Over the last five years, Milliman has worked closely with a pension administration client to transition its 30,000-participant defined benefit plan to a novel solution that continued to offer ongoing benefit accruals to participants, while maintaining cost-efficiency and contribution stability.
The plan, established in 1987, offers a cash balance formula as its primary benefit. When the client chose Milliman, it wanted to modify the cash balance formula to achieve both plan health and cost-efficiency. During a subsequent consulting session, it was determined that the plan’s goals could be better met by moving to a variable annuity benefit formula.
In this study, Tim Bernazza and Rebecca Connell discuss the administrative effects of changing to a variable annuity formula for this pension administration client.
Many multiemployer pension plan trustees and advisers are familiar with the potential penalties associated with untimely adoption of a funding improvement plan (FIP) or rehabilitation plan (RP) for plans in endangered or critical status. Those who have worked with critical status plans are also probably aware that a failure to meet “scheduled progress” under an RP for three consecutive years can result in excise taxes.
However, many may be less familiar with the rules providing potential excise taxes and/or civil fines for failing to meet the FIP’s or RP’s goals by the end of the prescribed period. This could result in a new and sudden reality for some plans due to the impact of the coronavirus on the stock market and employment levels.
Once the FIP/RP period begins, the plan sponsor is required to annually review the FIP/RP and update it if necessary. There could be a wide range of reasons for needing an update, many that are outside the control of the plan sponsor, including lower investment returns and/or contributions than expected. Milliman consultant Bill Wade provides more perspective in this Multiemployer Review.
On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act became law as part of the Further Consolidated Appropriations Act, 2020. Most SECURE provisions are for defined contribution (DC) pension plans. However, the SECURE Act also provides relief for the nondiscrimination and minimum coverage requirements applicable to closed defined benefit (DB) pension plans. This is good news for plan sponsors who wish to continue providing accruals in closed DB plans. The relief generally falls into one of two categories: (1) deemed compliance, and (2) additional testing flexibility under the coverage and nondiscrimination regulations for those situations that will require continued testing.
Below are some key provisions related to the nondiscrimination testing requirements under Treasury Regulation 1.401(a)(4) that are modified by the SECURE Act:
A closed DB plan can be aggregated with a DC plan for testing on a benefits basis without satisfying a gateway requirement.1 Prior to the enactment of the SECURE Act, the high cost to meet a gateway could lead to premature plan freezes. The closed group needs to meet the following requirements for testing relief:
For the plan year in which the closed group closes and the two succeeding plan years, the plan meets the coverage and nondiscrimination requirements of 410(b) and 401(a)(4)
After the date the closed group was closed, any plan amendment that modifies the closed group or the benefits does not significantly discriminate in favor of highly compensated employees (HCEs)
The closed group was created before April 5, 2017, or the plan has been in effect for at least five years as of the date the closed group is created and there has not been a substantial increase in the coverage or value of the benefit, right, or features (BRFs)
Matching and nonelective contributions in a 401(k) or a 403(b) plan can be used in the general test;2 further, matching contributions can be treated as if they are nonelective contributions.
DC plans with different plan years are allowed to be aggregated with a DB plan.
DC plans with different BRFs are allowed to be aggregated with a DB plan.
A closed DB plan is deemed to satisfy the nondiscrimination requirements for BRFs under 1.401(a)(4)-4 if the plan meets the requirements as noted above.
A closed DB plan is deemed to satisfy the requirements for minimum participation3 under §401(a)(26) if the plan amendment was adopted prior to April 5, 2017:
To cease all benefit accruals
To provide future benefit accruals only to a closed group
Prior to the SECURE Act,
the Internal Revenue Service (IRS) had provided regulatory guidance that was meant
to alleviate some of the difficulties in satisfying these technical tests. While
plan sponsors appreciated the effort, the regulatory guidance was temporary and
limited, which is why the SECURE Act addressed these issues. During the last
few years, plan sponsors had implemented some or all of following changes to
their DB plans to meet the nondiscrimination and minimum coverage requirements:
Provided additional nonelective
contributions under the DC plan at a potentially significant cost to employers
in order to continue DB accruals
in the DB plan for some non-HCEs who were previously not eligible under the
Froze accruals for
participants who are HCEs
Froze accruals for all
participants under the plan
Plan sponsors can elect to apply the relief provisions of the Secure Act retroactively for plan years beginning after December 31, 2013. However, in certain situations, the plan document must be formally amended. Plan sponsors may amend their plans to provide previously eliminated BRFs or to provide benefit accruals to a closed group if a sponsor is forced to change a plan because of prior testing limitations that were relieved as a result of the SECURE Act.
