Guest Article

(Reprinted from The 401(k) Handbook, published by Thompson Publishing Group, Inc.)

Got a Question About Your 401(k) Plan Administration? Read the Plan Document

by Martha Priddy Patterson

Many plan sponsors come to advisers with questions about their plans that could easily be answered by reading the plan document. Given the length and density of most plan documents, the caller can be forgiven for his or her resistance to read it, but would be well repaid by doing so. And now is a perfect time to read this document, for at least three reasons.

First, ERISA requires that plans "be established and maintained pursuant to a written plan document" and that plan fiduciaries carry out their duties, not only with diligence and prudence, but also "in accordance with the documents and instruments governing the plan." Second, many plan mistakes - improper allocations, failure to vest, impermissible distributions - result directly from failure to follow the plan document. Third, by the end of plan years beginning on or after Jan. 1, 2001, plans must be amended for several laws enacted over the last five years. Since an employer must amend the plan anyway, the employer may use this opportunity to change plan provisions that are ignored, outdated or too complex.

Fiduciary Duty

Administering the plan as written is a required fiduciary duty. Obviously, that duty cannot be fulfilled without reading the plan document. A fiduciary would be hard-pressed to establish diligence and prudence in dealing with the plan if he or she must admit to having never read the plan document.

A single read-through of this plan document may not be enough, and most readers may need to consult a retirement plan specialist to interpret some of the more dense provisions. Congress' numerous changes in pension law, and the IRS' shifting interpretation of those laws, may have resulted in numerous amendments to the plan document. The situation may be further complicated by the fact that both Congress and the IRS provide for a remedial period in many cases that permits delays in amending the plan - so long as the plan is operated in compliance with the new law. Although the law permits ignoring certain parts of the document during the remedial period, it is not reasonable to ignore those parts of the plan document dealing with those laws under the remedial period.

The fiduciary duty to administer the plan in accordance with its document is imposed by ERISA, not the Code. Although certain failures that follow the plan document could lead to plan disqualification, such as the failure to follow vesting or nondiscrimination rules because these failures directly violate the law, the failure to follow plan documents is not necessarily a cause of plan disqualification under the Code.

Nevertheless, the IRS has essentially "assumed" the authority to review compliance with the plan document through its Employee Plans Compliance Resolution System (EPCRS) by including "failure to follow plan documents" as one of the operational failures that will be open to resolution under EPCRS.

Avoiding Mistakes

Some fiduciaries think they do not need to read the plan document because they may simply assume the plan's recordkeeper has read and is carefully administering it. Although the record-keeper generally is knowledgeable and diligent about the plan, at times, the recordkeeper's administrative employee is taught the rules for a certain type of document and simply assumes - without reading each plan document - that those rules apply to all the documents provided by the record-keeper. If the plan sponsor also has not read the document, these mistakes may not be caught for years. The IRS' recent opening of EPCRS to third-party administrators for correcting failures that affect more than one plan sponsor through the new VCGroup program indicates that mistakes do occur.

Additionally, the employer is usually responsible for determining the level of the deferral going to the recordkeeper. This can become a case of "bad data in, bad data out." If the employer's staff provides a figure for compensation that does not match the plan's definition of compensation, the recordkeeper generally has no way of knowing this. For example, the plan document may exclude pay bonuses from the definition of compensation. The payroll department never includes annual bonuses in compensation, but the employer creates "spot bonuses" and the payroll department includes those bonuses in compensation. The employer may well want to include spot bonuses, and would amend the plan to do so. But unless someone reads the plan and knows the bonus exclusion is not limited to "annual" bonuses, the amendment will not be made and the plan will continue to receive improper allocations.

Amending for GUST - A Good Time to Amend for Reality

By the end of 2001, a calendar year plan must have amended its plan document to include the changes required by the laws known collectively as GUST, which include the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), the Small Business Job Protection Act of 1996 (SBJPA) and the Taxpayer Relief Act of 1997 (TRA '97). In addition to required changes, GUST laws permit a number of optional changes, such as changes in the minimum distribution rules at age 701/2 and in the definition of a highly compensated employee (HCE). These optional changes contain items such as eliminating the combined limit when an employer offers both a defined benefit plan and defined contribution plan and eliminating the family aggregation rules that applied to various IRS limits on the contributions and benefits to all members of an HCE's family as though the various members were one individual.

These last two items are no longer law, but if they remain in the plan document, they will have to be imposed. Inevitably, some plans will fail to remove these provisions. And just as inevitably, some very high level employee - and perhaps members of his or her family - will be very unhappy when they learn their contributions or benefits are being limited by the plan, even though the law does not require such limitations.

All these factors lead to the conclusion that reading the plan document closely, amending some portions of the plan and changing operations to meet other plan provisions are in the best interests of the plan and its participants.

Finally, reading the plan document saves a number of frustrating calls to plan practitioners or recordkeepers.

Martha Priddy Patterson is the director of employee benefits policy analysis with Deloitte & Touche LLP's Human Capital Advisory Services in Washington, D.C. Patterson is the contributing editor of The 401(k) Handbook.

Reprinted with permission from the April 2001 supplement to The 401(k) Handbook, ©Thompson Publishing Group, Inc., 2001. All rights reserved.

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