Restatement of a DB Prototype Plan

[flosfur]

A Prototype DB plan was effective 1/1/94, say. The plan's benefit formula was amended 1/1/97, 1/1/1999 and 1/1/2002.

The plan is being restated for GUST, effective date of which is 1/1/97.

The adoption agreement has room for only one formula. I am told I will have to complete 3 adoption agreements to accommodate the 3 formulas.

Question:

What are the potential problems with the following approach.

Complete one adoption agreement with the 1/1/97 benefit formula in it and then add an addendum showing the benefit formula effective 1/1/99 and 1/1/2002.

Thanks for your help.

[Mike Preston]

I vote for none of the above. I think a good course of action would be adopt the formula in the A&R which is the lowest. Then prepare as many standalone amendments as are necessary to implement the higher formulas at different dates, with effective dates as appropriate. The problem is with shoehorning multiple provisions into a singular document. I have talked with a number of people at the IRS and they are pretty adamant that the GUST restatement itself needs to be a "word for word" adoption, and if the document as submitted didn't include language which allowed for multiple effective dates as to formulas, well, you just can't use that document along with a modification that does provide for multiple effective dates and retain word-for-word reliance.

So, you have to finesse it another way.

[flosfur]

Since the GUST restatement has effective date of 1/1/97, the adoption agreement will have the benefit formulas in effect @ 1/1/97. The addendum will contain the benefit formulas that were effective after 1/1/97. The corp resolution for restatement will make a reference to the addendum.

What did I change in the adoption agreement to negate the proto status?

[Mike Preston]

Maybe nothing, and if the 1/1/97 formula is the lowest, you may be fine. But if it isn't the lowest, I think there may be issues.

Why do you favor an addendum over amendments? Aren't they substantively the same thing?

[flosfur]

Why you say, "May be not"? Is there any doubt and if so why the doubt?

I prefer the addendum because:

The amendments were actually adopted and signed in the past. The addendum just memorializes the fact that there were certain changes to the plan since the effective date of the GUST restated document.

Whereas re-doing the amendments would require signing and dating them - what date(s) does one use? Original adoption date of the amendment or the current date? Either choice does not make any sense to me at all and only creates unnecessary extra work. I know, I know - the law and its enforcement does not have to make any sense.

A question just arose in my mind.

Where in the actual law (IRC/ERISA etc) does it say that IRS or DOL has an authority to dictate the actual wording of a pension plan document etc?

[Mike Preston]

I'm not sure I understand your last comment. Isn't this a pre-approved plan that you are trying to shoehorn your multiple formulas into? If it is pre-approved, that sort of answers your question as to where it is written that the IRS gets to approve the language. If you don't want a pre-approved type plan, the IRS has to go along with anything you write that is substantively compliant.

And I'm worried that the way you are contemplating implementing the formulas will result in either the plan being deemed outside of the IRS' parameters for pre-approved plans, or will result in a potential interpretation that a formula higher than what you want to be effective is somehow applicable to a given participant.

[flosfur]

My question about the wordings was for the pension plans in general. I know, for pre-approved (prototypes & volume submitters), the IRS can & does dictate the wordings.

So I take it, for individually written plans there is no legislative requirement for how the document should be worded - of course this all changes when one applies for a favorbale determination letter.

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I still am perplexed about why I would lose the prototype status if I have an addendum listing prior formulas with respective effective dates for each formula. Those dates will clearly tell anyone looking at the document which formula(s) was applicable to participants during various periods.

In fact in large plans' documents (individually written, of course) you will see a long list of formulas going back to .... (whatever is the opposite of eternity).

And how would having freshly adopted amendment(s) alleviate the problem(s) you envision or overcome the hurdle of negating prototype status. Because I am told by the prototype doc sponsor (and by others) that "not" filling in the adoption agreement for each change since 1/1/97 (say), would negate the prototype status.

Finally, let's assume the IRS does say that prototype status was negated. What would be the possible consequences of that? If they argue that the language in the plan document is not in compliance and hence try to disqualify the plan, would they have a leg to stand on? After all, except for the addendum (or separate amendments in your approach), the document has the wording which was approved by them. If they pick on something on the adoption agreement which was not completed correctly but that would have negated the prototype status anyway no matter what else was done to negate the proto status.

For consideraing the above, let's ignore the fact that the IRS/DOL can try anything because they have the big stick of authority....

[Mike Preston]

There have been a fair number of provisions approved over the years that have been deemed inappropriate by the Service in restrospect. Reliance is a nice thing to have.

All I can say is that the IRS is somewhat adamant as to what constitutes a "word-for-word" adoption. It is their game, so they get to make the rules. I have fought this particular battle in great detail, so I'm only sharing with you that which I have been told is the ONLY way to insulate the plan sponsor from a claim by the IRS that the document is not a word-for-word adoption. And that is to adopt the plan with documentation that is "word-for-word".

If your addendum wasn't submitted to the IRS as part of the pre-approval process (which we both know it wasn't) then the fact that it has language which modifies the plan just seals the fate of the plan sponsor. It is not a "word-for-word" adoption.

As indicated in a prior message, you need to do something that finesses the issue. Certainly, having multiple adoption agreements executed fulfills this need. Having an amendment made which is not part of the original "word-for-word" adoption appears to meet the need. But having the original "word-for-word" adoption be something (anything) other than pre-approved language doesn't.

Have fun.