Protecting Your Organization, Plan Participants, and Fiduciaries

A great American educator once wrote, “Understanding includes knowing all of the right information. Wisdom is knowing what to do with that information, skill is knowing how to do it, and virtue is doing it.”

Employer-sponsored retirement plans are coming under increased scrutiny. Ignorance of the law for not following the retirement plan document is no defense in the event of an IRS or Department of Labor audit. As the plan sponsor of an employer-sponsored retirement plan, engagement and understanding on your behalf are required.

A trend appears to be developing amongst employers / retirement plan sponsors which represents a significant cause for concern: employers are instituting plan design changes to their retirement plan that are not reflected or allowed in their written plan document. Such changes could be putting your organization, its retirement plan and those subject to fiduciary oversight at risk. Potential penalties for such actions include plan disqualification, income inclusion, and civil and / or legal fines to your organization and its retirement plan fiduciaries.

Background information will help to establish context.

According to the IRS, a Plan Document is defined as “a written instrument under which a retirement plan is both established and operated”. The plan document represents the legal and authoritative description of a plan sponsor’s employer sponsored retirement plan.

1. The plan document must be written in a fashion which matches the plan to existing legislation.
2. The plan in writing must match the plan in operations.

ERISA and the Internal Revenue Code both require that a retirement plan include a written plan document. 403(b) plans were sometimes exempt from this requirement until the passage of new legislation became effective January 1, 2009. Church 403(b)(9) plans continue to be an area of debate in this area. It is clearly our opinion that even church plans are best served by a written plan document.

The retirement plan in “form” (the written plan document) must match the retirement plan in “function” (the actual day to day operations of the plan). There are no exceptions. Only administrative details (and not plan design elements) are permitted to be left to the discretion of the plan administrator. The plan administrator is the individual named in the plan document who is ultimately responsible for providing oversight to those day to day operations.

In the event that a discrepancy exists between the plan in “form” and the plan in “function”, the plan document always governs.

The cause for concern…

Given current economic conditions, many employers have adopted plan design changes to their retirement plan that are not reflected or allowed (through the use of discretionary language) in their written plan document. For example, a reduction or complete suspensions of employer contributions into their organization’s retirement plan. If the amended plan design elements are not reflected in either the plan document or a separate plan document amendment, the employer is legally bound by the original terms of the written plan document. There are no exceptions. In the aforementioned employer contribution example, the plan has an operational failure. The plan in form does not match the plan in function. Plan participant's are due the past and unsubmitted employer contributions plus applicable earnings.

In the event that such an operational failure exists, two important corrective actions are required. First, the past failure must be corrected. Second, changes need to be implemented that will prevent the plan from operating out of compliance moving forward. It is in the plan sponsor’s, plan participant’s and beneficiary’s best interest if such corrections are made on a voluntary basis prior to a plan audit. As a point of reference, the Internal Revenue Service is currently auditing about 5% of all qualified retirement plans on an annual basis.

1. The past failure needs to be corrected.
   Where the Department of Labor offers a self correction method of treating such operational failures through their Employer Plan Compliance Resolution System, an ounce of prevention is worth a pound of cure. Assure that your retirement plan is operating in conjunction with your plan document.
2. Amend the plan document if needed.
   Plan Documents can be amended. The amended plan document will allow the plan to operate in a compliant fashion on a go-forward basis. The effective date of the plan amendment is the later of the restatement date as indicated in the amendment or the signature date. Plan amendments that deal with benefit accruals are prospective and not retroactive. In other words, the past failure cannot be corrected by a plan amendment.

We’re here to help! Envoy Financial provides plan amendment and plan restatement services. Contact Dave McHenry at (888) 879-1376, ext. 228, or by email, to further discuss your situation and your needs.

“Understanding includes knowing all of the right information. Wisdom is knowing what to do with that information, skill is knowing how to do it, and virtue is doing it.”

Be encouraged as you continue to provide your staff with the retirement plan benefits that are so needed in today’s uncertain economic environment. The day will come when the paycheck stops, yet the call to service and the need for resources does not.