Case Study: Retirement Plan Redesign for Rapidly Growing Company

This blog is an excerpt of Anne Tyler Hall’s book “Case Studies in ERISA: Why It Matters And How It Benefits You, A Plan Sponsor’s Guide To Employee Benefits Legal Compliance”  request your free digital copy of the book here.


Client:

A professional services organization with approximately 350 employees and approximately $100 million in retirement plan assets. The organization grew rapidly over the past decade — both organically and through acquisition.

Issue:

Since 2009, the retirement plan assets had tripled. However, there had been no contemplation of whether the plan design still made sense for this rapidly growing firm. The plan allowed for little flexibility in plan contributions for certain participants (i.e., they were required to contribute a certain amount each year). Certain highly compensated employees wanted to contribute MORE to the plan while others desired to contribute less. Additionally, the plan had, in previous years, failed top-heavy testing.

Plan:

Hall Benefits Law worked with the company to outline its primary objectives related to the individually-designed retirement

plan. We determined that the following issues embodied the company’s primary objectives:

Redesign certain plan contribution requirements;

Maximize tax savings for the company’s leaders; and

Avoid top-heavy plan status.

Plan Contribution Formula Redesign:

One of the contribution formulas in the existing Plan required specific groups of HCEs to contribute to the maximum Code Section 415 limit ($56,000 for 2019). Some HCEs were frustrated that it was mandatory to contribute the required amount each year. These individuals had other, necessary expenses and wanted more flexibility in the contribution limit (i.e., the ability to contribute less than the current, required 415 limit). Other HCEs had more flexibility in their budget and wanted to contribute more to the plan.

Hall Benefits Law identified several alternatives for easing the rigidity of the current required contribution plan design:

Revise the contribution formula to provide for a minimum and maximum contribution amount. This allows HCEs who wish to contribute the maximum to do so. It also allows those with other expenses to cover (i.e., a child in college) to contribute less. At the same time, all participants are required to contribute something, because the employer was concerned that if participants were not required to contribute each year, some would not have enough saved for retirement when they reached normal retirement age.

Allow participants to waive their rights to the contribution. The plan was drafted to position the contribution as an “employer” contribution. However, such contribution came directly out of the income of the participating employee. In our review, we noted that there was no prohibition on allowing a participant to “waive” his or her allocable share of this employer contribution.

Add a cash balance plan. As part of the flexibility in plan design, Hall Benefits Law recommended that the company consider adding a cash balance plan to the existing 401(k) plan.

Adjust strategies to avoid the costly correction of top-heavy status. Failure to satisfy top-heavy testing in prior years cost the employer an amount in excess of six figures in contribution adjustments to non-key employees. To increase participation and participation rates in the plan by rank-and-file employees the plan was adjusted as follows:

o Immediate eligibility to participate in pre-tax elective contributions for new hires.

The existing plan design allowed new hires to make pre-tax contributions only after completing one year of eligibility service. The new objective was to encourage rank-and-file employees to participate in the plan earlier, creating a longer period in which to grow their account balances.

o Automatic Enrollment Escalation.

The existing plan design provided for automatic enrollment at 2 percent contribution. We recommended the company automatically enroll employees at a higher percentage rate (i.e., 5 percent rather than 2 percent) with an auto-escalation clause each year until the participant achieved a 10 percent (or higher) contribution rate.

Because these plan design changes were significant, we recommended that the plan sponsor obtain an IRS determination letter approving the new plan design prior to implementation.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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