OFFSETTING STAGNANT SALARIES WITH INCREASED BENEFITSWhile base pay remains a top consideration to attract and retain
employees, increasingly a strong benefits package is important as well. Towers Watson, a leading global professional services company, found in a recent survey that employers indicated they may allocate more funds for employee benefits because of only moderate pay increases in the coming year.
EMPLOYEE BENEFITS INSIDER | Summer ‘14
BENEFITS AFFECT HIRING
Some employers have reported that their benefits — or lack thereof — have prevented them from hiring certain employees. These employers are looking to improve their employee benefit packages and may need to allocate more to make them competitive.
Employees are increasingly listing benefits as an essential element of their job satisfaction. According to Towers Watson, employees are more likely to prioritize retirement guarantees over pay increases by a greater than 3-1 margin.
In fact, the loss of benefits is a bigger concern than the loss of a job. In Gallup’s annual Work and Education poll, 40% of employees surveyed expressed concern that their benefits will be cut in the near future. That compares to 28% who fear they’ll be laid off, and another 28% who worry that their pay will be reduced.
WHAT BENEFITS MATTER TO EMPLOYEES?
Studies have shown that benefits play a large role in employee satisfaction. What are some reasons to offer employee benefits that
MORE LIKELY TO
GUARANTEES OVER PAY
INCREASES BY A GREATER
THAN 3-1 MARGIN
IN FACT, THE
BENEFITS IS A
THAN THE LOSS
OF A JOB
in turn, can benefit employers? Here are a few:
TAX CREDITS. If employers offer health care plans that include dental or company paid premium life insurance plans, these expenses can help at tax time. For example, small employers (less than 25 full-time workers with average wages less than $50,000) who pay at least half of their employees’ health insurance premiums can use tax credits where premiums are paid for health and life insurance and dental and vision plans.
ATTRACT TALENTED AND LOYAL EMPLOYEES. Offering an employer match can help attract and retain talented and loyal employees. For example, employees or potential employees who participate in their employers’ qualified plan will increase whatever they contribute by a fixed percentage, thus increasing their personal benefit. Inform employees about the cost of the benefits you offer, including the total cost incurred for the benefits and how they factor into their total compensation package. This will illustrate how much you’re investing in them.
LOWER TURNOVER RATE. By offering a competitive mix of salary and benefits to employees, employers may see less employee turnover.
BENEFITS EQUAL SECURITY
Employees are looking for more security in their retirement benefits. By offering a competitive benefits package, employers will have a better chance to attract and retain the key employees they need.
FOR MORE INFORMATION ON HOW TO ENHANCE
YOUR EMPLOYEE BENEFITS PACKAGE, SPEAK WITH
ONE OF OUR EBP SPECIALISTS:
ZACH HUTCHERSON,CPA, MBA P: 423.702.8150
IS IT TIME TO REVIEW YOUR 401
PLAN?Plan sponsors have a fiduciary responsibility to ensure that their
qualified plan complies with all current employee benefits laws and regulations. In addition, they must make certain that the plan functions within the plan’s current provisions. One of the most effective ways to do this is for plan sponsors to review the plan annually.
To assist plan sponsors, the IRS has prepared a 401(k) plan checklist. The checklist summarizes major compliance issues; however, the IRS doesn’t intend for plan sponsors to use it as a comprehensive guide. It provides general definitions, examples and methods for correcting possible errors.
Because of the complexity of various plan provisions and correction methods, plan sponsors should consult their benefits specialist or visit the IRS website for additional information.
10 IMPORTANT COMPLIANCE AREAS
When focusing on important compliance areas, consider these 10 questions: (Check yes or no)
1. HAVE YOU UPDATED YOUR PLAN TO REFLECT RECENT LAW CHANGES? Some regulatory changes offer optional benefits while others provide for a mandatory change for all plans. The new laws also provide additional benefits and protection to plan participants. For example, the Pension Protection Act (PPA) allows participants to roll over distributions to a Roth IRA.
2. IS THE PLAN OPERATING ACCORDING TO THE PLAN DOCUMENT’S TERMS? Even though a plan may have several advisors, ranging from third-party administrators to ERISA attorneys, the plan sponsor is responsible for ensuring that the plan complies with all laws.
When the plan sponsors change a plan provision, they must take appropriate steps to ensure that the change functions properly. Some questions to consider include: Was a plan amendment required? Were plan advisors made aware of the changes? Were plan participants notified of the change? Work with colleagues and advisors to make the necessary
changes and adjustments where appropriate.
