401(k) Document Review

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The Plan Administrator is the person or entity responsible for ensuring that the Plan is operating in full compliance with the Plan document. For this purpose, the term “Plan document” includes the Plan document and all Plan amendments, and also refers to auxiliary Plan-related documents such as the Plan’s loan procedures, the Plan’s QDRO procedures, the Plan Administrative Committee Charter, and the Plan’s Investment Policy – all of which are examples of documents which play a role in dictating how the Plan’s day-to-day operations are to be governed.

The Plan Administrator is also responsible for maintaining and safeguarding operational documents and participant records as outlined below.

In addition to being operated in full compliance with the Plan documents, the Plan also must at all times be operating in full compliance with all applicable provisions of the Employee Retirement Income Security Act (ERISA), the Internal Revenue Code  (IRC), and other federal and/or state law or regulations pertinent to 401(k) retirement benefit plans. These legal requirements are covered elsewhere throughout the Dashboard materials.

Plan Related Documents

The Document Review expectation means systematically safekeeping, managing, and reviewing on a regular basis all governing plan and plan-related documents. This includes ensuring that each Plan-related document is properly signed (if required) and, upon each annual review, confirming that it represents the most recent version of such document.

In the event of an IRS or DOL audit or examination, as many as 3 (three) years of plan-related documents and operational reports may be requested initially, and as many as 3 (three) additional back years may be requested later, if needed by the governmental agency.

Examples of Plan-Related Documents

Plan Document

There are three types of plan documents that an adopting Plan Sponsor may use. They include the following:

  1. Standardized preapproved Plan document;
  2. Non-standardized preapproved Plan document; or
  3. Individually designed Plan document.

Due to recent updates to the Internal Revenue Service (IRS) determination letter program, it has become increasingly important to understand the type of 401(k) plan document being used and the IRS rules that apply to that type of plan document.

Standardized Pre-approved Plan Document

A standardized pre-approved plan document (formerly known as “master and prototype plan” or a “prototype plan”) includes:

(i) a basic plan document, which sets forth the basic plan provisions, and

(ii) a separate adoption agreement, which sets forth all of the options available under the plan document.

The IRS has reviewed the basic plan document and adoption agreement, including all of the options available under the adoption agreement, and has issued an opinion letter which provides that the documents meet the requirements to be a qualified plan.

Employers using a standardized pre-approved plan document make plan design decisions by checking boxes and filling in blank lines on the adoption agreement, using only the options made available in the adoption agreement. The employer can rely on the IRS opinion letter that was issued for the standardized pre-approved document because the employer is not permitted to make any changes to the plan document.

Non-standardized Pre-approved Plan Document

A non-standardized pre-approved plan document (formerly known as a “volume submitted plan”) includes basic provisions and optional provisions. The IRS has reviewed the non-standardized pre-approved plan document and has issued an advisory letter which provides that the plan document meets the requirements to be a qualified plan. Many non-standardized pre-approved plan documents are set up to look similar to a prototype plan, using a basic plan document and a separate adoption agreement, but volume submitter documents typically include more flexible options, while others include all plan provisions in one document and resemble an individually designed plan (with any unchosen options removed from the text of the document). Many employers who adopt a non-standardized pre-approved plan document may rely on the advisory letter that the IRS issued to confirm that the language of the plan document meets the requirements to be a qualified plan.

However, if an employer modifies the terms of the non-standardized pre-approved plan other than by choosing among options permitted under the terms of the pre-approved plan document, the employer cannot rely on the advisory letter, but the employer can request a separate determination letter for the plan document. The determination letter application will likely be filed using IRS Form 5307 (the form that applies to pre-approved plans) unless the modifications made require the application to be filed using IRS Form 5300 (the form that typically applies to individually designed plans), as explained below.

If an employer modifies any provision of a non-standardized pre-approved plan from the exact form of the pre-approved document as approved by the IRS (for example, by adopting a superseding provisions addendum to the plan document for provisions which are not addressed by the pre-approved document), check with your TPA or legal counsel to determine if and when the employer can request IRS approval of these modifications.

Individually Designed Plan Document

If a plan does not use a pre-approved plan document (as described above), the plan is referred to as an individually designed plan. Although not legally required, to ensure that the document for an individually designed plan complies with the Internal Revenue Code, the plan sponsor must submit an application to the department to ask the IRS to review the document and issue a favorable determination letter on its qualified status. This action is completed by filing IRS Form 5300 during the time periods specified in IRS guidance. The determination letter is just a ruling that the words on paper meet the requirements to be a qualified plan.

Under the Internal Revenue Code for a plan to be qualified for favorable tax treatment, the plan documents must contain many specific provisions, and many other provisions are prohibited. If a plan document does not comply with all Internal Revenue Code requirements, the IRS may disqualify the plan. An employer can know that its plan document meets all of the Internal Revenue Code requirements if it:

Summary Plan Description (SPD)

The Employee Retirement Income Security Act (ERISA) requires plan administrators to give to participants and beneficiaries a Summary Plan Description (SPD) describing their rights, benefits, and responsibilities under the plan in understandable language. The SPD includes such information as:

New employees must receive a copy of their plan sponsor’s latest SPD within 90 days after becoming covered by the plan. Plan Sponsors are not required to file the SPD with the DOL, however, they are required to provide it to DOL upon request.

In addition to the Summary Plan Description, plan participants are entitled to receive a Summary of Material Modifications (SMMs) when there is a material modification of the terms of the plan or any change to the information in the Summary Plan Description. The SMMs must be written in a manner that the average participant can understand. The material must be furnished within 210 days after the close of the plan year in which the modification was made.

Trust Agreement

Plan Sponsor must ensure participant contributions to the plan are held in a trust. The trust document, as with any trust instruction, must be in writing, and the trustee must be identified, either in the trust document or within the plan’s Adoption Agreement.  The trustee essentially has legal title to the plan assets.

The plan’s assets are protected from the creditors of the Plan Sponsor.  As such, if the employer was to become financially insolvent, the assets would be available to the plan participants and their beneficiaries.

The trustee of an ERISA plan can be the owner or CEO of the plan sponsor, or a financial institution, such as a trust company or bank can serve as the plan’s trustee. In some instances, a financial institution will serve as a “Directed Trustee” on behalf of a Plan Sponsor. It is important to understand and distinguish the role of the Plan’s Trustee from that of a Directed Trustee. When an individual is named a trustee, the physical assets of the plan will be placed with an institutional custodian. Neither a trustee nor a custodian has beneficial ownership of the plan assets.  To the contrary, the assets are treated as if owned by the plan participants. Also, the trust, as a separate entity, is not bound to any other party (e.g., the Plan Sponsor, the trustee, custodian, investment manager, etc.).

Operational Documents

Although not all Plan-related documents in the sense that they control the operation of the Plan and warrant annual review, here are examples of some important documents relating to the Plan that should also be safely stored on a consistent and ongoing basis for a minimum of  6 (six) years. These documents are often requested by the IRS or DOL upon plan audit or examination.

Examples of Operational Documents

Participant Records

The Plan Sponsor or Plan Administrator is required to maintain and safeguard all relevant Plan-related participant and beneficiary-level records.

Examples of Participant Records

Thorough Review

In addition to maintain and safeguarding these records, the Plan Administrator must ensure the reasonable completeness of all current Plan-level participant and beneficiary records, including each of the following: