While the final weeks of the year can be a little less demanding for most employees—a season of office parties, celebratory staff lunches and vacation time—it’s one of the busiest periods for HR professionals. Before they can ring in 2005, they have to tie up administrative details remaining from 2004 and make sure the company is on course for a seamless transition to the approaching year.
Among the most important items on HR’s must-do list at year’s end, of course, is the twofold task of verifying and implementing the benefits-plan choices that employees made during open enrollment a month or so earlier. In addition, HR is often drawn into compliance duties arising from the company’s sponsorship of retirement and health plans. Federal agencies—particularly the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS)—as well as state agencies have various deadlines for employers to file forms and send notifications to employees. Deadlines pertaining to benefits plans are generally tied to the end of the plan year, which is usually—but not always—Dec. 31. (For the purposes of this article, it’s assumed that plan years end on Dec. 31.)
As experienced HR professionals know, benefits-plan compliance rules and procedures can be complex and daunting, especially for newcomers to the field, says Sally Lockwood Church, senior counsel and a benefits specialist at the Pittsburgh law firm of Thorp, Reed & Armstrong LLP. “Try to educate yourself on all the compliance issues, because it’s pretty easy to trip up.”
And there’s more: At year’s end HR often has to handle at least part of the records updating for payroll operations and has to bring to a close a host of other administrative matters.
To stay on top of it all, HR directors must plan ahead and stay organized. “The sooner you think about it, the easier it is to plan,” says Juliet C. Hafford, SPHR, vice president of HR and administration at PPOM, a 310-employee health insurer in Southfield, Mich. “The biggest thing is to have checklists.”
Nancy C. Nelson, SPHR, HR director of Ultra Clean Technology Systems and Service Inc., a 300-employee company in Menlo Park, Calif., that makes gas and liquid delivery systems, plans for year-end tasks by checking their due dates and working backward to establish their start dates.
Following are many of the matters that will involve HR professionals in these final weeks of 2004. Some of the tasks have year-end deadlines, while others are geared to making sure 2005 gets off to a smooth start. They cover a wide range of HR responsibilities, from health and retirement benefits to payroll data to regulatory compliance to simple, straightforward reminders to employees that there may be some paycheck and benefits details that they too should consider at this time of year.
Filling In The Benefits Blanks
The first step after open enrollment ends, many HR practitioners say, is to verify data in health, cafeteria and other plans. HR should check the accuracy of basic information—names, addresses, birth dates and such—before it’s transmitted to outside vendors. Many benefits administrators also send letters to participants asking them to verify either their selections or their decision to decline coverage.
Enrollment changes are legally allowed through Dec. 31, but it’s up to human resources to decide how accommodating it can be to employees’ changes. Be sure to leave enough time to process changes by Jan. 1. The more automated your benefits systems are, of course, the less time it will take.
“We’re pretty strict about the deadline,” says Donn Broich, SPHR, HR manager for the U.S. Forest Service’s Midwest Service Center. “We don’t spend a lot of time cleaning up data.” His center, based in Milwaukee, serves 1,800 employees in five states. He says he likes to have benefits data processed quickly so there’s ample time remaining to handle paperwork for the many workers who retire at year’s end.
The end of the year raises special concerns for HR professionals overseeing retirement plans. For example, plan sponsors must follow the IRS’s minimum-distribution rules, which require retirees and vested former employees who have reached 70 to receive their benefits by Dec. 31. However, initial distributions to retirees who this year turned 70—the age at which a participant must start receiving distributions—are not due to the retiree until April 1, 2005.
HR also needs to make certain as the year draws to a close that employees participating in defined contribution retirement plans do not contribute more than federal law allows. This year an employee can put as much as $13,000 in pretax wages into a 401(k) plan, and an employee who is 50 or older can put in as much as $3,000 more in “catch-up” contributions.
In 2005, the cap on employee contributions will rise to $14,000, and the limit on catch-up contributions will increase to $4,000.
Sometimes an employee’s pretax contributions to a 401(k) plan will exceed the legal maximum for an individual in a given year. If it’s the result of an administrative error, it’s easily corrected before year’s end, notes Serena G. Simons of the Washington, D.C., law firm Bredhoff & Kaiser. But it’s a bit harder to head off by the end of the year if, for example, it has occurred because an employee changed jobs and contributed pretax income to two different retirement plans, she says. “Neither employer will necessarily know.” It’s up to the employee to notify the plan administrator and ask that the excess deferral—plus earnings on the excess—be distributed to the employee as taxable income, she says.
