Unexecuted plan documents

[KJ Theo]

What is the timing for adoption agreements for new plans to be executed? Must they be signed before the effective date of the plan? If a plan isn't adopted timely, do you need to file with the VCP? Would this be considered a nonamender failure?

[ESOP Guy]

A document can be signed and executed after the effective date.  You can sign a Profit Sharing Plan or ESOP on 12/31/2017 to be effective 1/1/2017 for example. 

My understanding is you can't sign a 401(k) plan on 12/31/2017 and have been putting deferrals into the plan all year long.  The document has to be signed before deferrals can be put into the plan. 

You also can't sign the document in 2018 going back to any time in 2017. 

So the exact timeline and type of contribution is important.  If you want to give the exact dates the attorneys on this forum ought to be able to give you better answers than mine.  I am pretty sure in my answers although. 

[RatherBeGolfing]

ESOP guy is correct.

[QDROphile]

ESOP Guy is correct for practical purposes.

If paid, some of "the attorneys on this forum" might have some interesting things to say about adopting the plan vs. signing the plan document.

[ESOP Guy]

46 minutes ago, QDROphile said:

ESOP Guy is correct for practical purposes.

If paid, some of "the attorneys on this forum" might have some interesting things to say about adopting the plan vs. signing the plan document.

So are we to understand the jokes go like this:

What is 2+2 equal?

Actuary:  What do you want it to equal.

Attorney:  If I am being paid I have some interesting things to say about those numbers.  If I am not being paid it is 4. 

[jpod]

Unless the document's explicit terms says it is not effective until signed, if there were Board of Directors' resolutions approving the adoption of that document a certified copy of those resolutions or a certified copy of minutes of the meeting at which the resolutions were adopted could serve as sufficient "execution," with the signing and dating of the Plan document merely a meaningless formality.  Just a possibility I am throwing out there.  That being said, absent any other monkey business I think this should be a relatively easy fix through VCP. 

[Larry Starr]

1 hour ago, jpod said:

Unless the document's explicit terms says it is not effective until signed, if there were Board of Directors' resolutions approving the adoption of that document a certified copy of those resolutions or a certified copy of minutes of the meeting at which the resolutions were adopted could serve as sufficient "execution," with the signing and dating of the Plan document merely a meaningless formality.  Just a possibility I am throwing out there.  That being said, absent any other monkey business I think this should be a relatively easy fix through VCP. 

No way.  A plan is required to be a written document.  What you describe is not a written document until it is reduced to writing and signed/adopted. A resolution authorizing the adoption of a plan is not the same as adopting the plan.  As an aside, many years ago, I believe it was J.C. Penny that actually authorized the adoption of a cafeteria plan so that employee contributions to the health insurance premiums would be pre tax and they treated it as such. Then, it was discovered by IRS that the plan was never actually executed.  As I remember, it cost them a fortune to fix it. Authorization to adopt is not the same as adopting.

[QDROphile]

2 hours ago, jpod said:

Board of Directors' resolutions approving the adoption of that document

Appears to me that the Board approved a written document -- that one.  What did I miss?  Does "signed/adopted" not include adopted?  Is "that document" a hologram, not reduced to writing?

[jpod]

Larry is way overstating his case in my opinion.  For example, the Board of Directors of a corporate plan sponsor, which 99.9% of the time will have authority to adopt or amend a retirement plan on behalf of the corporation, quite often approves plan documents or amendments and there is no signature on the document or the amendment.  I have never had an issue with IRS over this in my years of practice, or with any other constituency, such as ERISA lawyers on the other side of a merger or other acquisitive transaction conducting due diligence, and I've had a few years.  The issue is whether the document or amendment by its terms purports to be ineffective absent signature.  If it does not, the fact that there is a signature line that was never signed is irrelevant if you have proof of adoption and the date thereof in accordance with the Plan Sponsor's internal rules of governance.  

