ERISA requires all retirement plan sponsors to have a written plan document to formalize how their unique plan will operate. Operating a retirement plan without this key document can open up your business to significant liability. Why is the plan document so important, and what elements should be included in your organization’s plan document?
Why the Plan Document Matters
A plan document governs a retirement plan’s features and procedures. It is essentially a roadmap for plan sponsors, their recordkeepers, plan administrators and financial advisors, providing a clear framework by which the plan can operate. Even the most well-drafted plan document may leave some issues up to interpretation, but spelling out the who, what, when, why, and how of plan contributions, distributions, and management decisions can assist in ensuring that all members of your plan committee are on the same page. Creating and adhering to a comprehensive plan document can also promote transparency and protect your plan committee against allegations of disparate treatment or breach of fiduciary duty.
What to Include in Your Plan Document
Your plan document can contain as much information as you wish to offer, with one caveat: it should, at a minimum, cover the standards outlined in ERISA and all applicable DOL and IRS regulations. Not all regulations apply to all plans, and your plan counsel, plan custodian or financial advisor can provide customized advice on the regulations that apply to your specific business size and plan type. Just a few of the standards the IRS regulates include:
Minimum Participation Standards
Each plan sponsor can set out the minimum standards for participation in a company retirement plan. Some common standards include setting a defined period of employment before an employee can contribute to a plan, implementing incentives like matching to avoid a “top-heavy” plan, and setting service requirements.
Minimum Vesting Standards
Vesting schedules provide an incentive for employees to remain with the plan sponsor longer to receive their full benefits. Plans that have a vesting schedule should also address how vesting is handled when an employee has a break in service or works less than full-time hours.
Joint and Survivor Annuities
Many plan participants are drawn to annuities and other fixed-income products that offer similar benefits as a pension. But one important feature of an annuity involves its ability to remain payable beyond the beneficiary’s death. An annuity with no survivorship election can pay out at a significantly higher rate than one with a survivorship election, but also offers less financial protection for the surviving spouse.
Because having an annuity that terminates on the beneficiary’s death can put the beneficiary’s spouse in a dangerous position, plan sponsors must obtain consent from both the employee and their spouse before a survivorship option may be waived. Plan sponsors must be careful to ensure that employees make an informed decision on whether to elect or decline survivor benefits.
Coverage and Nondiscrimination Requirements
Defined contribution and defined benefit plans may need to satisfy certain safe harbor guidelines to ensure that the plan isn’t skewed to benefit higher earners. By going through the IRS’s worksheets on the topic, plan sponsors can ensure that their plan satisfies all applicable safe harbor nondiscrimination requirements.
Permitted Disparity Limitations on Contributions and Benefits
The IRS also offers worksheets for plan sponsors to use when reviewing plans that explicitly provide for a disparity in the rate of employer contributions or benefits to favor highly-compensated employees (HCEs). These plans must also set forth the guidelines by which to calculate HCEs’ contribution limits, as these may deviate from the standard $19,500 limit for 401(k) contributions for those under age 50.
Required Plan Distributions
Premature plan distributions may be made penalty-free under certain circumstances. However, in other situations, an employee may not be permitted to withdraw from their retirement plan at all unless their employment is terminated. Because this can be a point of contention for employees who would prefer immediate access to their funds, plan sponsors can benefit from having clear guidance on required and discretionary plan distributions.
The CARES Act also made some tweaks to the way required minimum distributions (RMDs) will be handled in 2020, and continuing changes in tax policy mean that this is an area plan sponsors should watch carefully.
Employer and Matching Contributions
Finally, plans may want to address the structure, tax treatment, and vesting schedule of employer and matching contributions. Plan sponsors typically view their contributions differently from the deferrals made by the participants.
The IRS’s online checklists for retirement plan documents can be an invaluable resource for plan sponsors who want to confirm that their plan meets all applicable requirements. But sorting through these regulations remains a complex process, which makes the plan’s counsel or its financial advisor’s role all the more critical.
Further, most retirement plan recordkeepers maintain a generic form of a plan document known as a volume submitter document that allows a plan sponsor to check the applicable boxes for the provisions it desires to offer. This document typically comes with IRS pre-approval. Using a volume submitter document provides ease of use and reduced costs, although a retirement plan counsel should still be in involved in the review.
PlanPILOT Can Help
With the current climate within the retirement plan environment, it can be easy for plan sponsors to inadvertently fall out of ERISA compliance. PlanPILOT is an independent registered investment advisor (RIA), not tied to any funds or investment banks. We help clients control their risks in operating retirement plans and help them deliver the benefits intended. We also review fund lineups and score investments, highlighting any recommended changes. We encourage you to contact us at (312) 973-4911 or info@planpilot.com to discuss defining and managing fiduciary roles for your plan.
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