February 6, 2023

Volume XIII, Number 37

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February 03, 2023

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401(k) Compliance Check #4: Required Participant Notices

In last month’s 401(k) Compliance Check, we discussed what to do if you inadvertently failed to enroll someone in your 401(k) plan. In this month’s Compliance Check, we focus on the variety of typical notices that are required for 401(k) retirement plans. We do not discuss every single notice, however; for example, we don’t discuss certain individualized notices, such as notices about whether a qualified domestic relations order is acceptable to the plan, nor the requirements to distribute summary plan descriptions or summary annual reports.

Why is This Topic Important?

Failing to provide required notices can subject the plan, and its fiduciaries, to liability. Notice failures can result in penalties imposed by the Internal Revenue Service or U.S. Department of Labor, or lawsuits from participants who were not informed about important information that affected their decision-making. For many safe harbor plans, providing the safe harbor notice is a pre-condition for qualifying for the safe harbor. And ensuring that all of your plan’s required notices have been timely provided makes for a smoother audit process, whether it be the plan audit for your Form 5500 or a governmental audit of your plan.

What Are the Standard Notices That Must Be Provided?

401(k) Safe Harbor Notice

  • This notice provides basic information about the safe harbor plan. It is required for 401(k) plans that have elected to meet certain safe harbor requirements by providing a minimum level of matching contribution or by adopting a qualified automatic contribution arrangement (QACA), which is a type of safe harbor plan that provides for automatic enrollment and then annual automatic contribution increases. This notice is not required for a plan that meets safe harbor status by providing a minimum required nonelective contribution and is not a QACA.

  • The notice must initially be provided to an eligible employee within a reasonable period before their eligibility date. For QACAs, the notice must be provided sufficiently early so that an employee has a reasonable period of time after receipt to avoid automatic enrollment — but note that the automatic enrollment has to begin no later than 30 days after the notice is provided or by the second payroll that begins after the notice is provided, whichever is earlier. Thereafter, the notice must be provided annually to all eligible employees at least 30 but not more than 90 days before the beginning of the plan year.

Automatic Enrollment Notice (Non-QACA)

  • This notice is required for 401(k) plans that provide for automatic enrollment of eligible employees, other than a QACA, which is discussed above. The notice provides basic information about the automatic enrollment, including the percentage of deferrals that will automatically be made on the participant’s behalf, and what steps the participant can take to avoid automatic enrollment.

  • The notice must be initially provided to eligible employees, generally at least 30 days before their automatic enrollment is effective. For plans that automatically enroll employees immediately when they’re hired, an employer may give employees the notice on their date of hire. If it’s impractical to give the notice to an employee before they’re eligible to be in the plan, the plan can still meet the notice timing requirements by giving notice to the employee before the pay date for the pay period in which the employee becomes eligible and allowing the employee to make deferrals from any compensation he or she received after becoming eligible.

  • The notice must also be provided annually, within 30-90 days before the beginning of the plan year, to employees who are subject to the automatic enrollment arrangement.

Qualified Default Investment Alternative (QDIA) Notice

  • This notice is required of 401(k) plans that allow participants to direct the investment of their accounts. It describes the default investment fund in which a participant’s account will be invested in the absence of an investment decision and explains how a participant can invest in the other available investment options.

  • The notice must initially be provided to eligible employees at least 30 days in advance of their date of plan eligibility or, if the QDIA is a new feature, at least 30 days in advance of the first investment into the QDIA. Thereafter, the notice must be provided annually at least 30 days before each subsequent plan year. It is typical to include the QDIA notice with a QACA notice or other automatic enrollment notice.

Fee Disclosure Notice

  • This notice is required for 401(k) plans that permit participants to make investment elections. It includes information about the various fees applicable to the 401(k) plan that may affect an individual’s account balance, such as investment or recordkeeping fees or fees for initiating distributions or loans.

  • The notice must be provided annually, but at least once in any 14-month period, to all individuals with account balances. In addition, if any information in the notice changes, an updated notice must be provided at least 30 days before the effective date of the change.

Periodic Benefit Statement Plus [NEW!] Lifetime Income Disclosures

  • This notice is required for all 401(k) plans. It provides information about the participant’s account balance, including their vested interest.

  • The notice must be provided at least quarterly to participants if the plan permits them to direct their investments. If investment direction is not provided to participants, the notice must be provided annually. In addition, it must be provided on request to a beneficiary but can be limited to one request during any 12-month period.

  • An additional disclosure feature was added recently for lifetime income disclosures. This new disclosure must be provided by all 401(k) plans regardless of whether they offer a form of payment that provides lifetime income, such as an annuity. The notice is individualized and shows the participant how their account balance would pay out on an annuitized basis over the lifetime, determined using specified assumptions.

  • The new lifetime income disclosure is provided annually. For plans that provide quarterly benefit statements, the disclosure should be included with the quarterly statement for the quarter ending prior to September 18, 2022. For plans that provide annual benefit statements, the disclosure should be included with the annual statement that is provided for plan years ending after September 18, 2022.

Blackout Notice

  • This notice is required when a 401(k) plan imposes a temporary suspension, limitation, or restriction on the ability of participants to direct or diversify assets, to obtain loans, or to take plan distributions, such as in connection with a change in investment funds or change in plan recordkeepers.

  • The notice must be provided to all account holders affected by the blackout at least 30 but not more than 60 days before commencement of the blackout period.

Are There Best Practices?

  • It’s okay, and often helpful to employees, to combine some of these notices. For example, a safe harbor notice can include both the QDIA notice and the annual fee notice.

  • Always confirm with your 401(k) recordkeeper whether they will be providing these notices or whether they expect you to do so. Also, for the new lifetime income disclosure, if your recordkeeper has not yet confirmed that they will be ready to provide this notice on your plan’s behalf, reach out to your account representative for a discussion on this topic.

  • If your recordkeeper prepares and sends out the notices on your plan’s behalf, ask for copies of representative notices and keep them as part of your plan’s files in case you later need to prove to a government auditor that the plan satisfies its notice obligations.

© 2023 Foley & Lardner LLPNational Law Review, Volume XII, Number 111
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About this Author

Leigh Riley Business Attorney Foley Lardner
Partner

Leigh Riley is a partner in the Business Law Department with Foley & Lardner LLP. She focuses her practice on employee benefits and executive compensation. Leigh is a member of the firm's Management Committee and the former chair of the Employee Benefits & Executive Compensation Practice.

414-297-5846
Amy Ciepluch Employment Attorney Foley Lardner
Partner

Amy Ciepluch is a partner with Foley & Lardner LLP. She is Chair of the firm's Employee Benefits & Executive Compensation Practice and Co-Chair of the Tax, Benefits & Estate Planning Practice Group. Amy works closely with employers on the design, drafting and ongoing legal compliance of their retirement, and health and welfare programs.

414-319-7116
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