[Luke Bailey]

I agree with jpod in terms of both the legal theory, which is based on state corporate law, and private and IRS practice. For a corporation, the board's adoption is the crucial fact, whether at a meeting or by unanimous consent. The resolutions will then direct officers to execute. If you had a calendar year plan and clear board action adopting a particular document, e.g. referenced as an exhibit in the resolutions, on or before 12/31 and the document did not get signed by an officer until after 12/31, I think you would be good. You would likely have to explain all that and provide dated proof of the board's action, such as a dated secretary's certificate, to IRS to get a DL on initial adoption, but in my experience the IRS will agree with the argument. More complicated as you move from corporations to other entity forms. Also more complicated with closely held corporations, as many states' corporate laws relax corporate formalities for closely held corporations.

[Larry Starr]

I'm not sure we disagree.  If the plan document was drafted and presented to the board and the board resolution says the plan AS PRESENTED was adopted by the entity, then I think you are ok. 

I didn't get any information in the prior posts that that was done.  If all that happens is a resolution saying that the entity will adopt a plan and that specific plan document has not already been drafted and the subject of that resolution, THEN I think they are SOL.

If Jpods post (which started this jump off of the original post) was meant to suggest the actual document was subject to the board discussion and approval, then I am in agreement, as I think we all probably are.

But if all it was was a discussion about adopting a plan and they agreed to do it and now a corporate officer is going to go get it drafted with all the provisions, until THAT document is signed, there is no plan.  Does anyone disagree with that?

[Luke Bailey]

Larry, I agree we don't have facts for original question, and I almost completely agree with your last post. The one exception that I think is possibly worth discussing is as follows. As you or someone else stated, the IRS's position is that the plan document has to be in place (board adopted and/or executed) before elective deferrals occur for a 401(k) plan. Say you have a bunch of divisions from other companies that had 401(k) plans and they are spun off and formed into a new company on 12/31 of Year 1. At some point in year 2, the plans that the employees participated in will spin off and merge their 401(k) balances into the newly formed 401(k) for the new company. Board of new company adopts resolutions on 12/31 of Year 1 that say that new company is hereby creating a 401(k) plan to be effective 1/1 of Year 2. The board resolutions just state that it will be a K-plan, that all employees in the old plans will be immediately eligible, that there will be a discretionary match, and maybe a few other things, just a bulleted list in the resolutions, and directs the company's officers to have a plan prepared, which it is and then the board adopts it at some time before the end of Year 2. I think that in this circumstance, the IRS would accept that the new company had a 401(k) plan as of 1/1 of year 2, even though a detailed document had not been adopted and/or executed yet. The plan would be in effect and satisfy the definitely determinable written plan requirement because the operative provisions (allowing deferrals, discretionary match) are so simple. The fact that all of the other requirements of 401(a) would not be satisfied by the bulleted list in the board resolutions would be handled under 401(b). Of course, you sort of want to have that plan document adopted ASAP, before anyone terminates and wants a distribution, or you have to figure out vesting or beneficiary rights, etc.

[jpod]

Let's be clear.  In my first post I said that I was just throwing out the concept for consideration, because there was nothing in KJ Theo's original post to suggest that it couldn't be viable.  Then, someone else said "no way," so that led to responses as to why it could be "way." 

[KJ Theo]

My questions are hypothetical. I want to spell out to a potential customer what the ramifications are if an adoption agreement doesn't get signed before the plan effective date, assuming there is no board resolution for the plan being adopted. If the adoption agreement isn't signed or board resolution is not in place by the effective date of the plan, will this need to be filed with the VCP? And if yes, would the plan be filed as if it were a nonamender?

[jpod]

I see no choice but to use VCP, but it doesn't sound like a "non-amender" candidate to me.

[Larry Starr]

I would suggest that you actually don't have a plan; I'm not sure it is "fixable" to do anything that would make that plan exist in the prior year.  You can't adopt a plan retroactively to a prior year (though that is one of the proposals that is with Congress, but it isn't law at this time).  Therefore, there is no "fix" to make that happen.  I don't know how VCP can help.

