Restating Your Preapproved Plan Document: Opportunities and Pitfalls

Purveyors of preapproved defined contribution plan documents are now in the process of distributing document restatement packages to employers. The restated documents reflect updates required by changes in law, including the Pension Protection Act of 2006, which previously had been reflected in a series of addenda and amendments to plan documents. Restatement packages will certainly include a new adoption agreement (describing the design and features of the employer’s plan) and the “base” or “basic” plan document (containing all legally required provisions and permitted alternatives, which are activated by the adoption agreement). They may also include an updated trust agreement, a new summary plan description (assembled based on the provisions of the new adoption agreement), and possibly an overview of material changes made to the last version of the preapproved document. All of these materials will come with the admonition that the employer should review the documents carefully with legal counsel before executing the new adoption agreement. And employers would do well to heed that advice, because the restatement of a preapproved plan document presents opportunities both to identify existing administrative problems and avoid future problems. With this review process in mind, we share these thoughts.

Preserve the Plan Design. The adoption agreement template and the base document have, of course, been approved by the IRS. The most important task for the employer and legal counsel, therefore, will be to make sure all of the elements of the design of the current plan are fully and accurately transferred from the current plan document onto the new updated preapproved plan document. This may appear to be a relatively simple matter – compare the new adoption agreement to the current agreement and confirm that all of the correct alternatives have been selected (that is, the correct checkboxes have been checked). Changes in the form and content of the new adoption agreement, however, can make this seemingly easy “mapping” process more challenging than one might think. Provisions relating to eligibility, contributions, vesting, service crediting, and the like in the new preapproved adoption agreement may be in different locations than they appeared in the current adoption agreement. And while the record keeper should be able to deliver an accurate document, responsibility ultimately rests with the employer to make sure the document says what it is supposed to say. So there is no substitute for a careful line by line and page by page comparison of the old and new adoption agreements. Even the most careful and thorough record keepers will occasionally make mistakes and these mistakes, if left undiscovered for a period of time, can prove very costly down the road.

Do Not Ignore Administrative Terms. When reviewing the new adoption agreement, do not skip provisions that appear to be simply administrative or do not directly relate to the preservation of your plan design. While eligibility, contribution percentages, and the like are most important, provisions describing the status of the employer (for example, as a member of a controlled group), the coverage of related employers, and the inclusion of participating employers (which often will require the execution of a participating employer agreement or addendum) are critically important to ensuring the proper administration of your plan. In addition, your document vendor may be unaware of significant structural changes that have occurred in your organization since the last time a plan document was prepared. Your organization may have acquired or disposed of new subsidiaries, established a new plan administrative committee, or made other important changes that can and should be reflected in the terms of your plan document. Remember that most record keepers will produce SPDs by using an assembly program that pulls information from the adoption agreement. So if administrative information appears incorrectly in the adoption agreement, that error will be reproduced in the SPD.

Cross Check Payroll and Other Operations. The restatement of the plan document offers an important opportunity to confirm that internal operations and administration are consistent with the written terms of the plan. In many instances, a careful review of the adoption agreement by the right players within the employer organization may reveal ways in which the administration of a plan has departed or may in the future depart from the written terms of the plan. One key term to focus on is the definition of “compensation,” which will be used to determine contributions under the plan. The new adoption agreement may include a reformatted or redesigned provision that presents the definition of compensation differently. For example, the new document may provide a list of items that are excluded from the definition of compensation while the current adoption agreement provides a list of items that are included in the definition, or the descriptions of the excluded or included items may have changed. Even if the format of the definition has not changed, it is a good idea to confirm that the payroll system is accurately capturing the compensation covered by the plan. In addition, almost all preapproved adoption agreements will offer opportunities to customize the terms in a limited way by checking boxes that allow for the inclusion of specified terms that may not appear in the predesigned options in the adoption agreement. For example, with respect to compensation, a document may allow for a category labeled “other” that requires the employer to fill in a blank to specifically identify items to be included or excluded from the definition of compensation. Only a careful review of the plan document will allow you to take advantage of an opportunity to capture terms accurately or avoid a pitfall if terms are not correctly transferred.

Other Items. Finally, if the preapproved restatement package includes such important documents as administrative services agreements or other matters that require the attention of plan fiduciaries, one would do well to include those in the review process and not just assume that they are fit for execution in the form in which you have received them from the document vendor.

Bottom Line: “Preapproved” does not mean “guaranteed to work.” So invest the time now to make sure the documents say what they should. This will avoid the time and expense of correcting the documents or change administrative practices in the future. In addition, this periodic review of your plan terms provides an excellent refresher for the individuals involved in plan administration and will pay dividends in the event of a plan audit or correction.