USA – TEXAS Trends and Developments Contributed by: Sydnie Shimkus, Bell Nunnally & Martin
Tip two: ensure your fund manager’s actions are without self-interest ERISA requires benefit plan administrators to manage financial investments as a reasonably prudent busi - ness professional, balancing manageable risk with protection of plan assets without self-interest. This is generally accomplished by investing in established investments and investment vehicles with a trusted history of performance. Commonly, benefit plan managers will outsource fund management to a non-party investment manager and delegate proxy voting authority. Recent trends have raised concern that outsourced benefit plan manag - ers are not always acting without interest, including investing in funds they will benefit from. To avoid this concern, benefit plan managers should: • when selecting a manager, conduct a thorough review of a manager’s voting record prior to their selection; • for current managers, confirm they are exercis - ing financial prudence in managing plan assets through arm’s length transactions, exercising the highest duty of loyalty to the plan and its partici - pants, and managing assets without any undue influence or conflict of interest; and • consider passing the voting responsibilities directly to plan participants and their beneficiaries. Tip three: handling of non-vested employee benefits There has been an uptick in litigation attacking an employer’s use of 401 (k) forfeitures to offset employ - er contributions. Oftentimes, employers will use non- vested amounts from employees who leave before fully vesting towards employer contribution require - ments. This can be seen as a form of self-dealing and a violation of the fiduciary requirements in managing a 401 (k) plan, especially when an employee is mak - ing a termination decision and chooses one employee over the other to avoid full vesting – and thus frees funds to allow for contribution towards the employer’s requirements. Tips four and five: medical plan considerations Coverage decisions for Medicare-eligible workers
Tip one: employer’s response to overfunded/under - funded employee 401 (k) accounts Retirement plan sponsors need to periodically audit their 401 (k) plans. One of the biggest issues the firm has seen lately is an employer’s discovery that an employee’s 401 (k) account has been over- or under - funded. Underfunded employee accounts In situations where an employee’s retirement account is underfunded, the employer should reallocate the balance for the missing period. There is no tax liabil - ity for the underfunding, but there is a risk that an employee otherwise paid taxes on money that should have been sheltered in their 401 (k). Overfunded employee accounts In situations where an employee’s 401 (k) fund has been overfunded, an employee will face a 6% pen - alty for the overfunded amount. This can be avoided if the employer recovers and redistributes that mon - ey before 15 April of the tax year in which the fund was misallocated. If discovery is made after 15 April, then the overfunded portion will need to be retracted, which includes the amounts earned on the excess funding for the calendar year. This should be done immediately to help the employee avoid double taxa - tion, whereby they get taxed on the overfunded por - tion now, and when they withdraw the funds or other- wise receive a distribution. If possible, the overfunded amount can be allocated to the employee’s account In both scenarios, the employer will need to issue amended W-2 forms. Likewise, the 401 (k) plan will need to file an amended return to reflect the proper participant allocation. Finally, even if the overfunding/underfunding issue occurs by the fault of a third-party administrator, the tax and penalty liability will flow to the employer as the benefit plan sponsor. However, the employer should examine whether its third-party administrator has an obligation to indemnify the employer in such situa - tions. in the following year. Employer response
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