Now, if you could be more specific with your problem by giving us dates of when these things are happening, our answers would be more on point.  For example, we have clearly said you don't have to adopt the plan before the effective date.  Assume calendar year company; you can adopt the plan, say, in June and make it effective back to 1/1/ and all would be fine.  it could even be a safe harbor 401(k) in that circumstance.  But you can't adopt it 2/1 and make it effective for the PRIOR calendar year.  In that case, a VCP filing can't help you. You don't have a plan for that prior year. Period.

[Larry Starr]

19 hours ago, Luke Bailey said:

Larry, I agree we don't have facts for original question, and I almost completely agree with your last post. The one exception that I think is possibly worth discussing is as follows. As you or someone else stated, the IRS's position is that the plan document has to be in place (board adopted and/or executed) before elective deferrals occur for a 401(k) plan. Say you have a bunch of divisions from other companies that had 401(k) plans and they are spun off and formed into a new company on 12/31 of Year 1. At some point in year 2, the plans that the employees participated in will spin off and merge their 401(k) balances into the newly formed 401(k) for the new company. Board of new company adopts resolutions on 12/31 of Year 1 that say that new company is hereby creating a 401(k) plan to be effective 1/1 of Year 2. The board resolutions just state that it will be a K-plan, that all employees in the old plans will be immediately eligible, that there will be a discretionary match, and maybe a few other things, just a bulleted list in the resolutions, and directs the company's officers to have a plan prepared, which it is and then the board adopts it at some time before the end of Year 2. I think that in this circumstance, the IRS would accept that the new company had a 401(k) plan as of 1/1 of year 2, even though a detailed document had not been adopted and/or executed yet. The plan would be in effect and satisfy the definitely determinable written plan requirement because the operative provisions (allowing deferrals, discretionary match) are so simple. The fact that all of the other requirements of 401(a) would not be satisfied by the bulleted list in the board resolutions would be handled under 401(b). Of course, you sort of want to have that plan document adopted ASAP, before anyone terminates and wants a distribution, or you have to figure out vesting or beneficiary rights, etc.

Luke, I had to delay responding because of the complexity of your example and the fact that sometimes I have to do real work that allows me to sign the paychecks every couple of weeks! :-)

I had to take some time to figure out what was going on here; I think I understand it.  I would be very cautious in accepting your premise that the IRS would accept that the plan was was in existence on 1/1/ of year 2.  Obviously, and if this was my client, we would have gotten the plan document in effect before anything moved from the old company.  If this came to me with the situation you describe, as I think I understand the example, I would not be willing to accept that the plan was in effect on 1/1/ of year 2 and would proceed from that position to figure out what we had to do.  Maybe we could get IRS to buy it but that would certainly be a chore and, I expect, an expensive one.  I'm not sure how I would fix it otherwise, because I do see it as a real FUBAR situation.   I'm glad I don't have to figure out how to fix it! :-)

 

[Luke Bailey]

2 hours ago, Larry Starr said:

Luke, I had to delay responding because of the complexity of your example and the fact that sometimes I have to do real work that allows me to sign the paychecks every couple of weeks! :-)

I had to take some time to figure out what was going on here; I think I understand it.  I would be very cautious in accepting your premise that the IRS would accept that the plan was was in existence on 1/1/ of year 2.  Obviously, and if this was my client, we would have gotten the plan document in effect before anything moved from the old company.  If this came to me with the situation you describe, as I think I understand the example, I would not be willing to accept that the plan was in effect on 1/1/ of year 2 and would proceed from that position to figure out what we had to do.  Maybe we could get IRS to buy it but that would certainly be a chore and, I expect, an expensive one.  I'm not sure how I would fix it otherwise, because I do see it as a real FUBAR situation.   I'm glad I don't have to figure out how to fix it! :-)

 

