Time to Dust Off the Retirement Plan Document

The title, above, is somewhat misleading. A retirement plan document should not be gathering dust. We live in a dynamic environment and employers have an obligation to manage their retirement plans in the best interest of participants and beneficiaries. This requires a knowledge of plan provisions and frequent revisiting of the plan document so that it is responding to changes in this industry. IRS rules compel review at this time to make sure that they confirm to regulations.

Short-term action
The first two issues are relatively short-term issues for which a response before year-end is due. One issue is that many 401(k) and similar plans are operated in a “safe-harbor” manner. By making certain minimum contributions, the plan administrator can avoid the difficult process of ADP testing and return of excess contributions, if any, to highly compensated employees. In addition to making the safe-harbor contribution amounts, the plan administrator must also distribute a “safe-harbor notice” to plan participants. For calendar year plans, the notice must be delivered on or before Dec. 1, 2014 to assure safe-harbor plan status in 2015. (For non-calendar year plans, the due date is 30 days prior to the start of the plan year.) Similar notice responses apply to plans with automatic contribution and qualified default investment alternative (QDIA) features.

The second is that documents must comply with federal rules for same-sex marriage by the end of the year (with some limited exceptions). The performance of same-sex marriage remains unlawful in Michigan following the recent decision of the Sixth Circuit Court of Appeals. The U.S. Supreme Court has agreed to take up the issue and may make their decision in 2015. Regardless of the outcome at the Supreme Court, Michigan employers must bring their plans into compliance with the earlier Windsor decision to address the possibility that employees married in other jurisdictions present themselves to the plan.

Same-sex marriage is available in an increasing number of states and the issue for retirement plan purposes is only a week-end trip away for your current employees. Also, hiring an employee from one of the many jurisdictions that recognize same sex marriage could raise the issue with a Michigan employer. Regardless of state law defining marriage, Federal rules require all retirement plans to recognize a marriage that is valid in the state in which it was performed.

The rules addressing retirement plans prohibit naming a beneficiary without the spouse’s consent. Likewise, in a plan providing for qualified joint and survivor (QJS) annuity payments, the participant may not waive the QJS benefit without the spouse’s consent. Hardship distributions, required minimum distributions, spousal rollovers and qualified domestic relations orders are also affected.

Most of the plans we have reviewed have neutral language regarding the definition of spouse and therefore no additional amendment is necessary. However, if the plan defines the terms “marriage” or “spouse” by reference to the Defense of Marriage Act (DOMA) then a change must be made. Even if plan document changes are not required, we recommend circulation of a notice to all employees describing some of the possible impacts this change may have on those participants who are married to a person of the same sex.

We are not aware of any additional required amendments due to periodic IRS action that require action by year-end.

Periodic Restatement
The next obligation is the need to restate the plan document to incorporate new language required by law and regulation accumulating over the last six-year period. Individually designed plans must be restated over a rolling, five-year cycle. We contact employers as their individually designed plans come due.

Individually designed plans have become rare. The most common forms of documents for small employers are in the prototype or volume submitter format. These must be restated every six years and all prototype and volume submitter 401(k) and other defined contribution plans must be restated between April 1, 2014 and March 31, 2016. The documents in effect from 2008 through 2013 were called the EGTRRA series and the documents to be effective from 2014 through 2019 are called the PPA series.

The larger plan support organizations (Fidelity, Vanguard, Putnam, etc.) have begun contacting the employers using their platforms, and they are presenting restated documents for review and signature. They don’t want to get stuck restating all the plans they support in the last month. When employers receive these documents, they should pause to review them and to consider whether any optional changes should be made.

Among the things to consider in connection with restating your plan document (or independent of restating your plan document) are the following:

  • Safe harbor status to avoid ADP/ACP testing.
  • Plan administrators may also want to consider adding an automatic contribution feature to the plan. This could boost the savings rate of your employees and may also result in safe-harbor status.
  • Fiduciary status. Several service providers are offering more comprehensive services that tend to relieve the plan sponsor of fiduciary responsibility.
  • Service provider changes. Is your service provider supplying your employees with sufficient education about investments and retirement income? Are the fees out of line? The new investment fee and performance reports make it easier to compare one provider with another. These reports have tended to bring down expenses overall. Since plan documents must be amended in the two-year window, it is a convenient time to switch service providers, if appropriate.
  • Roth accounts. If adopted, plans have been able to offer employees the option to make after-tax Roth contributions for several years. More recently, regulations have changed, permitting employees to convert existing pre-tax accounts to Roth accounts (subject to a current tax cost).
  • Is your current plan design accomplishing employer goals? If you wish to make other discretionary amendments to modify your plan terms or change plan provisions, such as eligibility or vesting terms, or changes in the definition of covered compensation, this is an excellent time to consider them.

If your 401(k) service provider presents you with restated documents, don’t set them aside but begin review promptly. Consider whether the plan terms are appropriate for your circumstances or whether one of more of the optional changes makes sense at this time.