Good Plan Document Compliance Habits for Tax Qualified Retirement Plans
by Tom Ackmann, Vice President, Baden Retirement Plan Services
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Choosing whether or not to sponsor a tax-qualified, or tax-deferred, retirement plan, such as a 401(k) plan, is a decision that has to be made at one time or another during the evolution of a business. Once that decision is made, then more decisions present themselves due to the myriad of plan design options, allowable contribution types and allocation methodologies that exist. Most importantly, there are plan document and disclosures prescribed by the Internal Revenue Service and the Department of Labor with which plan sponsors must comply. Non-compliance could result in penalties or disqualification of a plan’s tax-deferred status. Sounds daunting, doesn’t it? It can be, but doesn’t have to be. Business owners who sponsor a plan should strive to have the administration of their retirement plan mirror the way they manage other IRS- and DOL-regulated benefits such as payroll and healthcare benefits. A plan sponsor must keep a plan document updated and plan participants informed.
Keep Your Document Compliant
The starting point for any tax-qualified employer-sponsored retirement plan is the drafting and publishing of the plan document. The plan document will, among other things, describe your type of plan, what an employee must do to become eligible to participate in the plan, and how a participant’s money vests in the plan. A big mistake some plan sponsors make is to ignore their plan document after it is published and not amend it to reflect new legislation or changes in the plan’s design. Since the passage of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) in 2002, the DOL has required at least one amendment each year for all tax-qualified plan documents. Also, because of the extensive changes to retirement plan legislation in recent years, plan documents are required to be restated every 6 years. If you aren’t aware of these changes or haven’t seen a restated plan document for your plan in the last couple years, you may want to contact your provider.
Keep Your Participants Informed
While maintaining an up-to-date plan document is important, making plan participants aware of any changes to the retirement plan is equally as important due to the obligation a sponsor has toward keeping their eligible employees informed. There are three main pieces of information that must be shared with participants: Summary Plan Description, Summary of Material Modifications and Summary Annual Report.
The Summary Plan Description (SPD) is a more readable version of the plan document. The IRS requires that each participant receive an SPD within 90 days after first becoming a plan participant. If someone were to ask a participant in your company’s plan if they have received an SPD, what would they answer? It’s important to not only abide by the timing provisions noted, but to also document a participant’s receipt of the document should you ever be audited.
When an amendment is made to a plan document, whether sponsor-initiated or required by legislation, a plan sponsor must provide a Summary of Material Modifications (SMM) to the plan participants. The SMM is a more readable version of the plan amendment and must be distributed no later than 210 days after the close of the plan year for which the modification was adopted. (If, instead, a new SPD is distributed that includes the changes, that will also meet the requirement.) Reflecting on recent past history, were there any amendments made to your plan? Perhaps a matching contribution was changed or eligibility was adjusted? If so, was an SMM distributed and receipt documented?
Each year, most qualified plans are required to file a Form 5500 with the Federal government. The Summary Annual Report (SAR) is a narrative version of that filing that informs participants of the plan’s financial status. This form goes to all participants, including those no longer employed, if they have a balance and plan beneficiaries. SARs for 401(k) plans must be distributed to all participants within nine months after the close of the plan year. If a plan has filed for an extension on the 5500 filing, the SAR must be distributed within two months after the extended filing deadline. If, as a plan sponsor, you were asked to provide evidence of distribution, would you be able to do so?
Distribution of Information
The SPD, SMM and SAR can be distributed using various methods. Paper copies that are delivered by hand and/or first class mail are two of the most common ways. If the plan’s participants have access to computers as a part of their job responsibilities, an electronic version of the forms can be emailed to them as long as each participant is notified electronically or in writing which documents are going to be provided via electronic distribution. Additionally, the form must appear in the same general format and the plan sponsor must agree to provide a hard copy upon participant request. The DOL regulation also states that receipt of the electronic form must be documented by using a return receipt electronic mail feature or by conducting periodic surveys that test the integrity of the distribution system.
Document compliance and distribution of information go hand in hand. To accomplish one task and not the other, places the whole plan in jeopardy. By being aware of what is expected and implementing a careful oversight plan, a plan sponsor can stay compliant. Contact us with questions or concerns you might have about starting or reviewing your company’s plan.