Larry, usually an employer deliberates about adopting a 401(k), spends time on the design, etc., and you would not have the problem. The reason I raised the elaborate example that I did is that I have sometimes seen situations involving corporate mergers and acquisitions where the parties have assumed that the new company being formed, which is going to take business operations and  employees from some other companies immediately, have waited until the last minute to think about the actual vehicle they will use. The question then becomes, what do you do in the limited time you have before the first payroll for the new company? Do you adopt a plan document that no one has had time to design or review, and then replace it with the document you want later (which of course has lots of compliance pitfalls), or do you have the board adopt resolutions that say, "We hereby establish a 401(k) that will include all of the continuing employees of the constituent business units and that will have a discretionary match, and the company's officers are authorized to prepare, review, and adopt such documents as shall carry this out ...." I've done the latter (rarely) and not had it questioned by IRS on initial DL request. I distinctly recall hearing someone at IRS at a fairly high level at a CLE gathering explain that a "plan" for purposes of the definite written plan requirement of 1.401-1 can start out pretty rudimentary, e.g. in corporate resolutions, and then be embellished later. He was saying it in the context of explaining that you had to have some writing in place, or you could not let the employees defer. But yeah, there is no guidance and I would not want to do it unless I really had to.

[Larry Starr]

Okay; understood.  I would probably not be willing to accept the modest paperwork as a substitute for the plan document; for many years I maintained prototype documents for my firm that I basically never used (I do all individually produced volume submitted documents). The prototypes were for one use only: someone comes in on 12/31 and need a plan.  I can fill out an adoption agreement to give me what I want in a matter of minutes and it is a fully legitimate plan.  I then replace it within the next several days to a week with the longer term document as an amendment in its entirety.  Now, we can usually get a VS document done in a day if we had to.  I've had signing sessions at new year's eve parties in the past!

While I'm not surprised that you were not questioned on a DL request, your DL request would have had to be on the full document you submitted.  I don't believe you can get a DL that would say it was "ok" to use the corporate documents to justify the plan contributions for that year.

The qualification requirements under 401 are pretty significant; I don't know how one could justify that the corporate documents come anywhere near being adequate, but one can certainly take the risk (knowing it's a risk) and pray that no one checks (which is the likely scenario, especially in today's IRS limited resources world).

 

[Luke Bailey]

Good discussion, but on your last point, Larry, suppose instead of bare bones corporate resolutions we had a 10-page signed plan document that left out any issues that needed design input, and replaced that in the first few months of the year, without any cutbacks, with a new document that is then submitted for a determination letter. The first document might have been too incomplete to be qualified under 401(a), and about as brief as the corporate resolutions I referred to, but I think everyone would agree that would be OK, because the second document would replace the first within the remedial amendment period. I think this is the same principle.

For completeness let me point out that of course even the "initially specified in corporate resolutions" plan that I posited had a signed trust agreement between the employer and trustee so that deposits could be accepted.

[KJ Theo]

As I mentioned, my questions are hypothetical, but the following are scenarios that I can see occurring: ABC Company sponsors a multiple employer plan and uses a prototype plan document. The adoption agreement was restated effective 1/1/2016 and executed 4/20/2016. The plan has over 100 participating employers.

Participating employer X was an adopting employer of another MEP and had been participating in that plan since 1/1/2012. They then transferred their plan to the ABC MEP in 2016. New participation agreement is effective 1/1/2016 but the participation agreement was never signed and there is no board resolution. Assets from their prior plan transferred in March 2016 and participants have been actively making contributions since February 2016. 

Participating employer Y had never been a part of a 401(k) plan and decided to become an adopting employer of the ABC MEP. Their participating agreement has an effective date of 9/1/2017 but it was never signed and there is no board resolution. Contributions have been actively made since 9/2017.

Participating employer Z was an adopting employer of another MEP and transferred their plan to the ABC MEP in March 2018. Assets from their prior plan transferred in April 2018, but contributions have been made into the ABC MEP since March. Participation agreement has not been signed and there is no board resolution. 

Under each of these circumstances, what can the participating employers do? I tried to give 3 different examples to field any questions I may have from an ABC Company at some point. 

[Luke Bailey]

VCP. One think I don't know is whether, since a plan was in place, but these employers just did not formally adopt it, the IRS would permit retroactive adoption in VCP and not require the employee deferrals for the non-adoption period to be distributed. My guess is they'd allow retroactive adoption and not require return of the deferrals.