Retirement Plans—Looking Ahead
In setting up retirement benefits arrangements for the coming year, HR must take note of any changes by the IRS in plan limits, usually announced late in the year for the following year. By year’s end, says benefits attorney Church, HR “should make sure the new limits are integrated into their systems.”
One such limit is the cap on annual compensation that defined contribution and defined benefit plans can consider for the purposes of contributions and accrued-benefits formulas. This year the limit has been $205,000. In 2005, the compensation limit will be $210,000.
Another cap that can change from year to year is the “415 limit” on retirement plan contributions by the employer and the employee. This year the maximum benefit has been $41,000 for defined contribution plans and $165,000 for defined benefit plans. Next year the benefits maximums for those types of plans will rise to $42,000 and $170,000, respectively.
(The term “415” refers to the section of the IRS Code that provides for dollar limits on benefits and contributions under qualified retirement plans—those that qualify under IRS rules for beneficial tax treatment.)
In addition, experts say, it can be useful at this time of year to perform nondiscrimination testing—the retirement plan analysis that determines whether, as the IRS defines it, “the amount of contributions made on behalf of rank-and-file employees is proportional to contributions made on behalf of owners and managers.” Late-in-the-year testing can head off problems down the road. “If you’re too close to the limit,” Simons notes, “you can stop contributions from higher-paid employees.”
Such testing, which requires employers to gather data on the number of participants and their compensation and contributions, also involves a dollar amount that can change from year to year—namely, the income level defining a “highly compensated employee.”
And if your plan fails the test, you have time to consider fixes, such as expanding eligibility, increasing the company match or using a safe-harbor arrangement, says Melissa Kurtzman, a partner in the Philadelphia law firm of Wolf, Block, Schorr & Solis-Cohen LLP.
A safe-harbor 401(k) plan “among other things, must provide for employer contributions that are fully vested when made,” according to the IRS. “The safe-harbor 401(k) is not subject to many of the complex tax rules that are associated with a traditional 401(k) plan, including annual nondiscrimination testing.”
Payroll Tasks—For Now and Later
HR’s connection with payroll matters during the transition from one year to the next involves some duties that have to be done by the end of December and others that can be carried out the following year.
An immediate responsibility for HR is to make sure the company’s payroll system has incorporated all of the changes that employees have requested for their pretax benefits and contribution levels. “No matter where payroll reports, it’s got to communicate with HR to make sure year-end will work well,” says Scott Mezistrano, senior manager of government relations for the American Payroll Association, based in San Antonio.
In some companies, payroll is tied to HR, but in others it reports to the accounting department, as it does at PPOM. HR director Hafford, whose department includes benefits, says she meets with her payroll and accounting peers to coordinate year-end duties. For starters, HR can remind employees to check the accuracy of information on their pay stubs so that necessary changes will be reflected on their Form W-2 wage and tax statements and in their personnel records. It’s important to note changes in name and marital status.
And HR should remind employees that they may want to adjust their Form W-4 withholding information if the number of their dependents has changed—through childbirth or adoption, perhaps, or if a child no longer qualifies as a dependent because of age and income.
“People do forget to update their W-4s,” says Jim Northrop, statutory analyst at ADP Inc., a payroll and benefits administration firm in Roseland, N.J. “It’s a wise policy to remind employees to make sure payroll has the latest information.”
Ultra Clean’s Nelson says, “Periodic reminders work best.” In late November and early December she e-mails notes to employees with links to the company’s self-service system. All such changes must be updated on your on-site system even if you use an outside payroll company. “You want to do it in time for your first 2005 payroll” but after your last 2004 payroll, says Brenda Sural, national payroll practice leader for Hewitt Associates, an HR consulting firm based in Lincolnshire, Ill.
W-2s and other payroll reports are routinely submitted to the IRS and the Social Security Administration (SSA) early in the year. (For more information, see “Payroll Paperwork”.)
Northrop notes that this is the last year in which employers with 250 or more employees “can submit records to the SSA on magnetic tape or cartridge.” Starting with W-2 reporting for 2005, he continues, the SSA will accept only electronic filings, and he expects that requirement to be adopted by state and local agencies as well. Mezistrano says that filing electronically can save employers time and money because “the employer doesn’t have to print forms and distribute them.”
