Provisions of a Standardized Adoption Agreement

[Guest Nabiyah1]

This is a two part scenario:

(I.) It is my understanding that an standized prototype does not allow entitlement or excluded class provisions; However, I have a basic document (with a section specific to the profit sharing plan, under standardized document) that says "Any participant who is actively employed by the employer and all terminated participants who performed less that 501 hours of service during any plan year shall not share in Employer Contributions," written into the document. While the Employer does not have an opportunity to elect an entitlement provision, this seems to be an entitlement provison.

*Would someone please clarify this for me. Basically, I am stuck on the statement that says "any participant who is actively employed."

(II.) It is my understanding the 501 hour requirement for terminated participants as described in Part I. above, is a statuatory exclusion from a compliance standpoint, for example the 410(B) Ratio Percentage Test/Actual Contribution Percentage Test, which allows you to remove anyone in that population from your denominator when your Plan has entitlement, increasing the chances for better results.

However, in the case of a standardized plan that should not have entitlement, why would this language be there? Is this considered and entitlement provision and are the IRC regs. written to include "active employees," as well as terminated? This document also has a determination letter. What am I missing?

Thanks Nabiyah

[Tom Poje]

the regs are written to say that all employees still employed at the end of the year (actives) are treated as either:

ineligible - never met the eligibility requirements

includable and not benefiting - enter the plan but failed hours or last day requirement to receive a contribution

includable and benefiting - entered and met hours requirement to receive a contribution

in the case of a standardized plan, all active employees (those still working on the last day) receive a contribution - there is no hours requirement. that is what the document means by active employee. it does not mean anyone who simply worked during the year.

in the case of terminees, the regs allow you to excluded any terminee with less than 500 hours. therefore all terminees who worked more than 500 hours will also receive a contribution. The plan could even be more generous and do away with any hours requirement as well for terminees.

therefore, in a standardized plan, your ratio % has to be 100% everytime, every year.

[Guest Nabiyah1]

I really appreciate your response. However, if you would clarify just a little further for me.

Because the document that I have as a standardized prototype says: Any participant who is active and all terminated employees performing less than 501 hours of service shall not share in employer contributions...

The Fiduciary has operationally omitted active employees (anyone who is active on the last day of the plan year in question) who did not perform at least 501 hours of service from receiving employer contributions for that plan year. I am interpreting your response to say the 501 hr provision in the standardized prototype only applies to terminated employees (not active on the last day of the plan year) and although an "active employee" may have performed less than 501 hours of service, which directly translates as a break in service, that "active employee" should still be funded for that plan year.

Am I interpreting this correctly?

[Guest MTransue]

You are correct. After satisfying the eligibility and entry requirements, any participant who is employed on the last day of the plan year is eligible to receive an allocation. The 501 hours must be satisfied by participants who terminated during the year.

By omitting any participant who didn't complete 501 hours of service would be incorrect with a standardized document.

Just a side note, if it is the intent of the employer to omit participants, (i.e. completion of 501 hours AND actively employed on the last day of the plan year), a nonstandardized document would have the capacity for the type of provision.

[Tom Poje]

to me it sounds like a really poorly worded document - or perhaps better yet, is there an SPD, and what does that say.

the statement:

'Any participant who is active and all terminated employees performing less than 501 hours of service shall not share in employer contributions...'

I could read this as saying any participant who is active (no hours requirement) and all participants < 500 hours shall not receive a contribution. - that interpretation would make no sense.

the fiduciary has been reading this to say

anyone < 500 hours shall not share in employer contributions. [if so, why didn't they word the document that way]

while that is certainly possible in a plan, I didn't think that was possible in a standardized plan.

The typical language is as follows (assuming it has been updated for law changes): employees to share in the contribution are

for plan years commencing on or after 1/1/90, participants who complete at least 501 hours of service during the plan year

{therefore it doesn't matter if you quit once you complete 500 hours}

OR are employed by the employer on the last day of the plan year

{thus it doesn't matter how many hours you work if you are there on the last day}

If the plan has a 1-year break in service rule,the suspension from participation occurs the year following the break in service, not in the current year, thus a coverage problem could still exist.

I'd be curious to hear if others have encountered a plan with language such as Nabiyah has described.

All that being said, I suppose if you follow the interpretation of the document, the fiduciary could be correct, but then I don't think you really have a standardized plan, in which case I think there exists issues such as reliance on the opinion letter/determination letter, but I am not a document guru - I yield at that point to someone more versed in that area.

[Guest Nabiyah1]

Thank you both for your responses. It is very helpful and definitely gives me a few things to consider regarding the document and the SPD's language.

Tom just to answer your question the SPD reads as follows: What special service requirements determine whether I receive and employer contribution during a given plan year? You must be credited with a least 501 Hours of Service during a given Plan Year to receive Employer Contributions.

As you can see, the SPD was the supporting factor to my confusion because the understanding implied is contrary to what I have been learned about a standardized plan.

Does this additional information above change anything for you? Or, emphasize the perspective that the document is poorly written and should be revised?

Thanks again for your input,

Nabiyah.

[Appleby]

My 2-cents

An employee may have met the service requirement to be a 'participant' in the plan and can therefore make deferral contributions. However, with respect to 'employer contributions' active employees, as well as those who terminate from service during the year, are not entitled to receive 'employer contributions' unless they perform the required hours of service, as stipulated in the plan document. This is permissible with standardized as well as non-standardized plans

Tom Poje, you are defining active employee, which is different from active participant- as one can be an employee and not a participant and vice versa.

[Tom Poje]

sometimes it takes awhile to find a source or comment or whatever one is looking for.

I found what I was looking for in The ERISA Outline Book 1.229 of the 2001 edition.

D.1. Standardized adoption agreement

"...A standardized adoption agrrement is restricted to options which guarantee the employer's plan will satisfy coverage and nondiscrimination requirements."

therefore, by following the terms of the document (and I don't see how you can't- and as you indicated the SPD indicates you are to do this as well) you run the possibility of failing coverage.

e.g. suppose I only had one NHCE, who entered the plan, but in the current year worked less than 500 hours. By terms of the document, you would not give him a contribution. now you fail coverage.

I am not a document expert as to what happens next. Normally, in a standardized plan, you are relying on the opinion letter. I don't think you can do that since your plan could fail coverage.

I yield to someone more expert in that area.