Plan Sponsor Responsibilities: An Essential Guide

by: Aaron Epstein, QKA

Plan Sponsors receive significant support in managing and administering their retirement plans from TPAs, recordkeepers, financial advisors and accountants. However, the Plan Sponsors still retain overall responsibility for the plan. 

Below is a list of common tasks that must be performed by Plan Sponsors:

Providing Census Data

Plan Sponsors must provide accurate employee census data to their TPA. This data enables the TPA to perform the required compliance and administrative work for the plan. Census data includes dates of birth, hire, termination and rehire, hours of service, gross compensation and pension plan contributions. The Plan Sponsor should also notify the TPA about any corporate changes that might impact the pension plan, such as a change in ownership, merger or acquisition, change in corporate name or Employer Identification Number (EIN), change in legal entity type or trustee of the plan.

Tracking Eligibility

Plan Sponsors should be aware of the eligibility requirements of their plan. As employees come close to reaching the date when they can enter the plan, the Plan Sponsor should assist them in enrolling in the plan. The sponsor should provide new participants with the Summary Plan Description (SPD), Enrollment Booklet and instructions for how to enroll in the plan.

In addition to the plan’s eligibility requirements, plan sponsors need to be familiar with the Long Term Part Time (LTPT) employee eligibility rules introduced by the SECURE Act of 2019 and modified by SECURE 2.0 (2022). A helpful article to remind Plan Sponsors about the intricacies of this law can be found here: LTPT. Penalties are assessed if eligible employees are not given the opportunity to participate in the plan due to the negligence of the plan sponsor.

Timely Deposit of Employee Contributions and Loan Repayments

Plan Sponsors have a responsibility to their participants to timely remit employee 401(k) deferrals and, if applicable, loan repayments on the earliest date that the deferrals/loan repayments can reasonably be segregated from the employer’s general assets.  

The earliest date for depositing contributions is based on individual facts and circumstances—meaning the funds must be remitted as soon as the employer can reasonably segregate them from its general assets.

In general, for plans with fewer than 100 participants, the DOL provides a 7-business-day safe harbor rule; if the deposit is made within this timeframe, it is deemed timely, even if the employer could have made the deposit sooner. For larger plans (100 participants or more), the determination of timeliness is based strictly on the individual employer’s operational facts and circumstances, which often requires deposit within a few business days.

Failure to remit these amounts in a timely fashion will result in penalties and the requirement to make up “lost earnings” plus interest on those lost earnings through the date of the late remittance.  

Plan sponsors should review their internal procedures to ensure that amounts withheld through payroll deduction are being remitted as soon as feasible and that there are checks and balances in place to avoid any oversights.

Approving Distributions

Funds from the 401(k) plan can only be distributed to participants if a distributable event has occurred. Plan sponsors should be familiar with the distributable events that are defined in the plan document. 

Plan sponsors are also responsible for ensuring that all eligible employees receive their Required Minimum Distribution (RMD). With the changes introduced by the SECURE 2.0 Act, plan sponsors must stay current with the updated RMD requirements.

Retaining Plan Documents

Although the plan’s TPA and other service providers may keep copies of the plan documents, the IRS states that it is the responsibility of the plan sponsor to retain the plan documents since the inception of the plan. Plan documents include the Basic Document, Adoption Agreement and Plan Amendments.

Maintaining Beneficiary Forms

It is the plan sponsor’s responsibility to maintain the records of the original Beneficiary Election forms. They should distribute the Beneficiary Election Form with the Summary Plan Description to new participants in the plan and to any participants that do not currently have a form on file. 

Managing the Forfeiture Account

Beginning in plan years on or after January 1, 2024, a plan must use forfeitures no later than 12 months after the close of the plan year in which the forfeiture occurred. For example, if a forfeiture occurs in a calendar year plan in 2024, the forfeiture would have to be used by 12/31/2025. Plan sponsors can use forfeitures to 1) reduce employer contributions 2) enhance employer contributions or 3) pay plan related administrative expenses. 

Plan sponsors should review their plan documents to confirm that it provides for the 3 allowable options regarding how forfeitures may be used.

ERISA Fidelity Bond Coverage

Under Department of Labor (DOL) regulations, retirement plans need to maintain an ERISA Fidelity Bond. A fidelity bond protects the assets in the plan from misuse or misappropriation by the plan fiduciaries. Plan fiduciaries include the plan trustees and any person who has control over the management of the plan and its assets.

The required bond must be a minimum of 10% of the total plan assets' value. However, if the plan includes any non-qualifying assets, the bond amount must instead cover 100% of the value of those specific assets. 

The bond is also subject to a maximum, which is generally $500,000 for plans without employer securities and $1,000,000 for plans that hold employer securities.

Providing Annual Notices to Participants

The Department of Labor (DOL) requires that employers provide certain information to eligible plan participants and beneficiaries. These regulations help ensure that participants and beneficiaries have the information they need to make informed retirement planning decisions.

