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New Jersey Qualified Plan Mandate and Qualified Plan Document Deadlines Approaching

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New Jersey Qualified Plan Mandate and Qualified Plan Document Deadlines Approaching

New Jersey Employer Qualified Plan Mandate.

On March 28, 2019, New Jersey Governor Phil Murphy signed A4134 https://www.njleg.state.nj.us/2018/Bills/PL19/56_.HTM into law, establishing the New Jersey Secure Choice Savings Program (“Program”). The legislation requires employers with 25 or more employees that have been operating for 2 or more years that do not sponsor a qualified retirement plan such as a 401(k), profit sharing, defined benefit or cash balance plan, to participate in a retirement savings program administered through automatic payroll deductions which are sent to New Jersey to administer and invest.  Although the Program is mandated for employers with 25 or more employers, the Program is also available for businesses of any size on a voluntary basis.  The mandate applies to for-profit and non-profit employers but excludes governmental employers.  New Jersey is one of 12 other states that have enacted such a mandate with many others considering similar legislation.

The Program gives workers in New Jersey the option to invest the amounts withheld by their employers and remitted to New Jersey in a state-administered Individual Retirement Account. While workers employed by employers with 25 or more employees are automatically enrolled in the program, which is funded through a payroll deduction, employees will have the opportunity to opt out if desired. Workers will be able to save a certain portion of their pre-tax income for retirement, with the option to continue with the same retirement account in the instance that employer changes.  This fund will be managed by the New Jersey Secure Choice Savings Board, which will include the State Treasurer, Comptroller, and Director of Office Management and Budget, or their respective designees, as well as two public representatives, a business trade organization representative, and a representative on behalf of the enrollees.

The legislation provided that the Program will be launched 2 years from enactment which was March 2021.  However, the legislation provides that the Secure Choice Savings Board can extend the timeline by up to 12 months if necessary. Employers will have 9 months after the Program is enacted to comply with the legislation and assume Program responsibilities.  As of the date of this article, no affirmative deadline has been set so it appears March 2022 could be the most likely deadline which would give subject employers until December 2022 to comply.

The Program imposes penalties on non-complying employers of a warning up to $500 per employee. The potential penalties will increase over the course of the Program’s implementation and over multiple violations.  Employers that collect employee contributions but fail to deposit any portion of the contributions to the Program will be subject to (1) a penalty of $2,500 for a first offense and (2) a penalty of $5,000 for the second and each subsequent offense.

Once effective, subject employers must:

  1. Notice Requirement. For the first six months following the opening of the Program, the Board will provide a process by which employers may register for the Program. Participating employers will be required to distribute an employee information packet prepared by the Board to (1) existing employees, upon the implementation of the Program, and (2) new employees, at the time of hire.
  2. Payroll Processes. Employers must set up a payroll deposit retirement savings arrangement no more than 9 months after the Board opens the Program for enrollment, and automatically enroll any employees who have not opted out of the Program.  Participating employers must deposit employee payroll deductions into the New Jersey Secure Choice Savings Program Fund (the “Program Fund”).
  3. Enrollment of employees. No later than 3 months following the date of hire, employers must enroll an employee hired more than 6 months after the Board opens the Program for enrollment, unless that employee opts out of the Program prior to automatic enrollment.  Following the initial implementation of the Program, participating employers must offer an open enrollment period, at least once every year, to allow employees who originally opted out of the Program to enroll.

Defined Contribution Plan Restatements.

The IRS requires that all pre-approved qualified retirement plans be restated in their entirety every 6 years (this period is often referred to as the “Restatement Cycle”). Pre-approved plans consist of prototype plans adopted by employers and are the primary method employers use to adhere to the requirement that the employer maintain a written plan document that is current with existing laws.  There is a different 6-year restatement cycle for defined contribution plans (401(k), profit sharing, money purchase, target benefit) and for defined benefit plans (including cash balance plans).  The current Restatement Cycle for defined contribution plans ends on July 31, 2022.  Employers who sponsor a defined contribution plan that do not restate their plan by July 31, 2022, will no longer be in compliance with the law and risk significant penalties.  If plans have not been timely amended and restated, under the Employee Plans Compliance Resolution System (EPCRS) Voluntary Compliance Program (VCP), sponsors can submit late adoptions and pay a reduced penalty than if the failure is discovered upon audit of the plan.  Information of the EPCRS and VCP can be found at https://www.irs.gov/retirement-plans/epcrs-overview. If they have not already, defined contribution plan sponsors should begin taking steps to restate their plan documents by contacting their existing prototype plan sponsor or engaging a new prototype plan sponsor (financial institution, third party administrator or attorney) which can provide this service.  It also a good time for plan sponsors to meet with their advisors to review plan design and add or remove features to the plan, including contribution allocation provisions.

Although the above plan restatement deadline does not apply to self-employed pensions (SEPs), SEPs are required to maintain a plan document.  SEPs satisfy this requirement either by adopting a pre-approved prototype plan document sponsored by financial institutions or by adopting a model SEP Form 5305-SEP PDF, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement.  The IRS has been increasing audits of SEPs in recent years because of finding noncompliance, including sponsors failing to have a current plan document, resulting in significant penalties to plan sponsors.  Sponsors of SEPs and their advisors should review all SEPs to determine if the sponsor has a current plan document in their files.  Most financial institutions do not maintain copies of plan documents so maintaining a plan document and being able to produce it upon audit is the responsibility of the sponsor.  The current Form 5305-SEP is dated December 2004, so if the sponsor has this form (signed and dated) the document is current.  Pre-approved plans adopted prior to 2002 are out-of-date and new documents should be adopted immediately.  If the sponsor has a document that is out of date or cannot locate its plan document, the sponsor should execute current documents and submit under VCP to avoid paying higher penalties if the error is discovered upon audit.  Information about the current Form 5305-SEP and correction can be found at https://www.irs.gov/retirement-plans/sep-fix-it-guide-you-have-not-updated-your-sep-plan-document-for-current-law.  Sponsors and advisors should check annually whether the IRS has updated the Form 5305-SEP and whether the pre-approved prototype plan sponsor has released an updated version.

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