As a plan administrator or employer, it is your responsibility to provide specific notices and required disclosures to plan participants about their defined contribution (DC) plans. And of course, there are a number of guidelines you’re required to follow when distributing them.
This blog is the third installment in our series to explain what these notices are, when and how you must provide them, and finally what happens when you don’t. If you have not done so already, please read Part 1 and Part 2 of this series.
It is extremely important that you follow the notices and required disclosures rules set forth by the U.S. Department of Labor (DOL), the Internal Revenue Service (IRS), and the Employee Retirement Income Security Act (ERISA). If you fail to provide them (or fail to provide them correctly), you may find yourself facing various legal, financial, and operational consequences.
Potential consequences could be:
1. Penalties and Fines
Civil Penalties
The DOL may impose civil penalties for:
- Failing to provide required disclosures
- Providing incomplete information
- Providing incorrect information.
For example, failure to provide a summary plan description (SPD) within the prescribed time frame could result in a fine of up to $110 per day for each violation.
Late Filing Penalties
If the required annual reports (Form 5500) are not filed on time, penalties could range from $25 per day, up to a maximum of $15,000 per report, depending on the level of delay.
2. Plan Disqualification
If you do not provide proper notices and required disclosures – especially those required under ERISA – the plan could risk disqualification. This could mean losing the plan’s critical tax-qualified status. Without the status, the plan may no longer be tax-deductible, and participants may face negative tax consequences.
3. Legal and Fiduciary Liability
Fiduciary Breach
Plan fiduciaries like you have a legal duty to act in the best interest of plan participants. If you fail to provide required notices, it could be seen as a breach of fiduciary duty. You could be subject to lawsuits or claims by participants, as well as enforcement action by the DOL or IRS.
Participant Lawsuits
Participants may choose to sue the plan sponsor, plan administrators, or fiduciaries. In these cases, they may seek damages for any losses suffered as a result of the failure to provide timely or accurate information.
4. Loss of Participant Trust and Engagement
Employees need information to make informed decisions about their retirement savings. If they’re not receiving proper communication, employees may lose trust in the plan. Trust is vital to a healthy DC plan. Without trust, employers typically see reduced participation, lower contribution rates, or even plan withdrawals. This lack of communication could hurt your employees financial well-being in the long run.
5. Potential for IRS Audits
Failing to provide the required disclosures may trigger an IRS audit. The IRS can impose additional penalties or fines and/or require corrective action, like providing the required notices retroactively. An audit is a headache in its own right, and you run the risk of uncovering other issues within the plan, leading to more extensive penalties.
6. Delayed or Incorrect Participant Elections
If participants do not receive proper notices about investment options, fees, or plan changes, they may make uninformed decisions regarding their investments or retirement savings. This could have a negative effect on the DC plan, resulting in financial losses or suboptimal investment outcomes.
7. Increased Plan Administration Costs
Imposed penalties and fees aside, correcting disclosure issues after the fact alone (such as providing backdated notices or retroactive corrections) will cost you.
Consider the expenses associated with this task:
- Administrative costs
- Legal fees
- Time spent resolving the issue
8. Reputational Damage
As well as losing trust with your employees, you’ll also lose trust outside your organization. Failing to meet regulatory requirements for transparency and participant communication can harm your reputation – both internally among employees and externally with regulators and stakeholders.
9. Disruptions in Plan Operation
Non-compliance with required disclosures can disrupt the normal operation of the plan. If notices are not provided on time, participants may not receive necessary information about plan design changes, investment options, or administrative procedures.
This could lead to operational inefficiencies, such as:
- Increased call volumes to HR or the plan administrator
- Delays in processing transactions
- Additional administrative costs to correct errors
It can also result in employee confusion:
- Confusion about how their contributions are invested
- Uncertainty about plan rules
- Frustration from making uninformed decisions that negatively impact retirement savings
10. Disqualification from Certain Plan Features
Some plan features, such as automatic enrollment or safe harbor provisions, may require specific participant notices to be effective. Without the required disclosures, these features are not valid, leading to potential tax and legal ramifications.
Do Right by Your Employees. Protect Your Plan.
Failing to provide required notices and disclosures can result in penalties, audits, and loss of participant trust. Worst of all, it hurts your employees and your plan. Protect your employees’ retirement security – make sure you’re following the guidelines for providing notices and required disclosures.
Remember, for a more detailed look at what those notices are and when/how they should be distributed, be sure to read Part 1 and Part 2 of this series.
At Watkins Ross, we’re here to support you. If you have any questions or need help managing these responsibilities, we would love to chat. Contact us today to keep your plan on track.
