How Retirement Plan Administrators Navigate Tax Season and Beyond
A retirement plan administrator, typically a third-party professional, manages the day-to-day operations of an employer-sponsored retirement plan, taking on responsibilities like plan design, compliance testing and employee support.
What does a retirement plan administrator do and how does that differ from a retirement plan sponsor? Usually, an administrator is an external third party responsible for managing day-to-day tasks. Tasks may involve advising on the initial plan design, employee matching, profit-sharing, drafting the Summary Plan Description and more. However, that's not where their role ends. In fact, most plan participants will interact with their retirement plan administrator on a regular basis.
Administering an employer-sponsored retirement plan requires significant fiduciary responsibilities — especially during tax season. This is the time of year when businesses need to satisfy their due diligence to remain in good standing with the Internal Revenue Service (IRS) and the Employee Retirement Income Security Act (ERISA).
From completing plan compliance tasks to filing plan testing requirements, a plan administrator's role during tax season can be time-consuming and complicated. Here's a closer look at what their job entails:
Tax-related responsibilities
Plan administrators are subject to certain filing requirements. For example, Form 5500 must be filed to report critical details of the plan, including design specifications, financial condition and investments, as well as the movement of assets like contributions, distributions and earnings. Penalties for failing to file on time can be costly and severe.
Nondiscrimination testing must be performed and passed annually to maintain a tax-qualified plan. These tests must include all employees eligible to participate in the plan, verifying that their wages and matching contributions aren't biased.
Standard testing methods include the Actual Deferral Percentage (ADP) test and the Average Contribution Percentage (ACP) test. The "top-heavy" method may also be used to determine if key employees hold more than 60% of the total plan assets. If a plan is found to be discriminatory, the plan sponsor must make a corrective employer contribution for the applicable tax year by the deadline for filing the company's federal tax return, including extensions.
Plan administrators work diligently throughout the year to help ensure a smooth tax season and continued compliance with the IRS. They typically conduct a plan audit to make sure essential tasks are completed, including:
- Plan reports are up to date
- Investments are reasonable
- Investment certificates are maintained
- Contributions are collected and distributed in a timely manner
- Assets are appropriately valued and insured
- Participants receive an annual summary report
For plan administrators, year-end activities can seem overwhelming as they all lead to officially closing out the year with the IRS during tax season. With the right partner, support and solutions, organizations can work smarter and more efficiently during tax season and beyond.
How retirement plan administrators are different from retirement plan sponsors
As mentioned previously, a retirement plan administrator manages the day-to-day operations of the retirement plan. This includes collecting contributions, processing distributions, and keeping a close eye on the plan and compliance with applicable regulations. Alternatively, a retirement plan sponsor is the creator of the plan. They address overarching issues such as the plan's components, funding of employer matches, and the vetting and selection of third-party service providers.
The plan sponsor is legally responsible for the plan. However, a sponsor can appoint itself as the retirement plan administrator, which is sometimes the case with smaller businesses. A sponsor may also select a third-party administrator to oversee its plan. Under ERISA, a sponsor and the company, when performing the role of the retirement plan administrator, must act in the best interests of plan participants. However, in most cases, a retirement plan administrator is an external third party and a fiduciary.
How retirement plan administrators serve employees
A retirement plan administrator assists employees at every stage of the retirement lifecycle. In fact, in most cases, retirement plan administrators will interact with plan participants far more often than a plan sponsor. That's why the selection of a high-performing administrator is crucial to the success of a plan.
From enrollment and account access to processing contributions, offering investment guidance, managing beneficiary updates and handling tax reporting, administrators play a vital role. By delivering these services, they not only make retirement planning more accessible for employees but also help ensure the plan stays compliant with all applicable regulations.
For plan administrators, year-end activities can seem overwhelming as they all lead to officially closing out the year with the IRS during tax season. With the right partner, support and solutions, organizations can work smarter and more efficiently during tax season and beyond.
ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor.
ADPRS-20230210-4175
