Summary of Material Modifications required

[Belgarath]

We have had an unusual situation posed to us as a hypothetical issue, although I'm pretty nearly certain it is real - pretty hard to dream this up. A group of several large 403(b) plans (not a controlled group or affiliated services group) that were set up with intentionally identical provisions. The 403(b) documents required a Year of Service to be eligible for employer contributions. Plan uses 1,000 hours for a Year of Service, measures the initial computation period from date of hire to the end of the 12-month period. So far, so good.

However, no election was made in the adoption agreement as to whether subsequent eligibility periods switch to plan year, or remain on anniversary years. The adoption agreement is clear - one or the other should be chosen. But it wasn't.

The plans have been ADMINISTERED with subsequent eligibility periods changing to plan year. Given that there is an omission in the adoption agreement, this is good, as it is more favorable to employees (potentially earlier eligibility for employer contributions).

I don't believe this is a "document failure" in the technical sense for purposes of RP 2021-30. It doesn't, "on its face" violate a requirement of 403(b), I don't think. Thoughts on this?

Ignoring that aspect, and pushing a tenuous position - when the plan is amended to correct this, is a SMM necessary? Obviously, the safe and solid answer is "yes." But is there a valid argument to be made that since the employees have been treated consistently under the "change to plan year" option, that there's no material change that actually affects them?

Beyond that, there's no specific penalty for failure to provide an SMM.

I understand this is legal counsel territory, and that is what we are recommending.  However, curious as to thoughts on this, and the "risk" factor in taking the aggressive approach.

[Peter Gulia]

A few paths each sponsor/administrator might want its lawyer’s advice on:

Many IRS-preapproved documents and other documents using an adoption-agreement format include texts about what provision results when an adoption agreement does not specify the user’s choice. A sponsor/administrator might look for provisions of that kind before assuming that what was administered is what the plan provides.

If there is an ambiguity about whether the statute calls for a restated summary plan description or a summary of material modifications, one might interpret the ambiguity considering Congress’s purpose that a participant may look to the summary to know those of the plan’s provisions that ought to be summarized. And one might ask this rhetorical question: Could a participant—without asking the employer/administrator, and just by reading the SPD/SMM—know the plan’s service-counting provision (and check whether the plan’s administrator applied it)?

If furnishing an SPD or SMM incurs almost no incremental expense, an administrator might weight its decision-making in favor of communication. Conversely, if the statute and rules for an SPD/SMM do not clearly require the update and a nontrivial expense would burden participants’, beneficiaries’, and alternate payees’ accounts, a fiduciary might consider that circumstance in evaluating when to furnish the next restated SPD or SMM.

[Belgarath]

Thanks Peter - I should have specified - the question assumed use of an FIS 403(b) document. I looked at one, and the AA doesn't provide a default if an election isn't made. And the FIS document (which I have, 'cause we use it) specifies that it is as elected in the AA. So your second paragraph, while good advice, doesn't apply here. But thank you for the suggestion. 

I don't know the expense involved - I think there may be a very large number of participants in total, and have no idea of the expense.

Your last point is interesting. Assuming the plans are restated early in the next cycle, (so could be perhaps early 2024) the updated SPD would be furnished then, so the "window" of not providing the SMM even if required isn't all that long. I'll mention this to their ERISA attorney - many of them don't have your experience or creativity!

Thanks again for the response. Since we aren't administering the plans, this whole thing is an intellectual exercise only, but forces me to think outside the box, which is a great thing when you aren't responsible for the outcome!

[Luke Bailey]

On 10/14/2022 at 7:56 AM, Belgarath said:

Ignoring that aspect, and pushing a tenuous position - when the plan is amended to correct this, is a SMM necessary?

Belgarath, my thought would be that it depends on what the SPD says. If the SPD can be interpreted as consistent with what they've been doing, it would seem that an SMM would not be necessary.