Plan Restatements and Amendments

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

Have you recently restated or amended your plan document?  If yes, are you confident that your plan is being administered in accordance with the updated sections?  A common fallacy of the plan administrator is the sole reliance on the third party administrator (“recordkeeper”) to ensure that the plan is being properly administered, subsequent to the restatement/amendment date.

While it may be true that the recordkeeper is paid to recordkeep and to administer the plan in accordance with the plan document, the ultimate responsibility for plan compliance will lie with those considered plan fiduciaries. Furthermore, recordkeepers rarely act in the capacity of fiduciary.  (See H&H blog dated August 11, 2009 written by Kim Lubbers, for further discussion of the responsibility of the plan fiduciary).

Plan compliance errors frequently occur when the plan has a restatement/amendment.  The errors can result from the recordkeeper not updating their systems properly, or the plan administrator is not reviewing new reports, or providing new information, as required by the restatement/amendment.  The following paragraphs are just a couple of examples of common errors that can occur.

Restatement/amendment – Plan restates to elect safe harbor status, whereby the employer safe harbor match is 100% vested upon deposit to the participant’s account. Previous employer matching contributions were subject to vesting. 

Error – The recordkeeper did not properly code the safe harbor match after the restatement/amendment date. Accordingly, persons that received the safe harbor matching contribution would have that account improperly subjected to vesting. Furthermore, if any forfeitures were withheld from the safe harbor matching contribution due to the miscoding, that error would require corrective action.

Restatement/amendment – Plan administration updates the plan to allow for employer matching contributions, while the plan document did not previously allow for such contributions. Additionally, the update required participants to have worked for a specific number of hours to earn the employer match awarded for that year.

Error – The recordkeeper and plan administrator were not tracking the hours worked and some individuals who received the employer matching contribution, and terminated prior to meeting the requisite service hour requirement, were receiving all or a portion of the employer matching contribution. Accordingly, this would require a corrective action.

Restatement/Amendment – Plan initiates a restatement/amendment and the new plan document inadvertently does not exclude certain compensation that was previously excluded, such as commissions or bonuses.

Error – The plan administrator does not update their payroll system to include commission or bonus as compensation subject to employee or employer deferrals. Accordingly, this would cause a plan compliance failure, requiring corrective action.

Our general recommendation is to actively communicate with your recordkeeper regarding the changes to administration of the plan due to the restatement/amendment. We also recommend, the plan administrator sample test transactions subject to the new changes of the restatement/amendment, to ensure proper administration and accounting of the transactions. Any identified errors should be addressed immediately to correct the compliance issue.

The plan administrator should also communicate any identified issues with their plan auditors, so the plan auditor can properly assess the situation and what supporting documentation may be needed to support the corrective actions, for audit purposes. If you have any questions on the above issues, or other similar issues, please contact us using the contact information displayed on this page.

Victor Fuentes