More Questionable Retirement Plan Features
In a recent Top of Mind, and in our latest webinar, we shared some questionable plan features that came back to haunt retirement plan sponsors during the COVID-19 pandemic. But there are plenty of other questionable plan features that all too many plan sponsors adopt that can greatly increase plan administration, be detrimental to plan participants, or both. These include:
- Utilizing a non-calendar plan year — If a plan sponsor’s fiscal year is a non-calendar year, the plan sponsor may use that as the plan year for its retirement plan. While that sounds like a great idea on paper, there is one small problem - most IRS limits are calculated on a calendar year basis. Thus, a simple task, like administering the 401(a)(17) compensation limit, becomes an administrative nightmare. So, unless there is a strong business case for making the retirement plan year a non-calendar one, it should be avoided.
- Allowing hardship distributions — This is a common plan provision; however, 2020 may be precisely the year to revisit it, since few are taking hardship distributions right now (opting instead for the far more participant-friendly COVID-19 distribution/loan, except for the few plans that do not allow these transactions). Why should those with this provision reconsider? It is easily one of the worst retirement transactions a retirement plan participant can make, due to its terrible tax consequences (nearly half of the distribution is lost in high-tax states), and the fact that it cannot be repaid to the plan, which destroys retirement wealth, particularly for younger employees. Consider eliminating this provision and steering employees toward loans instead.
- Not having a loan policy — How many loans may a participant have outstanding at any one time? Should there be a limit to the total number of loans a participant may take? What is the grace period for the repayment of loans? Should terminated employees be permitted to continue to repay loans or initiate loans? Some plans lack a loan policy, either in their plan document or in a separate document incorporated by reference, leaving the plan’s recordkeeper(s)/TPA to determine the answers to these questions. And often, the answer a recordkeeper determines is, well, not optimal. So, save some headaches and establish a loan policy if the plan allows loans (and most do).
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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