These Annual Notices include, but are not limited to:

• ERISA Section 404(a)(5) Fee Disclosure: Requires plan administrators to disclose detailed investment-related information to participants and beneficiaries at least annually. This includes anticipated expenses and fees charged to a participant’s account.

• Automatic Enrollment Notice: For plans with an automatic enrollment feature, the notice details the plan’s automatic enrollment process and participant rights.

• Safe Harbor Notice: For safe harbor plans, the notice provides details of the safe harbor feature.

• Qualified Default Investment Alternative Notice (QDIA): The QDIA Notice describes the plan’s default investment and the participants’ rights to direct their investments.

• Summary Annual Report (SAR): The SAR is a concise document summarizing the key financial details of the plan, including assets, expenses, contributions, and investment performance.

These annual notices are often prepared and distributed by the plan’s TPAs and recordkeepers. Check with your service providers to make sure that all the annual notice requirements are taken care of.

Be Sure to Use Your Plan's Forfeitures Before Year-End

by: Nicole Figliolo, CPC, QPA, QKA

What are plan forfeitures?

In a Defined Contribution plan, such as a 401(k), assets are considered forfeited when a participant separates from service before they are 100% vested. Since employee contributions are always 100% vested, forfeitures can only arise from employer contributions.

The nonvested portion of a participant’s account balance becomes a forfeiture at the earlier of:

1) Distribution of the vested account balance, or
2) The end of five consecutive one-year breaks in service.

If an employee terminates from employment and their entire account balance consists solely of unvested employer contributions, then under most plans’ rules, they are considered to have received a “zero-dollar cash-out” and their entire balance is forfeited immediately upon termination.

It is important to note that when a participant terminates and requests a distribution of their assets, any unvested money is forfeited upon distribution and moved to the plan’s forfeiture account. However if the participant is later rehired, they must be offered the option to repay the distribution and have the forfeited money restored to their account. If the plan’s forfeiture account does not have enough money to restore the participant (because forfeitures were used as described below), then the employer must make an additional contribution to make the participant whole.

What’s changed?

In 2023, the IRS published a notice of proposed rulemaking, notifying the public that they are planning to update the forfeiture regulations, which were last issued in 1963. Among other changes, the proposed regulations explicitly require all plans to use forfeitures within 12 months following the end of the plan year in which the forfeiture occurred. This timing rule has been included in preapproved plan documents for many years, however, the IRS recognizes that many plans have not strictly complied with it. In order to ease compliance, the proposed regulations have provided a generous grace period. Under the proposed rule, all forfeitures from 2024 or earlier will be considered compliant as long as they are used no later than December 31, 2025.

How are forfeitures used?

Depending on the plan document, forfeitures may be applied to:

1) Pay certain plan administrative expenses,
2) Reduce employer contributions, or
3) Increase benefits in other participant’s accounts.

The IRS has stated any violation would be considered an operational failure if only one use of forfeiture is selected and the forfeitures exceed the amount that can be used for that one purpose. Therefore, it is best practice to provide more than one method in your Plan Document.

Mandatory Roth Catch-Up

by: Kristin Tocket, CPC, QPA, QKA, TGPC

One of the most urgent and significant upcoming changes taking effect under SECURE 2.0 requires Highly Paid Individuals (HPIs) aged 50 or older to treat their catch-up contributions as Roth. Although this change was originally set to take effect in 2024, the IRS extended the transition period through the end of 2025. Employers must make a good-faith effort to comply by January 1, 2026, with enforcement of the final regulations beginning January 1, 2027. As these deadlines approach, plan sponsors should take practical steps to update their systems and processes and be able to document their progress toward meeting these new requirements.

Before addressing the operational impacts, it’s important to understand how HPIs are defined, and how they are not necessarily the same as a highly compensated employee (HCE) as defined for purposes of nondiscrimination testing. An HPI is determined solely by prior-year FICA wages as reported in Box 3 of the employee’s Form W-2. This may result in HPIs who are non-highly compensated employees (NHCEs) for testing purposes, and likewise, there can be HCEs who do not meet the FICA threshold to be considered HPIs.

For the 2026 calendar year, an HPI is anyone who earns more than $150,000 in FICA wages during 2025. Individuals with earned income, including sole proprietors and partners in a partnership, do not receive FICA wages, so they are exempt from this mandate, even if their income exceeds the applicable limit. Similarly, employees of state and local governments who are exempt from Social Security will not have Box 3 wages and likewise will not be subject to the mandate. The HPI wage limit will be indexed annually for inflation, and because this determination is made on a year-by-year basis, a participant may be considered an HPI in one year but not the next. Since the rule depends entirely on a participant’s FICA wages each year, it is essential that payroll records are kept accurately and the plan sponsors closely track any employee who may be approaching or exceeding the applicable limit.

A participant’s FICA wages are treated separately for each employer, meaning wages from different employers are generally not combined when determining when an employee’s FICA wages exceed the dollar limit. However, if members of a controlled group or affiliated service group utilize a common paymaster, then the plan document may require that FICA wages are aggregated when determining if an employee is a HPI. This may make it simpler for some groups to comply with the Roth catch-up rules.

