Retirement Plan Document Basics

A retirement plan consultant and an ERISA attorney offer tips for setting up, maintaining and following retirement plan documents.

The Employee Retirement Income Security Act (ERISA) Section 402 says every employee benefit plan has to be established and maintained by a written instrument, Bonnie Treichel, senior consultant at Multnomah Group, told attendees of an audiocast sponsored by law firm Drinker, Biddle & Reath.

The plan document must include at least one named fiduciary, and most of the time the named fiduciary is the employer or institution sponsoring the plan, she said.

Plan sponsors have options for creating plan documents. According to Treichel, there is almost a 50/50 split between plan sponsors that use an attorney-drafted (or individually designed) document and those that use a pre-approved plan document offered by a retirement plan provider.

She noted that if plan sponsors use an individually designed document, it will be a single document, very specific to the plan. It is helpful to use this type of document if the plan has complex designs or contribution formulas, and these plan documents are portable if the plan sponsor changes recordkeepers or third-party administrators (TPAs).

With a pre-approved (or prototype) plan document, there is a master or volume submitter document, which spells out the main plan requirements and features, and an adoption agreement with provisions plan sponsors have elected for which they have a choice. Treichel said one challenge to using a pre-approved document is trying to fit the plan into a box if it doesn’t totally fit. However, these types of documents are typically lower cost and typically better coordinated with the recordkeeper or TPA.

Summer Conley, a partner at Drinker Biddle & Reath, told audiocast attendees they must keep in mind the Internal Revenue Service’s (IRS’) change to its plan determination letter program. There used to be a rolling five-year cycle to submit individually drafted plans for a determination letter from the IRS, but that program has ended. “A determination letter gives plan sponsors some assurance that their plan meets IRS documentation requirements,” she noted.

According to Conley, elimination of the determination letter program creates an issue for plan sponsors. “If they were using a prototype and want to go to an individually designed document, they can no longer get a determination letter. If they have previously received a determination letter, and have made plan changes, they can no longer rely on the determination letter,” she said.

Conley added that in mergers and acquisitions, the acquiring plan sponsor often asked for the determination letter to have comfort in that the plan document met IRS guidelines. Also, a determination letter used to be required in order to take advantage of IRS correction features, but it is no longer a requirement.

Operating according to plan

Treichel said it is a fiduciary responsibility to follow provisions of the plan document unless a provision is inconsistent with ERISA. “Each plan has certain key elements that describe the benefit structure and guide day-to-day operations,” she said. “When you think about your fiduciary responsibilities, use your plan document as a guide in running day-to-day activities.”

According to Treichel, some plan sponsors don’t do that. Instead the plan document gets buried in a folder or is somewhere on a computer hard drive. Conley added that often she will get client calls asking, “Can we do this with our plan or is the calculation this?” Her answer is always, “What does the plan document say?”

Amendments are part of the plan as well, Conley noted. Sometimes plan sponsors convert to one plan document—i.e. restate the plan—so they don’t have to keep up with a separate document and amendment.

“Amendments should be made through a formal process and plan sponsors should keep documentation about the decision to amend the plan,” Treichel said. “Make sure the amendment is dated and signed.” Conley added that if the amendment is not signed and dated, it is not properly executed.

Plan sponsors should make sure copies of amendments go to the parties working with the plan, i.e. the recordkeeper and/or TPA, Treichel said. If not, processes can end up being out of line with the plan document. She also noted that if amendments are not kept together with the plan document, and there is a change in either plan sponsor or provider staff, processes may get reverted to old rules.

Conley noted that implementing a plan amendment is a settlor decision, but there could be fiduciary decisions involved in deciding to amend the plan. Plan sponsors should think about who has the authority to make a plan amendment. Retirement plan committees may not always need to go to company executives or boards. “For example, when an amendment won’t incur any material cost, the board may delegate full amendment authority to the committee or someone else, especially for legally required amendments. The board can assign responsibility via a resolution that should be kept with the plan document, but we prefer plan sponsors to put into the plan document who has the authority,” she said, adding that putting the assignment of responsibility for making amendments in a committee charter would work as well.

According to Conley, sometimes plan sponsors can adopt their amendment at the end of the plan year if they have been following the new provision or provisions all year. But, sometimes they need to adopt their amendments prior to using the provision or provisions, for example, when notices are required to be sent to participants.