3. IS THE PLAN’S DEFINITION OF COMPENSATION FOR DEFERRALS AND ALLOCATIONS USED CORRECTLY?
The plan defines what income is “compensation” for plan purposes and usually states whether the definition includes items such as fringe benefits and bonuses. The IRS has set a cap on the total compensation permitted for contribution purposes. The 2014 cap is $260,000.
Plan sponsors should know the annual deferral limits and what limit the plan allows. For example, some plans allow maximum deferral contributions following the IRS regulations, while some plans cap the deferral limit for employees.
4. WERE EMPLOYER-MATCHING CONTRIBUTIONS MADE TO APPROPRIATE EMPLOYEES UNDER THE PLAN’S TERMS?
The plan’s terms will set eligibility requirements, hours of service rules and entry dates for determining who receives employer-matching contributions. Plan sponsors must use the contribution formula in the plan document. The definition of compensation comes into play to properly calculate contributions.
5. HAS THE PLAN SATISFIED THE 401(K) PLAN NONDISCRIMINATION TESTS (ADP AND ACP)? The plan administrator must test the plan annually to determine the ratio between contributions by non-highly compensated employees and highly compensated employees to ensure that the plan isn’t solely benefiting highly paid employees.
6. WERE ALL ELIGIBLE EMPLOYEES IDENTIFIED AND GIVEN THE OPPORTUNITY TO MAKE AN ELECTIVE DEFERRAL?
The plan outlines when an employee becomes eligible to participate in the plan. This generally includes a combination based on age, service and hours worked. The plan sponsor can’t deny any employees the opportunity to defer so long as they meet the plan requirements.
7. DO ELECTIVE DEFERRALS MEET THE IRS LIMIT FOR THE CALENDAR YEAR, AND DID THE PLAN DISTRIBUTE EXCESS DEFERRALS? The IRS limits the amount a plan participant
EMPLOYEE BENEFITS INSIDER | Summer ‘14
can defer into the plan. Participants age 50 or older can make a catch-up contribution, if allowed by the plan document. If a participant defers more than the allowable limit, the plan administrator must withdraw the excess deferral from the participant’s account by April 15 of the year following the year the excess deferral occurred.
8. DID THE EMPLOYER TIMELY DEPOSIT EMPLOYEE ELECTIVE DEFERRALS? The employer is responsible for timely depositing elective deferrals. The Department of Labor (DOL) requires the employer to deposit deferrals as soon as reasonably possible, but no later than the 15th of the following month. For plans with fewer than 100 participants, the DOL mandates a seven-business-day safe harbor rule. If the employer fails to make timely deposits, the plan may have engaged in a prohibited transaction and the IRS may disqualify the plan.
9. DO PARTICIPANT LOANS FOLLOW PLAN DOCUMENT REQUIREMENTS? The plan document will outline the rules for plan loans, and if allowed, the loan’s parameters. Plan administrators must follow the plan’s loan provisions to avoid a prohibited transaction.
10. DID THE PLAN ADMINISTRATOR FOLLOW HARDSHIP DISTRIBUTION RULES? The IRS allows hardship distributions for immediate and heavy financial need. If a plan uses the “facts and circumstances” provisions, the employer determines if a hardship qualifies. Under the safe harbor approach, the IRS outlines six cases in which a participant qualifies (medical, tuition, funeral, primary home damage, eviction and home purchase). The calculation and required documentation for hardship loans can be complex, so it’s important to follow the plan’s provisions to avoid penalties.
BEYOND THE CHECKLIST
Retirement plans are complex, and plan sponsors should understand the questions presented in this article in addition to all other plan document provisions. Plus, as plan fiduciary, you must also periodically review your hired advisors, plan fees and investment allocations. You can find the IRS checklist and more information on the IRS’s website, http://www.irs.gov.
STRATEGIES TO BOOST 401
According to the Department of Labor (DOL), about one-third of eligible employees don’t participate in their employer’s 401(k) plan. But 401(k) plan participation benefits both employees and employers. Fortunately, there are strategies to help increase participation numbers.
WHY PARTICIPATION MATTERS
For many employees, their 401(k) plan is their only source of income to supplement Social Security benefits. Those who don’t participate in a 401(k) plan may have to depend solely on Social Security, which likely won’t allow them to live their desired retirement lifestyle and may not even be enough to fund basic expenses.