Normally, an employee must make an affirmative election to have their 401(k) contributions made on a Roth basis. To ease administration and reduce compliance risks however, plan sponsors may utilize a deemed Roth election. Under the deemed Roth election, plan sponsors may treat catch-up contributions for HPIs as Roth, even if the HPI does not affirmatively elect Roth or attempts to elect pre-tax. In order to use this safeguard, the plan sponsor must provide timely notification to participants regarding how their catch-up contribution will be treated. Sponsors may deliver this notice prior to the start of the year, with their safe harbor or automatic enrollment notices, or after the year begins once an HPI is identified. Either way, it must be delivered prior to the first payroll in which catch-up contributions are deducted. We recommend that employers speak with their payroll provider to determine whether they can accommodate a deemed Roth election in their system.

If a plan does not currently offer Roth, the plan sponsor is not required to add it; however, this means that HPIs will be unable to make catch-up contributions during that year. Fortunately, the absence of a Roth feature does not prevent non-HPIs from being able to contribute catch-up on a pre-tax basis. A key point plan sponsors should keep in mind is how this interacts with ADP testing. Some HPIs may not normally contribute enough to reach the annual deferral limit but may rely on reclassified catch-up contributions to satisfy ADP testing. If the plan doesn’t permit Roth and the plan fails the ADP testing, any HCE who is also an HPI would be unable to reclassify any of their pre-tax deferrals as catch-up. This can be a significant consideration for plans that rely on catch-up reclassification to minimize refunds to their HCEs.

As the effective date quickly approaches, we recommend that plan sponsors take the time to review their current processes and coordinate with their payroll providers and recordkeepers to accurately identify any participants who will be considered HPIs for 2026. Taking the time to review these procedures now will help ensure good-faith compliance in the upcoming year. If there are any questions on determining whether a participant is an HPI, sponsors can feel free to reference the information below or contact your plan consultant at our office.

Is the Participant Age 50+?

If YES, see below.

Were their FICA wages more than $150,000 in 2025?

If NO, Participant is a NON-HPI for 2026 and may make pre-tax or Roth catch-up (if the plan permits Roth).

If YES, Participant is an HPI for 2026. ALL catch-up contributions MUST be Roth. Pre-Tax catch-up is not permitted.

Water Fountains and Water Bottles: Visualizing End Game Risks for DB Plans

by: Nick Fox, Enrolled Actuary

Defined benefit (DB) plans, especially cash balance formulas, are an attractive way to shelter business owners’ income from taxation, well above and beyond the levels available in a defined contribution (DC)-only arrangement. In return, business owners with DB plans have to keep in mind the interplay between contributions to the plan and the maximum tax-sheltered distribution amount.

To visualize this risk, a helpful analogy I’ve used in my twenty years of actuarial practice is the humble water fountain. Imagine seeing one along your path walking through your office, or the gym, or your child’s school principal’s office… if you’re thirsty, you press a button, drink as much as you need, then let the button go and walk away. If you’re not thirsty, you pass by the fountain and nothing happens.

This is like a DC plan. Each year, if you’re thirsty to defer taxable income, you satisfy that thirst (your desired retirement benefit) from the water fountain (by contributing to the plan) until you can’t drink any more (reach the 415(c) limit), then you walk away until the next year. If you are not thirsty, you can simply choose not to drink (not contribute) and nothing happens.

Now instead of a water fountain, imagine your own kitchen sink, or Brita filter, and a water bottle. Imagine every morning you go to the sink, turn on the faucet, and fill up the water bottle. The bottle comes with you to work, in the car, at the gym, etc. Ideally you put just enough water in the bottle to satisfy your thirst for the whole day. You might fill up the bottle even if you aren’t thirsty right now, because you might need a lot to drink later. Or, you might run out of water in the middle of the day and go through a dry spell until you’re at the sink again. By the way, did you remember to turn off the faucet before you left the room?

This is like a DB plan. When you are thirsty (for a retirement benefit) you first turn on the faucet (establish a plan formula). You get your water bottle (the DB trust) and fill it as much as you like (contribute within the permitted range). If you are a very thirsty person you probably have a larger water bottle than someone who is less thirsty; and you probably want a bigger faucet (a larger benefit accrual) to fill the bottle faster. If you run out of water, you can drink what’s left in the bottle if there’s any left over; but you can’t fill a water bottle that’s already full (contribute to a plan that’s very overfunded). Further, with a full bottle that shows signs of age, there’s risk of spillage (trapped capital and excise taxes if you can’t distribute the full amount of the trust).

The advantage of the DC plan is that you can make contributions at will, with no minimum, and you can continue to participate as long as you have the desire; further, your investment growth is always retained (there is no trapped capital). The advantage of the DB plan is you can contribute much more than with a DC plan alone, so long as you actively manage your thirst for retirement savings throughout the lifetime of the plan and be mindful of the maximum benefit amount.

How well are you hydrating? If it’s been some time since you’ve checked in on your DB plan, give your PPPC administrator a call and we can help you get started with the right next action.