As the calendar changes to April and the snow clears from the ground I’m again reminded of all the home improvement projects that I put off over the last year (maybe 2). Whether it’s cleaning the outside windows, building new boxes for the herb garden or staining and sealing our deck there’s plenty of work to be done. The challenge will be having enough motivation to actually get it all done.
For many people, April marks the start of the spring cleaning season and no surprise it’s also on our list of things to do. Individuals are not alone when it comes to getting everything in order. Many employers use this time of year as an opportunity to review the benefits offered within their retirement plans and make changes to better align with goals. Some of the changes we often see made include making changes to the contribution structure – whether it’s reinstating employer contributions that were previously eliminated or modifying the contribution structure to provide higher levels of benefit to specific groups of employees.
Nondiscriminatory availability of benefits
Employers who sponsor retirement plans for employees are often given flexibility to design those plans how they choose. However, they need to be careful to make sure that all benefits, rights and features offered with that plan are available to a nondiscriminatory group of employees (e.g. non-highly compensated employees). Some of those features include-
- The right to receive a particular rate of contribution (match or non-elective contributions)
- The right to direct investments
- The right to receive a specific form of distribution (annuity, lump sum)
In order to make sure that the benefits are nondiscriminatory, the IRS says additional testing must be performed. A benefit is generally deemed to be nondiscriminatory if a similar percentage of NHCE have the right to receive that benefit when compared to the HCE that receive the same benefit. If testing shows the benefit discriminates in favor of the HCE, changes will need to be made to the plan design.
Improving participant outcomes
Offering various levels of contributions or benefits within a retirement plan may also help to produce improved participant outcomes at retirement. Generally, as employees’ salaries increase the level of benefit necessary to produce adequate retirement outcomes also increase. Employers that have the flexibility to vary the levels of benefits offered within the plan can have a significant impact on improving these outcomes.
Like spring cleaning, when considering changes to the retirement plans it’s important to plan and make sure everything is done correctly to avoid more problems in the future. Proper planning and preparation will help.
The subject matter in this communication is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
t160328027y – 3/2016