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.