Plan Penalties, Costs and 3(16)
The Department of Labor (DOL), Internal Revenue Service (IRS) and Pension Benefit Guaranty Corporation (PBGC) have extensive reporting and disclosure requirements for qualified retirement plan officials. These reporting and disclosure requirements serve the important function of educating and supporting participants in their retirement planning journey, as well as allowing governing agencies to keep an eye on the compliance health of retirement plans. For many, plans are complex, and participants need timely and accurate communications to make informed decisions.
Many plan sponsors find that the reporting and disclosure rules are overly burdensome, confusing, costly and create administrative headaches. A necessary evil, one might say. The onerous nature of the reporting and disclosure rules are one of the leading reasons some businesses balk at maintaining qualified retirement plans for their workers.
With respect to the cost of complying with such requirements, the impact can be twofold. First, there is the need for added internal resources to ensure compliance with the reporting and disclosure rules. Second, failing to meet the requirements can result in high-priced penalties and put a plan in jeopardy of disqualification (which could result in immediate taxation of all benefits).
From a penalty perspective, take the Form 5500-series return for a plan as an example. Late filed returns are subject to penalties from both the IRS and DOL. The IRS penalty for late filing or refusing to file Form 5500 is $250 a day (up to $150,000). On top of that, the DOL may assess a penalty of up to $2,529 per day, with no maximum. As another example, consider a plan with an automatic contribution arrangement (ACA). Failure to provide an ACA notice to participants can cost a plan up to $1,899 per day. And the list goes on.
Penalties for plan reporting and disclosure failures are considered “settlor” expenses and cannot be paid out of plan assets. That means, the plan sponsor is “on the hook” for the amounts—which can quickly add up. Plus, penalty fees will likely only continue to rise with potential future price hikes (like the one in 2019 where the per-day penalty for a late Form 5500 jumped from $25 to $250) and semi-annual cost-of-living adjustments. Clearly such potential liability could give pause to an organization considering a qualified retirement plan.
One way to defuse the compliance challenges and headaches of government reporting and disclosure rules for qualified retirement plans is by contracting with an outsourced 3(16) fiduciary. Utilizing a 3(16) fiduciary can also help minimize liability. A “3(16),” named for the section of governing ERISA Code, can assume many key retirement plan responsibilities from the plan sponsor—such as reporting and disclosure tasks—in addition to others. By engaging a 3(16), plan sponsors not only reduce their plan-related workload, but also minimize the associated risks and liability.
A 3(16) outsourced fiduciary solution allows plan sponsor to:
- Save time
- Reduce plan work
- Lighten compliance burdens
- Minimize risk and liability
- Eliminate complex responsibilities
- Save money by saving time and resources
- Improve plan outcomes
By engaging a 3(16) plan administrator, the plan sponsor shifts fiduciary responsibility to the 3(16) for the services specifically contracted (e.g., plan reporting, participant disclosures, distribution authorization, plan testing, etc.). Not all fiduciary services are created equally, so choose wisely and enjoy the benefits of a well-administered retirement plan without the headaches.
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