QDIA Notices—Who’s Responsible?
It is now five months since the final qualified default investment alternative (“QDIA”) regulation became effective. Default investments in a QDIA are provided a legal defense for fiduciaries, commonly called a safe harbor. Drawn by the siren song of safe harbor protection, many plan sponsors were quick to adopt a QDIA-eligible investment as their default investment. (A default investment is the choice for participants who fail to direct their investments.) However, in order to obtain and maintain the protection afforded by defaulting participants into a QDIA, participants must be provided notices initially and annually.
By way of background, the QDIA regulation requires that participants receive an initial notice (at least 30 days before default into a QDIA) and an annual notice (at least 30 days before each subsequent plan year).
Plan sponsors who do not have knowledgeable in-house benefits staff will likely not be able to fully understand and comply with these notice requirements. As a result, most small and mid-sized plan sponsors will need to turn to their providers for help. But, which provider is going to handle that job?
By way of background, third-party administrators often provide both recordkeeping and compliance work for plans. Typically, small plans will hire a third-party administrator to provide compliance assistance and not recordkeeping services. In those cases, based on our experience, the third-party administrators do not believe that it is their responsibility to provide those notices. Because the third-party administrators believe that the furnishing of these notices relates to investments and since they do not have responsibility for the investments, it should follow that they do not have responsibility for providing the notices. Additionally, based on our experience, advisers see themselves as being responsible for the investments and not responsible for administrative tasks such as delivering and preparing notices.
More than likely the burden for providing the notices will fall on recordkeepers or bundled service providers.
If that is the case, there is the issue of delivering the initial notice. That is, if someone other than the plan sponsor is responsible for providing the notice, the plan sponsor must have a process for collecting participant information so the notice can be sent. Generally, recordkeepers do not collect information on employees as they are hired. That is, most recordkeepers do not get information about employees until they become participants. Of course, that is too late for the initial notice, since it must be given 30 days prior to enrollment in a default.
Consider, for example, a participant that recently became eligible to participate in a plan. In order for the plan sponsor to obtain the QDIA safe harbor protection upon the participant’s default into the QDIA (assuming the participant fails to make an affirmative investment election), that participant must be given a notice 30 days before they are defaulted into the QDIA. If the responsibility for providing notices is that of the recordkeeper, it is unlikely that the participant will receive the notice in a timely manner unless the plan sponsor gives its recordkeeper the information necessary to deliver that notice to the participant.
Since the notice responsibility is ongoing, it is important that the plan sponsor create a procedure for ensuring that the notices are delivered timely. A large part of that will be identifying who has the responsibility for providing the notices to participants both initially and annually.
Any U.S. federal income tax advice contained in this communication (including any attachments) is neither intended nor written to be used, and cannot be used, to avoid penalties under the Internal Revenue Code or to promote, market or recommend to anyone a transaction or matter addressed herein.
© 2008
Reish Luftman Reicher & Cohen, A Professional Corporation. All rights reserved. The ADVISER REPORT is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish Luftman Reicher & Cohen does not warrant and is not responsible for errors or omissions in the content of this report.
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