Document Problems

[Dawn Hafner]

When gathering documents for a takeover client, we discovered that their copy of the adoption agreement was not signed. So, we contacted the prior recordkeeper (an insurance company) and asked for a signed copy from their files of the most recent plan document. Well, when we receive the document, it is a more recent restatement date than the client's copy. This more recent document has been signed by one person who is both the trustee and an officer of the company.

The problem is that there are two drafting differences between the two documents.

1) the money purchase formula was changed to read 0% (.001%)

2) the forfeitures were changed from using them to reduce contributions to allocating them to participants

According to the client, they never initiated any changes to their document, and have no board resolutions authorizing any changes. They have had one plan year end since this restatement, and they contributed at the prior formula under the plan, and used forfeitures to reduce the employer contribution. We are completing the current plan year end now.

Do we have any options here? I feel that the change to a 0% formula is an obvious error in computer entry that was never intended. By continuing to make the money purchase contributions they are only benefiting the participants. This appears to be an obvious oversight in computer entry because the entry was defaulted to .001% by the system.

The change in use of forfeitures I have a problem with though. This change was actually to the benefit of the participants, so in my opinion must be followed regardless of the intent of the employer.

From the employer's perspective, these drafting errors are going to cost them thousands due to losing the forfeitures, and insist the officer did not understand or recognize the changes. Obviously, that argument will have no merit with the IRS.

Any suggestions? Does the lack of board approval account for anything? My initial recomendation would be to continue contributing under the plan as under the prior formula. Immediately adopt an amendment to correct the 0% contribution level. Do not use forfeitures to reduce, but rather allocate to participants for this year. Also, correct under APRCS to contribute the forfeitures used last year plus any earnings to last year's eligible participants. I guess I do not think it is necessary to go through CAP just to contunue the formula as it has been for years, just due to an input error. Actually, due to the lack of 204(h) notice, the change would be ineffective anyway. Does the remedial amendment period help me any? The restatement date was in the January of 1996.

Any other thoughts or suggestions? Thanks!

[This message has been edited by Dawn Hafner (edited 09-17-98).]

[Alonzo]

Check the amendment provisions of your document. If the plan says the document may be amended by the "company", you are sunk, since signature by a corporate officer may well be enough to put the amendment into effect. However, the amendment provisions may require board approva for all amendments, or amendments which change the contribution formula or allocation formula.

Incidentally, I agree with your reading of the situation with respect to the formula, and the allocation of forfeitures.

[Ervin Barham]

I think your question as to the validity of this document is a good one and should be examined closely by the company's legal counsel.

In a similar case, the attorney indicated to me that without board approval, no amendment exists.

One question to ask might be: Did the board give a "blanket authority" to the officer to sign documents in an earlier set of minutes?

Does the insurance company have a "canned" set of minutes" in their files that were signed?

Your point about the 204(h) notice is good.

If the document is not valid, then you would go on with the old document, APRSC, etc.

Of course, I am not an attorney, so I repeat that one should be consulted at this point.