Retirement plan vendors sponsoring defined contribution plan documents approved by the Internal Revenue Service (IRS) have begun issuing packages containing the new IRS-approved version of those documents—reflecting the Pension Protection Act and other required regulatory updates—to employers that use them. The packages generally include (1) the new basic plan document, (2) a corresponding adoption agreement, (3) the IRS opinion or advisory letter, (4) a new administrative service agreement, and (5) an administrative services manual (i.e., plan administration manual, plan operational manual, or set of plan procedures) that highlights how the recordkeeping firm or third-party administrator will operate the plan. In IRS Announcement 2014-16, the agency announced a two-year period for employers to adopt new plan documents—from May 1, 2014 through April 30, 2016. This means that employers have until April 30, 2016 to execute new preapproved plan documents, although many vendors establish their own internal deadlines for tracking purposes. Missing the deadline could require a formal submission to the IRS Voluntary Correction Program (VCP) to address the untimely adoption.
Preapproved documents are a cost-effective way to curb certain plan expenses, but the form documents do not relieve compliance responsibilities, particularly as they pertain to plan documentation and operations. Employers adopting preapproved plans still must be cognizant of potential issues, such as inconsistencies between the plan document, existing plan operations, established/written plan procedures, and participant communications. Documentation errors could arise when converting from an individually designed plan document to a preapproved document, but also could surface when moving between two preapproved documents sponsored by different vendors. The following plan materials, in particular, require critical review before execution:
New Plan Documents:
Basic Plan Document, Adoption Agreement, and Prototype Amendments
When restating and adopting a new plan document, it is imperative to compare the documents to ensure that the terms selected in the proposed preapproved plan are consistent with the existing (soon to be prior) version. Unless there is an intentional change to plan terms (i.e., an intent to adopt an amendment to those terms by executing the new plan), the provisions of both documents should match (e.g., contribution types, vesting, distribution options, hardship withdrawal availability, etc.). The selected terms in the new preapproved document should be consistent with plan operations and should include the terms of any amendments adopted after execution of the existing document, including amendments reflecting required interim or discretionary design changes.
The plan restatement period also provides an excellent opportunity for employers to review plan features to determine whether the design still fits within the overall business objectives. For example, if economic or other business-related issues make it impractical or undesirable to continue employer contributions, employers may modify those provisions before executing the new document. (Note that reducing or eliminating 401(k) safe harbor contributions will trigger certain IRS requirements.) Additionally, after reviewing past operational compliance issues, an employer could adopt changes to reflect issues previously self-corrected pursuant to the IRS Employee Plans Compliance Resolution System (EPCRS), such as permitting rollover contribution withdrawals at any time rather than at specified periods.
Administrative Services Manual
In many instances, the administrative services manual (ASM) is the go-to guide for plan-specific operations. Especially for directed recordkeepers, the ASM is the book of instructions provided for plan operations and generally requires an acknowledgement of such official instruction along with a signature. In the event of an operational or compliance error, vendors often review the employer’s direction (or, if a different entity, the administrator’s direction), as outlined in the ASM, instead of attempting to interpret plan terms. Accordingly, the ASM should be consistent with the preapproved plan document and summary plan description. It also should reflect how the employer wants the plan to be administered. Regarding the plan restatement, the new proposed plan document should be consistent with internal plan operations reflected in any new ASM (e.g., contribution elections, plan loan procedures, partial withdrawal limitations, etc.).
Administrative Services Agreement
The administrative services agreement is an important tool for protecting employer interests. Although vendors often hesitate to alter the terms of standard contract templates, administrative services contracts should reflect balanced terms particularly regarding (i) the scope and duration of the agreement; (ii) fees; (iii) participant disclosure obligations; (iv) authority for (and notice of) periodic plan procedure adjustments; (v) termination, resignation, and removal; (vi) limitation of liability; and (vii) indemnification. The administrative services agreement also should address liability and associated financial responsibility for operational errors that cause plan qualification issues, particularly systemic operational issues originating within the recordkeeping platform.
Keep in mind that the IRS limits the availability of IRS determination letters for employers with preapproved plan documents. Employers that adopt “word-for-word” master and prototype documents (M&P plans) generally are not eligible to apply for individual IRS determination letters and must rely on the 2014 opinion letter the IRS issued for the document. Employers that adopt volume submitter plan documents (and make limited modifications to them) may apply for determination letters if the modifications are not extensive. Still, in this case, the deadline for submitting a determination letter application is April 30, 2016. So, regardless of the type of document, all employers using preapproved plan documents generally must take action by April 30, 2016.