The importance of plan document maintenance for benefit plans

Financial reporting Employee benefit plans Employee benefits

The U.S. Department of Labor (DOL) Employee Benefits Security Administration and the IRS both require tax-qualified retirement and 403(b) plans to be documented in a detailed written plan document, which serves as the “manual” for operating the plan. Plans operations must be consistent with laws and regulations, as well as plan provisions. Additionally, any other documents that present information about the plan, such as the summary plan description, employee handbooks, new employee informational handouts and employee intranet pages, need to be consistent with the plan document. It therefore is imperative that plan sponsors have procedures and controls in place for proper maintenance of the plan document, including procedures related to operations of the plan and maintenance of related information.

If the document is deficient, the plan sponsor may face a penalty or even plan disqualification. Since the Employee Plans Compliance Resolution System was implemented, actual disqualification is rare. But if document failures are discovered during an IRS audit of the plan or the Plan Sponsor, the penalty imposed on the Plan Sponsor to retain a plan’s tax advantages can be substantial.

Plan document design and maintenance

The first step in plan document maintenance is to understand what the plan actually says. This may sound like a simple task, but plans can be lengthy and written with complex language. Plan sponsors need to ensure the plan language properly articulates the desired plan operations. For example, if bonuses are to be excluded when allocating employer contributions, the plan document’s definition of compensation for that contribution type should reflect that exclusion. It is critical that fiduciaries have conversations with third-party administrators and internal or external payroll service providers regarding the operational attributes of the plan to determine whether they correlate with the plan language.

Recently a plan sponsor identified that there were many former employees in the plan with very small balances. The adoption agreement specified that distributions could be made without employee consent to persons whose balance was under $1,000.  But the adoption agreement did not specify WHEN such distribution was to be made. The client reviewed the terms of the basic plan document, and discovered that it required that such distributions “shall be made as soon as administratively feasible” following the individual’s termination of service. The third party administrator (TPA) had not initiated these distributions, as their contract specified that the plan sponsor was to authorize them to make any distributions. This is an example of the need to review both the adoption agreement and the basic plan documents, and identify the relevant action points, to identify who has the authority to take an action, and to establish procedures to make sure that the appropriate party takes action at these points.

In addition to operating in accordance with the plan document, the plan also must operate in accordance with qualified plan laws. Congress, the IRS and the DOL frequently change retirement plan regulations, and the plan document must be revised to stay in compliance with these regulations. There are statutory deadlines by which provisions become effective, and the IRS generally establishes a firm deadline for adopting these changes. The IRS Plan Document Fix-It Guide provides a table of recent legislation and the required amendment dates. Plans must operate in compliance with a new or changed tax qualification requirement as of its effective date, regardless of when a plan amendment is adopted. Most regulatory changes are effective on a plan-year basis, while the plan sometimes is amended later. Qualified plans need to have procedures in place to change both plan language and operations on a timely basis. Someone employed by the plan sponsor should be responsible for annually inquiring with the plan’s attorney or third party administrator as to whether the plan and its operations are up to date with all regulatory changes.

Prototype or volume submitter plan documents

Many plan documents are provided by an investment vendor or record-keeper. These are prototype or volume submitter plan documents that have received approval from the IRS for their basic form and content. However, that approval does not mean that the plan sponsor is relieved of their duties of care with respect to maintaining the plan. The preapproved document provider will usually prepare and distribute any revisions to the plan based upon legislative or regulatory changes, but the Plan Sponsor remains responsible for taking the actions necessary, if any, to adopt such changes. Also, the Plan Sponsor is responsible for reviewing the adoption agreement to make sure it is consistent with their expectations for the plan’s coverage and operations. In addition, prototype plans and many volume submitter plans will include a basic plan document that covers the detailed plan provisions that are not in the adoption agreement. The Plan Sponsor needs to be familiar with both documents (adoption agreement and basic plan document) to operate the plan within the requirements of the IRS and DOL. 

