees (including new requirements from the SECURE Act), the impact a merger or acquisition can have on your retirement plan, and the importance of regular review of beneficiary designations.

We encourage you to contact your TSC consultant with questions you may have about items in this newsletter or for assistance on any of your retirement plan needs or questions. We will continue to provide topical updates throughout the year as legislation or regulatory changes occur and as annual deadlines approach. Thank you for giving TSC the opportunity to work with you to make your retirement plan successful.

Thinking about excluding part-time employees? Think about this.

Part-time employees can be excluded from an employer’s retirement plan, as long as the exclusion is written in the plan document. Without this provision, part-time employees become eligible to participate once they satisfy the plan’s eligibility requirements, just like other employees.

But putting a part-time exclusion in the document does not guarantee that part-time employees will be excluded from the plan.

The law requires that an employee must be eligible to enter a qualified plan after attaining age 21 and completing a “year of service.” The law defines a year of service as a twelve-month period during which an employee works at least 1,000 hours. In other words, part-time employees who work 1,000 hours in their first 12 months of employment or in a subsequent plan year must be eligible to participate – overriding the document exclusion.

And there’s more: The SECURE Act mandated that beginning January 1, 2021, employees who complete three consecutive 12-month periods with at least 500 hours of service in each must be allowed to contribute salary deferrals in their employer’s 401(k) plan. This means that employers will want to carefully track part-time and seasonal employee hours starting in 2021 and retain these records to determine if any of their part-time workers will become eligible for the plan starting in 2024.

This new requirement does not apply to employer contributions, though employers may choose to allow long-term part-time employees to participate in these sources. However, for employees who enter under this rule, all years with at least 500 hours will count for vesting purposes—including years prior to 2021.

For more information about plan eligibility, including for your part-time employees, please contact your TSC administrator.

Mergers and Acquisitions - How does this effect the retirement plan?

When one business is considering acquiring or merging with another, special attention must be paid to the qualified retirement plans maintained by either entity. Often, when an acquisition or merger occurs without considering their effect on the retirement plans, your available options can be limited and unintended consequences can be difficult to correct. With proper advance planning, employee benefit programs can be transitioned smoothly to the new combined organization with minimal impact to employees.

When there is a transaction in which one company purchases the stock of another company, the buyer takes over the entire operation from the seller and generally assumes all obligations related to that business. This also includes the seller’s retirement plan unless it is terminated before the transaction closes. Employees of the seller remain employed by the entity unless they are specifically terminated. It may be desirable to combine the retirement plans in this instance in order to save cost, but there are times when it may be best to maintain two plans. It depends on the goals and desires of the plan sponsor so it is highly recommended to have that conversation prior to the acquisition or merger.

When there is a transaction in which one company purchases another company’s assets but not the stock, the retirement plans are treated a little differently. The selling company’s plan stays intact and the employees of the seller are not automatically employed by the buyer. In this situation, the buying company will have some decisions to make as to whether or not to take on sponsorship of the selling company’s retirement plan. Typically, rather than take on sponsorship of the selling company’s plan, the buying company will amend its own plan to address the desired eligibility strategy for new employees hired as a result of the asset purchase. In order to avoid any disruption in retirement saving for affected employees, it is imperative to make a plan for this prior to the acquisition.

We at TSC understand that mergers and acquisitions are complicated and that they can present some unique challenges for employers. We are happy to work with your advisors and legal team to ensure that your retirement plan strategy is in place. We encourage you to contact your TSC Consultant as early in the process as possible to confidentially discuss your options.

What is the Form 5500 and why does one need to be filed annually?

Nearly every retirement plan is required to file Form 5500. This is an annual return containing information about the plan’s financial condition, investments, and operations. The Department of Labor and IRS share this information to compile data and may use it to select plans for audit.

There are 3 variations of this form: 5500-EZ for very small plans (usually one person owner only plans), 5500-SF for plans up to 100 participants, and 5500 for plans with over 100 participants. Large plans filing the full Form 5500 will have additional schedules and attachments including an audit report from a CPA. The 5500-SF and 5500 are filed electronically with the Department of Labor through the EFAST system while the 5500-EZ may be filed on paper with the IRS or electronically through the EFAST system. Forms 5500 and 5500-SF that are filed through the EFAST system become a public document and are posted on the DOL’s website.

The Form 5500 series is due by the last day of the seventh month after the end of the plan year. An extension can be applied for which would extend the due date an additional 2½ months. TSC prepares Form 5500 for you based on information provided to us on investment statements, the annual questionnaire and employee census. TSC also monitors the process and works with you to make sure it is filed timely.

The DOL also requires that a summary of the financial information on Form 5500 and 5500-SF be provided annually to plan participants no later than 2 months after the Form 5500 due date. This notice is called the Summary Annual Report (SAR) and is also prepared by TSC.

Why Now May Be A Good Time to Update Your Beneficiary Designation Forms

Beneficiary designation forms indicate who will receive an employee’s retirement plan assets when they die. Typically these forms are completed when an employee first becomes eligible to participate in the plan. While the named beneficiary may have been appropriate at the time the form was filled out, the employee’s relationships and circumstances may have changed - such as in the case of a marriage, divorce, the birth or adoption of a child, or the death of a named beneficiary. Not only can an outdated beneficiary designation result in an unintended outcome for a participant’s beneficiaries, but it can also create uncertainty and complications for the employer sponsoring the plan. It can even entangle the employer in a legal dispute between would-be beneficiaries. For this reason, TSC recommends that our clients have their employees update beneficiary designation forms on a regular basis. Also, it’s important to keep these completed forms in a secure location where they can be readily accessed when needed.

TSC would like to wish everyone a fun filled summer!