What’s your ERISA duty with qualified retirement plan documents?

As a plan sponsor, you have a duty to maintain your ERISA plan document, which means making sure it reflects new plan design and legislative changes such as those in the Setting Every Community Up for Retirement Enhancement (SECURE) Act and Coronavirus Aid, Relief, and Economic Security (CARES) Act. To help you fulfill your responsibilities, we’ve provided a primer on plan documents, amendments, and participant reporting.

The three types of qualified retirement plan documents

The plan document is the heart of all ERISA retirement plans. It describes the terms and conditions for participation, contributions, and distributions, and is used to govern the plan’s day-to-day operations. If you don’t have a signed, written document, you don’t have a plan.

The documents outlined below vary in flexibility, preapproval, and cost. We've included both master and prototype and volume submitter plan documents for illustrative purposes, although the IRS now refers to both as preapproved plans.  

 

Preapproved standardized

(formerly standardized master and prototype plans)

Preapproved nonstandardized

(formerly nonstandardized master, prototype, and volume submitter plans)

Individually designed

Description

 

 

 

It may be in the form of an adoption agreement with a basic plan document or a single plan document. The plan document consists mostly of required provisions such as compensation is restricted to total compensation, generally all employees (other than statutory excludable employees) are eligible to participate, and the plan uses design-based safe harbors for nondiscrimination purposes.

Elective provisions are quite limited.

It may be in the form of an adoption agreement with a basic plan document or single plan document. In contrast to the preapproved standardized plan, the adoption agreement or single plan document includes elective provisions with respect to nondiscrimination testing and other plan design features that are permitted under the IRS preapproved plan program.   

 

 

A fully customized plan document that’s drafted by the plan sponsor’s ERISA attorney/plan consultant.

 

 

 

 

 

 

Preapproved by IRS

Yes

Yes

No

IRS determination letter (confirmation of qualified status)

Not applicable since language is preapproved; sponsors can rely on the IRS opinion letter that comes with the document

 

Recommended if any plan provisions are modified

 

  

Highly recommended; only available for initial qualification, plan termination, and special circumstances (See IRS Revenue Procedure 2019-20.)

Flexibility

None

 

 

Minimal

 

 

Significant

 

Cost

Reasonable drafting fees and no IRS filing fees

Reasonable drafting and IRS filing fees (IRS filing fee only applies if modifications are made to the document, and an IRS determination letter is requested.)

Expensive drafting and IRS filing fees

Best for

Plan sponsors who want a “check-the-box” document

Plan sponsors who want more flexibility but don’t need a fully customized document

Plan sponsors with unique needs that don’t fit the off-the-shelf document options

Besides dictating the plan’s operations, the type of qualified retirement plan document also determines how plan amendments are handled, which we’ll look at next.

Updating plan documents for legislative changes 

ERISA and IRS rules require plan sponsors to amend their documents whenever a new retirement law is enacted. You must update your document by the designated deadline to maintain the plan’s qualified status. Failure to amend plan documents is one of the top 10 mistakes identified by the IRS.1

This deadline is referred to as the remedial amendment period, which we’re currently in for the SECURE Act and CARES Act, as outlined below.

SECURE Act and CARES Act plan amendment deadline

Nongovernmental plans

Governmental plans

The last day of the plan year beginning on or after 1/1/22 (e.g., 12/31/22 for calendar year plans)

The last day of the plan year beginning on or after 1/1/24 (e.g., 12/31/24 for calendar year plans)

For plans using preapproved documents, the document provider should send the necessary amendments to the sponsors, along with instructions. Generally, you’ll have to make certain elections, sign the amendment by the effective date, and file it with your other important plan papers. Sponsors using individually designed documents should work closely with their ERISA attorneys/plan consultants to determine which changes are needed.    

Although plan sponsors are given a grace period to amend their documents, as noted above, they must operationally comply with the new legislation. For example, the SECURE Act raised the required minimum distribution age to 72. You must adhere to this new rule now, and you can’t wait until you’ve officially updated your document.  

Amending ERISA retirement plans for design changes

In addition to legislative developments, documents must be updated for discretionary design changes. These are optional changes a sponsor decides to make to address the organization’s objectives and the evolving needs of participants. For example, some plan sponsors may have expanded their loan provisions or added hardship withdrawals to help participants struggling during the pandemic. Others might decide to alter their matching contribution formula to encourage higher contribution rates.   

You’re free to modify plan provisions as you see fit, as long as the new terms are fair, don’t discriminate in favor of highly compensated employees, and don’t cut or reduce previously earned participant benefits. The effective date can be any day in the plan year, and you generally have until the last day of that year to sign and execute the amendment. 

Let’s say you decide to add automatic enrollment to your calendar year 401(k) plan, effective July 1, 2021: The deadline for amending the plan is December 31, 2021.

Communicating ERISA plan changes to participants

Emails and letters may seem like the easiest way to notify participants about plan amendments, but they’re not enough. You must also provide a summary of material modification (SMM) to fulfill your reporting responsibility and update your summary plan description (SPD). These documents outline the plan’s terms and conditions in easy-to-understand language and preempt other participant communications when questions or disputes arise.

 

 

SPD

SMM

Description

Explains plan provisions, including eligibility, contributions, benefits, and distributions

 

Explains plan amendments, including the purpose and effective date

 

Initial distribution

Must be distributed to participants no later than 90 days after meeting the eligibility requirements or to beneficiaries 90 days after they first receive benefits

 

Must be distributed to participants and beneficiaries within 210 days after the end of the plan year in which the amendment was effective

 

Ongoing distribution

Must be updated and distributed every 5 years, if changes have been made, or every 10 years, if no changes have been made

 

Not applicable

 

Delivery methods

Must choose a method that reasonably ensures delivery such as:

  • First-class mail
  • Hand delivery (welcome kit or enrollment materials)
  • Electronic distribution based on U.S. Department of Labor (DOL) guidelines  

 

Must choose a method that reasonably ensures delivery such as:

 

  • First-class mail
  • Electronic distribution based on DOL guidelines

 

Engage your plan providers for assistance

Creating your qualified retirement plan document isn’t a one-and-done event. It’s a living document that must reflect current laws and plan provisions. Work with your financial professional and other plan providers to stay abreast of legislative developments and prepare for the SECURE Act and CARES Act remedial amendment period, as well as any subsequent changes. With effective communication and preparation, you can keep your plan on track.  

1Top Ten Failures Found in Voluntary Correction Program,” IRS, October 2020.

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.
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