Treichel pointed out that plan sponsors don’t have a duty to send the plan document to participants, but participants have the right to request and obtain it. Conley added that if a participant requests a copy of the plan document, the plan sponsors must provide it within 30 days or it could rack up penalties of up to $110 per each day late. She suggested plan sponsors keep a record of when the copy was requested and when it was sent to the participant.

Treichel noted that plan sponsors do have to send a summary plan description (SPD) to participants. She explained that an SPD is a basic ERISA disclosure document that must accurately summarize the plan provisions in terms participants can understand. It must be sent to participants within 90 days of being covered under the plan, when requested, and once every five or 10 years if there have been plan amendments.

Conley added that a summary of material modifications (SMM) is required to be sent to participants if a plan sponsor has made changes to the plan. They can send participants a new SPD instead, but that could be a more cumbersome process if only one simple thing has changed.

Common errors in operating according to plan

The definition of compensation is a vital item in the plan document, but is often overlooked, according to Conley. Deferrals are based on compensation as defined in the plan, and many different definitions of compensation can be used. “It is easy to include or exclude certain items from compensation. Plan sponsors need to coordinate with TPAs, recordkeepers and payroll departments or providers to make sure the right compensation is being used.

Conley noted that recent tax changes provide that some moving expenses and bicycle commuting expenses can now be included in income. “For example, if W-2 compensation is the definition in the plan, last year these things wouldn’t be counted, but this year they would be in W-2 compensation. Plan sponsors can use coding to decide what is included or not included in compensation for plan purposes,” she said.

Plan eligibility can also be confusing for some plan sponsors. As examples, Conley said some companies may have subsidiaries, and some may want everyone included in the plan and some may want employees of new subsidiaries not included. Others may want to exclude certain subsidiaries. This should be spelled out in the plan document. Also a plan may exclude temporary employees; the plan document should dictate how temporary employees are defined—whether by hours of service or time based. Conley pointed out that per IRS regulations, if an employee worked 1,000 hours in a plan year, he or she has to be eligible.

Vesting is also a common issue that comes up. Plan sponsors need to make sure they are properly crediting service, especially if an employee moves within a controlled group of plan sponsors. “If part of the controlled group is not included in the plan, the plan sponsors must still must give that employee continued vesting even if not accruing more assets in the plan,” Conley said.

Treichel added that plan sponsors should make sure they understand how crediting toward eligibility and toward vesting are different.

According to Conley, participant loans and hardships is another area where her firm sees problems. “There is a lot of administration that goes along with this, and plan sponsors and providers must follow plan document requirements,” she said.

Generally the maximum period for repaying a loan is five years, but it’s 30 if the loan is taken for the purchase of a primary residence. For purchasing of primary residence, the employee must provide proof of escrow or a purchase agreement. Conley warned that even if a plan sponsor has delegated responsibility for administering loans and hardships to a third party, it is still responsible for making sure documentation is received and plan terms are followed.

Regarding hardships, Conley noted that currently, if someone takes a hardship, he or she will have to have deferrals suspended for six months. She said sometimes there are communication issues and deferrals are not cut off, or after six months, does the document say deferrals will start automatically or will the participant need to re-enroll? Conley added that this requirement is on the table to be eliminated by legislators.

She said she has also seen instances where hardships were distributed participants when the plan document doesn’t even allow them.

Distributions of required minimum distributions (RMDs) also is often overlooked. Plan sponsors need to follow the rules for when these must be paid, and are ultimately responsible for making sure they are.

Finally, Conley noted that as a general rule, if a plan has forfeitures, they are reallocated to participants by the end of the plan year in which they accrue or are used for plan expenses. The plan document must specify how forfeitures are used, and plan sponsors should make sure they are processed per the plan document. “Generally, I suggest plan documents be drafted broadly for any permitted use,” Conley said, adding that forfeitures must be addressed at the end of each plan year. “You cannot have unallocated amounts in the plan,” she told audiocast attendees.

“My guess is there is not a plan out there that doesn’t have some sort of mistake, even if they haven’t realized it yet,” Conley said.

However, she pointed out that if a plan sponsor finds out it has failed to follow the terms of the plan, the IRS offers its Employee Plans Correction Resolution System (EPCRS) to give plan sponsors the opportunity to fix problems. Conley added that even if the failure benefited participants, for example, they received more match than they should have, the IRS sees it as not adhering to the provisions of the plan document, so plan sponsors need to do something, whether correcting through the EPCRS or amending the plan retroactively.