Plan Document Problems That Can Be a Pain for Plan Sponsors
Retirement Plan documents must be written; they just can’t be some oral promise to pay retirement plan benefits. A written plan document is a legal document with legal ramifications in governing a legal entity known as a retirement plan. A retirement plan document can cause many issues for a retirement plan sponsor, and since most plan sponsors are wary of ERISA attorneys because of their billing practices (don’t worry, I charge a flat fee) many don’t know. So this “free” article can help plan sponsors take count of the many problems their plan document can have on their retirement plan and what steps they should take to avoid these problems.
The plan document was not drafted to
facilitate plan administration, but to
Years ago, as a TPA attorney, I reviewed
an amendment that changed the matching
provision in a 401(k) plan that was draft-
ed by another ERISA attorney. It took me
about three separate readings of the amend-
ment to fully understand what the ERISA
attorney was trying to do, but I wished him
luck in trying to have it administered cor-
rectly by my TPA. While plan documents
should be drafted to meet the needs of the
plan sponsor, they should also be drafted in
a way that will help TPAs administer the
plans correctly. This may be accomplished
just by drafting provisions in a language
that is easy to understand as well as avoid-
ing plan provisions that often lead to admin-
istrative errors. There are just administra-
tive provisions that are absolute bad ideas.
Such troublesome plan provisions could be
a loan provision that allows for unlimited
plan loans (more loans outstanding lead to
repayment errors and omissions) or a stated
match formula that may inadvertently re-
quire a matching contribution that an em-
ployer could no longer afford or a match-
ing formula that matches on a different pay
period than when the employer actually
makes the contribution. A plan document
should be reviewed for any ambiguous
or difficult provisions to understand so
that the administration of
the plan can go smoother.
The plan document no lon-
ger fits the plan sponsor’s
Retirement plans should
be tailored like suits; they
should be tailored to fit the
plan sponsor’s needs. Of
course over time, a compa-
ny’s needs do change either
through expansion or con-
traction. So a plan document
needs to be updated if the
plan sponsor can make more
employer contributions (or
less) or if their discrimination
testing is now starting to fail.
It is advisable that the plan
sponsor should work with
their TPA to see if the type of plan and its
provisions still fits the needs of the plan
sponsor. If not, then the TPA should work
with the plan sponsor in either amend-
ing the current plan document or perhaps
terminating it in favor of another qualified
plan or no plan at all. Plan sponsors may
discover that certain plan provisions were
drafted for a mistaken reason or assump-
tion many years ago. Plan documents that
have provisions that no longer meet the
plan sponsor’s needs may require em-
ployer contributions that are inefficient or
wasteful or aren’t used to maximize the
savings of highly compensated employees.
Annual plan document reviews will have
the effect of having the Plan become the
right fit for the employer sponsoring it.
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