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Your employees have been working for years, saving their hard-earned money in the company employee benefit plan for their future. Now they want their money out to enjoy the fruits of their labor. How do you ensure they get their money out of the plan and still meet all of the Internal Revenue Service (IRS), Department of Labor (DOL), and Employee Retirement Income Security Act (ERISA) requirements?
Distributions are an area where it's tempting to rely on your third party administrator (TPA) to issue distributions accurately, but remember that it is ultimately the plan administrator's fiduciary responsibility to ensure that distributions are being made in accordance with the Plan Document.
The following are a few common errors we find during our testing of distributions:
Each plan varies in the types of distributions allowed to be paid out to participants and how those payments can be made. The Plan Document includes the distribution options specific to each plan, so become familiar with it.
Some of the common differences between plans include whether:
Not all plans allow hardship distributions, but when allowed, they are a common area for mistakes. Employees are required to meet certain need-based requirements before qualifying for a hardship withdrawal, and an early-distribution penalty tax is assessed by the IRS. While a TPA often helps process the distribution, the IRS expects the plan sponsor to properly administer hardship distributions. Therefore, we suggest that documentation is retained for all hardship withdrawals. In addition, it is common for plans that allow hardship withdrawals to also require that employee deferrals be stopped for six months following the withdrawal. Many errors can occur in ensuring that employee deferrals are stopped and restarted on a timely basis. There are plenty of areas for mistakes so verify if your Plan allows hardship withdrawals and, if so, make sure you understand the various requirements.
When taking distributions, employees generally forfeit any balances in which they are not 100% vested. Employees are always 100% vested in their deferrals and any employer safe harbor contributions. For other employer contributions, the vesting schedule is included in the Plan Document and is generally based on the years of service worked by the employee. Verify that forfeitures are only being calculated on the appropriate types of contributions. While the TPA often calculates the forfeitures, it is important to review the calculation for errors, paying specific attention that the hire date is correct and that the years of service are being appropriately applied based on the definition within the Plan Document. Years of service can be credited based on a variety of methods, including the employee's anniversary date, the first of the year following the anniversary of the employee's hire date, or based on hours worked. Review the vesting schedule and the definition of years of service within your Plan Document to enable you to ensure that forfeitures are being calculated correctly.
Hopefully being aware of these common issues can help you dodge distribution disasters! Our dedicated, employee benefit plan team has significant experience auditing a wide variety of employee benefit plans, advising plan administrators, and helping implement best practices for plan operations over our long history. We would love to help you through any questions you might have regarding your plan. Please email or call us today at 503-697-4118!
Editors note: This post was originally published March 2018 and has been revamped and updated for accuracy and comprehensiveness.