1 The minimum aggregate allocation gateway, as described under Treasury Regulation §1.401(a)(4)-9(b)(2)(v)(D), requires each benefiting non- HCE to receive aggregate benefits from the combined DB/DC plan at a minimum level determined by the highest benefiting HCE as follows:
Highest value of combined DB/DC benefits for a HCE
Minimum value provided to each non-HCE benefiting under the
combined DB/DC plan
Less than 15%
1/3 of the value to the
highest benefiting HCE
15% to 25%
25% to 30%
30% to 35%
A plan is permitted to treat each non-HCE who benefits under the DB plan as having the same value of benefits under the DB plan by replacing the individual DB benefit by the average of benefits for all non-HCEs. The individual DC benefit value (if any) is then added to the average DB value for non-HCEs to determine whether the gateway requirement above has been passed.
2 The nondiscrimination regulations outline “safe harbor” formulas for providing benefits in a DB plan, or participant allocations in a DC plan. If the benefits or allocations are not provided using a safe harbor approach, then the benefits or allocations are subject to the general test in order to demonstrate that the benefits do not discriminate in favor of HCEs.
3 Minimum participation rules under §401(a)(26) require a DB plan to benefit the lesser of 50 employees or 40% of all employees within a controlled group.
Your organization has made the business decision to outsource your benefits administration. So now what? You may be dreading the upcoming and likely unfamiliar process while at the same time dreaming about the day you are able to hand off the day-to-day responsibilities of plan administration. Those responsibilities can include a day with a fully staffed call center to field participant calls; a user-friendly website for participants; and a team of benefit professionals dedicated to providing exceptional service to you and the plan’s participants.
As with many things in life, it is all about how you get started. The effort and attention given during the conversion process can set the stage for proper and efficient administration in the future. The conversion team of your selected vendor will have a well-defined process designed to streamline the administration of your plan, but you and your staff will be a key factor in facilitating the achievement of this goal.
Here are five tips to ensure as painless a transition as
possible for you, your participants, and your new plan administrator.
Gather and organize plan information Once a new administrator has been selected, begin to gather the information needed to administer your plan(s). For defined benefit (DB) plans, this includes plan documents and amendments, summary plan descriptions, and recent valuation files and sample calculations. Determine data sources needed for both historical and ongoing needs. Identify required interaction with other service providers—your payroll vendor, check writer, and actuary. It’s also important to provide details regarding any upcoming plan changes if any are being considered. This part of the process can be the most labor-intensive for your benefits team, but it is also the part that will allow for the greatest success.
Be clear about your current challenges You know what makes your plan(s) challenging to administer. Share your pain points and be specific about your expectations of the new system. Do you have manual processes that could be automated? Are there certain groups of employees or participants that will be sensitive to any changes? Do you have concerns about missing data? Making sure your current challenges are outlined clearly will help your new administrator determine the best solutions.
Be open to changing existing processes It can be uncomfortable, but don’t let “we’ve always done it this way” prevent you from benefiting from possible process improvements. Explain your business needs clearly, and allow your new administrator to share best practices. They will thoroughly review and analyze all current administrative processes and procedures and make recommendations for effectively streamlining when appropriate. Look at this as an opportunity to make things easier for your organization and your participants while increasing efficiency and managing costs.
Actively participate in the process You will be involved in status meetings and process discussions throughout the conversion project. You will be asked to review new communication materials and, most likely, a new participant website. Your attention and participation in the process will be vital to the successful delivery of the services at the live date and beyond. You know how your plan “works” and what your participants will expect. Participating in the review of the setup will provide confidence that your plan will be administered in the proper fashion and that the plan’s participants will be comfortable with the transition.
Share concerns as they are identified Open communication with your new administrator will be key to a successful transition. The conversion will typically be a project lasting several months, and you will likely have questions along the way. If there are decisions being made that you disagree with and/or think are confusing, bring that information to the team’s attention. Be open with your conversion team so that it can address concerns and make adjustments as needed. Turning over the administration of your plans(s) can be a daunting task and you should be comfortable with the assigned benefits team to provide you assurance that your plan is in good hands. Following these tips will help set the stage for a true partnership with your new vendor to administer your plan(s) in the future. Your participation in the conversion process will allow you to be confident that the plan will be administered properly and efficiently and that you will arrive at the live date with certainty.
From time to time pension plan sponsors are audited by the Internal Revenue Service (IRS) or the Department of Labor (DOL). One issue that often comes up during an audit is the process for locating lost participants or beneficiaries who are entitled to plan benefits.
Plan sponsors need to have well-defined procedures in place to perform a diligent search for lost participants. Otherwise, they could end up spending a lot of time documenting the details or defending their actions (or inactions) in an audit.
Milliman’s latest issue of DB Digest by David Benbow explains what steps the IRS or DOL expects plan sponsors to follow and document when searching for lost participants. To read the article, click here.
There are several pros and cons for defined benefit (DB) plan sponsors to consider before moving to a paperless records management system. The DB digest article “Paper records: Can we shred them yet?” by Milliman’s Stephanie Sorenson explores the advantages of converting to a paperless system. In the article, Stephanie also discusses the regulatory guidelines and administrative questions plan sponsors need to think about before making such a conversion.
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