Also new this year is the letter code “W” that employers who started health savings accounts must place in Box 12 of employees’ W-2 statements. The code reports an employer’s contribution to an account, which isn’t taxable to the employee.
Another compensation matter now requiring HR’s attention stems from the recently enacted American Jobs Creation Act of 2004. Provisions of the new law make major changes in the tax rules for nonqualified deferred compensation arrangements. Benefits specialists will have to become knowledgeable on the changes and take whatever actions are necessary on their deferred compensation plans before the new year.
Other year-end compensation tasks involving HR:
- If you changed your weekly or biweekly payroll formula for 2004 because of a calendar anomaly that gave you an extra payday this year, you must switch back to your regular formula if the number of your pay dates in the coming year reverts to 52 or 26.
- Check next year’s calendar to determine if any paydays fall on federal or state holidays or bank-closing days, which would require that you adjust the pay and direct-deposit dates for those paydays. (For more information, see “Selected Days Off in 2005”.)
- Schedule an adjustment payroll to account for fringe benefits, automobile allowances, rewards and other taxable income as well as any errors.
- Ensure that terminated employees have zero balances for loans, garnishments, vacation and sick leave.
- Check your supply of blank checks, payroll forms, blank W-2s and similar materials.
If Not Now, Soon
Some benefits tasks that require HR’s attention don’t have year-end deadlines but are generally taken care of at around this time. One is the notification required by the Women’s Health and Cancer Rights Act of 1998. Under that law, women whose group health plans provide mastectomy benefits must be notified every year that they are also entitled to reconstructive procedures, prostheses and other types of treatment related to the surgery. There’s no deadline for the notification, but many employers distribute or e-mail the notice in December.
In addition, now that the DOL has finalized COBRA notice regulations, which took effect for plan years starting on or after Nov. 4, “you need to reread your COBRA notices and make sure they’re consistent with DOL’s model notice,” says Kathy Bakich, national director for health compliance at Segal Co., a New York-based benefits consulting firm.
Moreover, Bakich notes, human resources has to adjust its procedures or confirm that an outside provider is doing so in light of the two new COBRA notices required as of Jan. 1. One must be given to a person whose request for COBRA benefits has been denied, stating the denial and the reasons for it. The other notice goes to former employees whose COBRA benefits will be terminated early.
HR should also take note now that on April 21, 2005, new security rules become effective under the Health Insurance Portability and Accountability Act of 1996. “They require group health plans to make sure any individual health information stored electronically is protected,” Bakich says.
As a result of the new rules, employers will have to secure the transmission of e-mail and other sensitive information sent to and received from insurance companies and third-party administrators by using encryption, a secure web site or other means, and they’ll have to make sure their vendors are doing the right thing, she explains.
By the start of next year, HR should begin gathering the extensive information needed for federal Form 5500, the annual report that plan sponsors must file on the status of their employee benefits plans. For plan years that end Dec. 31, the form is due July 31 or, with an extension, on Oct. 15.
At around this time, many HR directors audit head count, to make sure its numbers agree with those used by managers and in public reports. Broich says he updates his employee roster monthly and prints out the last one of the year to serve as a master record, which he consults when managers call with questions.
Along the same lines, Broich compiles a list of employees who are eligible to retire in the next few years—which can prove to be a useful tool for staffing strategy.
Church suggests that HR also monitor the roster of participants in employee benefits plans. When the number crosses the threshold of 100, she notes, a plan becomes subject to certain filing or auditing requirements.
Another task that can be done at this time of year—while the entries on W-2 and benefits forms are being checked for accuracy—is to make sure that names and Social Security numbers match. The SSA can check names in bulk or one at a time. If there’s a mismatch, employees won’t collect the Social Security benefits they’re due at retirement, and employers could be penalized by the IRS.
You also should review personnel, payroll and other records, both paper and electronic, to see if any should be purged. Laws and company records-retention policies will guide you on which records you should keep and which ones you can trash.
And finally, when you’ve done it all—from implementing open-season choices to monitoring changes in retirement benefits to sending old records through the shredder—wish yourself a happy new year!
Carolyn Hirschman is a business writer based in Rockville, Md. She has written for a variety of business publications and has covered workplace