Individually designed plan documents

Some plans need more specific terms than what are possible with a prototype or volume submitter plan document. Such plans are generally based upon published language from the IRS or DOL, but they include specific items at the request of the plan sponsor. For example, Employee Stock Ownership Plans are always individually drafted, as there is no preapproval program for these. Many defined benefit plans are also individually drafted. Maintaining these plans is more complicated, as there may not be an ongoing relationship with the provider of the original plan document. Thus, plan management has to establish procedures to recognize when regulatory requirements or operating terms change, when amendments are due and how such amendments are to be drafted, adopted and implemented. As noted earlier, it is not unusual for the implementation date of regulatory changes to precede the actual amendment of the plan’s terms. For these individually designed plans, it also is a good idea to periodically apply for a determination letter from the IRS that the plan is qualified and the plan’s trust is exempt. The IRS has established a regular time frame for the submission of determination requests, which is unrelated to the effective date of law changes. We strongly encourage such plans to request a determination letter whenever applicable on the IRS schedule (generally every five years), as that is one of the requirements for the use of self-correction under the Employee Plans Compliance Relief System.

Plan documents frequently contain safeguard language developed by the drafter to reduce the risk of error, which might have unintended consequences. For example, many preapproved plans include the transition rule on discrimination testing for coverage changes associated with a merger, acquisition and spin-off or split-up of the plan sponsor. This safe harbor language may exclude from plan participation for a period of up to two years, any employees who joined the company due to a business acquisition.  But the plan sponsor may want such persons to be treated as eligible employees under the same procedures as they apply to any new hire.  To include such persons in the plan under the normal entry rules, the plan sponsor will need to amend the plan document.  Obviously, to recognize that such language exists within the plan, controls must be in place to consider the impact of these business organization changes on the plan’s operation, and to consider this impact before such persons are enrolled in the plan.

Establishing the process and control environment for plan document compliance

Because plan document maintenance can be complicated, the plan should evaluate the process and controls it has in place for maintaining compliance. The following is a sample list of questions, which is not all-inclusive, that plan management might consider in evaluating the effectiveness of their controls over the plan document:

  • Is someone employed by the plan sponsor responsible for reviewing the plan terms and comparing them to plan operations, at least annually?
  • Is the plan document or any amendment reviewed to identify when specific actions are required, and by whom? Are controls in place to make certain that such parties execute such actions where required?
  • If changes are made in payroll, employment practices or through the addition or removal of business segments, divisions or related enterprises, is someone employed by the plan sponsor responsible for evaluating the impact of such changes on the intent for the plan’s operations, and whether amendments to the plan terms are necessary?
  • Is someone employed by the plan sponsor tracking required plan amendments? How do they keep up to date with changes to laws?
  • If the sponsor relies on a service provider for required plan amendments, is there a contract requiring that all required amendments be provided? 
  • Is someone charged with reviewing amendments for accuracy and consistency with existing policies and procedures or desired operational changes?
  • Is there a procedure to ensure required plan amendments are identified properly and timely executed by the authorized parties and recorded?
  • Is there a procedure to ensure that any plan amendments are forwarded to the necessary parties – such as legal counsel, third-party administrator, payroll provider or compliance advisor? Is there a follow-up procedure to ensure that the impact of such changes has been properly recognized, and the applicable systems revised accordingly?
  • Is there a procedure to update and maintain the summary plan description, employee handbooks, new employee informational handouts, employee intranet pages, enrollment forms and related documents that present plan information?
  • Does the sponsor retain SIGNED copies of ALL prior plan documents and amendments?
  • Does the sponsor or its service provider apply for a determination letter from the IRS? If yes, does the sponsor retain copies of the determination letter application and the related IRS response on individually designed plans, or the opinion or notification letter on a prototype or volume submitter plan? Are procedures in place to make sure that any actions required to receive the determination letter are properly documented and executed?
  • Are procedures in place at the plan sponsor to periodically test that the plan is operating consistent with the plan document, particularly when there has been a plan amendment or a change in personnel or providers?


In summary, maintaining plan documentation that is up to date with all required changes, complies with intended plan operations and is accurately reflected in other information provided discussing the plan is not simple. Frequently, plan sponsors believe that the service provider who provided their original plan document will take responsibility for keeping it up to date. Even with preapproved plan documents, this is not automatic. Frequently, this plan maintenance commitment requires additional contractual language and an annual fee. Even in cases where ongoing maintenance is part of the contract, the plan sponsor still needs to be engaged with the change process. Thus, controls must be in place that will actively identify when action is required.

RSM contributors