Optional 401(k) plan features can offer further employee advantages. For example, 401(k) plans can allow employees to direct their own investments and provide them with access to their funds during times of financial hardship.
In recent years, many workers have seen a decline in their 401(k) accounts. This may be due to investment losses or to hardship distributions they took to pay for mortgages, medical bills or tuition. By continuing to participate, employees can rebuild their 401(k) accounts for retirement and have money set aside for emergencies. For employers, if more employees contribute to the plan, the plan assets will be larger, and certain plan investment and operation fees may be reduced.
In addition, retirement plan participation can help employers attract and retain high-level employees. Unless the employer makes minimum contributions in a safe harbor 401(k) plan (see “Qualified automatic contribution arrangements” below), a 401(k) plan must pass an annual nondiscrimination test. This test ensures that highly compensated employees (HCEs) aren’t participating in the plan to a greater extent than the non-HCEs are.
Changes to federal pension laws in 2006 made it easier for 401(k) plans to automatically enroll their employees and for new hires to have a set amount of pay deferred into their retirement plan unless they opt out. According to Aon Hewitt, a global provider of human resources consulting, 401(k) plans with auto-enrollment have average participation rates of more than 85%, compared to 67% for plans without auto-enrollment. Employers have different options when setting up automatic enrollment:
401(K) PLANS WITH
RATES OF MORE THAN
85%, COMPARED TO 67%
FOR PLANS WITHOUT
QUALIFIED AUTOMATIC CONTRIBUTION ARRANGEMENTS (QACAs).
A QACA is an automatic enrollment provision with certain employee and employer contribution requirements that exempt the plan from annual nondiscrimination testing requirements, making it a “safe harbor” plan. The employee deferral rate must be at least 3% of compensation to start and increase to at least 6% (but no more than 10%) of compensation by the fifth year of participation. Employees always have the option to change the contribution rate. Automatically enrolled employees who don’t complete an investment election form will have their money put into a default investment.
Sponsors are required to provide annual notices for QACAs and qualified default investment alternatives. The notices must contain information about the arrangement and the default investment and explain an employee’s right to make changes through an affirmative election or to elect not to participate at all.
ELIGIBLE AUTOMATIC CONTRIBUTION ARRANGEMENT (EACA).
An EACA doesn’t require employer contributions, but it does require an annual notice. Although plans using an EACA aren’t exempt from nondiscrimination testing, the correction period for a failed test is
MORE WAYS TO BOOST ENROLLMENT
Automatic enrollment isn’t the only way to boost employee participation in your 401(k) plan. Some other effective ways to boost participation include:
REGULAR EMPLOYEE COMMUNICATIONS. Employers should provide employees with plan information even after the initial enrollment meetings to remind them of the plan’s specific features and the importance of retirement savings. Holding periodic enrollment meetings, frequently distributing enrollment forms and materials, and sending newsletters along with projected benefit illustrations for each participant can also help. It’s important to use both electronic and print media and to make sure the materials are easily understood by the average plan participant.
FREQUENT ELECTION PERIODS. If a plan allows participants to discontinue or change their elections frequently, they may be more willing to commit to higher deferral amounts. Plans can offer changes on a monthly basis, or even with each paycheck. However, balance the frequency of election periods against the plan’s administrative burden.
ADEQUATE INVESTMENT OPTIONS. Employers should offer a broad array of investment funds from which to choose. The opportunity to make frequent changes can create more enthusiasm for the plan.
GET A BOOST
Implementing these options can help you beat the DOL statistic and have more than two-thirds of your employees participate in your 401(k) plan. Consult your employee benefits specialist to learn more.
RANDY DUMMER, HHM’S EMPLOYEE BENEFIT PLAN
PARTNER, WOULD LOVE TO HELP BOOST YOUR PLAN
PARTICIPATION. CALL OR EMAIL HIM TODAY:
RANDY DUMMER,CPA P: 423.702.8394
THE HHM EMPLOYEE BENEFIT PLANNING TEAM
HHM has an experienced and knowledgeable team of Employee Benefit Plan Auditors. Let us help you streamline the process of preparing your Department of Labor (DOL) filing. The key to Employee Benefit Plan Audits is not merely producing financial statements. Our team thoroughly understands the process and can help you avoid problems with the DOL.
CALL THE HHM EMPLOYEE BENEFIT PLANNING TEAM