“It’s the most wonderful time of the year…”
Frozen turkeys go on sale, holiday carols fill the airwaves… and retirement plan sponsors check off those year-end 401(k) plan tasks to stay compliant. (That’s what you were thinking, too, right?)
Because by the end of the last month of the fiscal year—December if your company follows a calendar year—there are several year-end tasks that 401(k) plan sponsors must complete.
Year-end 401(k) Plan Task #1: Retirement plan amendments are due December 31.
Retirement plans, including 401(k) plans, must periodically update their terms to comply with changes in the law and regulations.
Chiefly, necessary and discretionary plan amendments must be adopted by the end of the plan year (December 31 for most) to maintain the plan’s qualified status under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC).
ERISA sets standards to protect retirement plan participants, including fiduciary responsibilities, reporting, and disclosure requirements, since the IRC provides tax advantages to qualified retirement plans. Timely amendments correspondingly ensure that the plan continues to meet ERISA standards and adhere to the latest tax laws and IRS regulations.
Types of amendments
New laws or regulations require changes to your plan; these are necessary (mandatory) amendments. By contrast, discretionary amendments are changes made by the plan sponsor to alter plan features, such as changing the vesting schedule or adding new investment options.
Resources and references
For more detailed information, you can visit the following IRS pages:
- Retirement Plan Amendments, an overview of amendment requirements and deadlines.
- Required Amendments List, updated annually, identifies changes in the law that require amendments to retirement plans.
Plan sponsors should monitor IRS announcements and the Required Amendments List to stay informed about necessary changes.
Meeting these deadlines helps avoid penalties and ensures the plan maintains its qualified status, providing ongoing benefits to participants and tax advantages to the sponsor.
Other transactions due by December 31.
Several items require processing by the last day of the plan year, typically December 31. These transactions include minimum distributions (RMDs) and de minimis distributions, loan-related payments and corrections of ADP/ACP errors.
Year-end 401(k) Plan Task #2: Required minimum distributions (RMDs)
RMDs are mandatory withdrawals from a 401(k) starting at age 73. The amount is based on the account balance and life expectancy. These withdrawals are taxed as income, and failing to take them results in penalties.
Year-end 401(k) Plan Task #3: De minimis distributions
These are small, often automatic withdrawals from accounts with balances below a set threshold (usually $1,000). They help clear out small accounts to reduce administrative burden.
Year-end 401(k) Plan Task #4: Loan-related payments
Participants can borrow from their 401(k), typically up to 50% of their vested balance or $50,000. These loans must be repaid with interest, usually within five years. Defaulting on repayment treats the loan as a taxable distribution.
Year-end 401(k) Plan Task #5: Corrections of ADP/ACP errors
These corrections address issues when a 401(k) fails nondiscrimination tests (ADP/ACP), which ensure plans don’t favor highly compensated employees. Corrections might include refunding excess contributions to highly compensated employees or making additional contributions to others.
Avoid unnecessary stress this December! Identify which year-end 401(k) plan tasks to stay compliant to complete this month, so your plan administrator has sufficient time to process them.
Have a large 401(k) plan and need help with this year’s outside audit? We’re here to help as your friendly neighborhood 401(k) plan auditor! Contact Cassell Plan Audits today.
