Practical Tips for Operating Your Plan to Avoid the Obvious Problems
It is best to begin with what this article is and what it is not. It is not a list of "best practices" for employee benefit plans. It is not a scholarly article. It is a description of obvious issues that can cause a significant problem for an employee benefit plan if not handled properly. The issues described are low hanging fruit but many of us have at one time or another confronted a problem because of them.
1. Update plan documents.
Yes, this is obvious but is not always easy and so is not always done. One or more of the plan professionals should be the "keeper of the documents." This means that someone should be responsible for drafting each amendment adopted, maintaining an up to date list of amendments and periodically incorporating those amendments into the plan documents. This includes the trusts, formal pension plan document and summary plan descriptions as well as any formal policies. All of the professionals should pay attention to the documentation, and should not hesitate to bring up issues and give reminders.
Amendments: Make it a practice to have at least two original hard copies of each plan amendment signed with one copy retained by the plan administrator and one copy by counsel. The original executed amendment should be promptly scanned and a digital copy e-mailed to all who wish to receive a copy. This makes it more difficult to misplace an amendment. Over the years I have had a few signed amendments go astray and it was the practice of having multiple signed and/or digital copies that saved the day.
Keeping careful track of amendments has obvious benefits. It makes it easier to update plan documents and SPDs. It makes pension plan determination letter filings easier and, most importantly, it helps ensure that the plan is actually administered in accordance with the most current document. In addition, for the reasons discussed below, plan amendments should be signed or their adoption documented in signed minutes.
Since the first round of filings under the Five-Year Determination Letter Program, the IRS has focused much more on documentation of the date plan amendments were adopted. IRS agents require signed and dated copies of plan amendments submitted (or signed minutes documenting the adoption of the amendment) as part of the determination letter application. If a signed copy is not provided upon the agent's request, the plan is handled under the IRS Employee Plans Compliance Resolutions System (EPCRS) as a non-amender discovered in the determination letter process and could be subject to a significant penalty. This has not changed in the second cycle under the current Revenue Procedure, Rev. Proc. 2014-6.
The Trust Agreement: It is particularly important to review the trust of a new client and periodically review the trusts of existing clients. The trust is generally not referred to on a regular basis and typically does not require regular updates to comply with changes in the law as is the case with plans and SPDs. Accordingly, trusts can be quite old and may include provisions that could cause serious problems. The following are some examples of such provisions which trustees should discuss with plan counsel:
- Delegation Provisions: I have been involved in two matters in which the plan had not restated its trust after ERISA but had adopted ad hoc amendments. In both cases these amendments did not include a delegation provision which is an optional provision as provided in ERISA § 402(c)(3). In one case, after an investment manager lost a great deal of money, the trustees were sued as co-fiduciaries for the loss because there was no provision for delegation. ERISA § 403(c)(2) provides generally that trustees are not responsible for the breaches of an investment manager if the manager was prudently selected and prudently monitored. However, this protection is only available if plan documents provide for delegation of the fiduciary duty for investments to an investment manager. The other lack of a delegation provision was discovered before it became relevant in litigation and an appropriate provision was adopted.
- Discretionary Authority of Trustees: Another important trust provision is language establishing the discretionary authority of trustees to interpret the plan--sometimes referred to as "Firestone" language after the Supreme Court case that established the principle. In the absence of such a provision, courts are more likely to apply a de novo standard of review under which the court substitutes its judgment as to the meaning of the plan for the judgment of the trustees. Discretionary language preserves the authority of the trustees so long as their interpretation is not "arbitrary and capricious".
- Settlor v Fiduciary Functions: Court cases have identified certain functions related to employee benefit plans that the courts find are inherently settlor in nature even if performed by a fiduciary of a multiemployer plan. The DOL has determined that plan assets may not be used for functions performed by multiemployer plan fiduciaries acting as settlors. However, the DOL took the position that "where relevant documents (e.g., collective bargaining agreements, trust documents, and plan documents) contemplate that the board of trustees of a multi-employer plan will act as fiduciaries in carrying out activities which would otherwise be settlor in nature, such activities would be governed by the fiduciary provisions of ERISA."1 Plan assets may, of course, be used for fiduciary functions. Although the DOL position may raise more issues than it resolves, plans will likely want to include a provision giving the trustees the ability to treat settlor functions as fiduciary functions.
Finally, make certain that trust requirements are followed.2 Trusts often contain specific provisions concerning appointment of trustees, number of meetings, quorum and limitations on investments. Make certain that the trust correctly identifies those individuals who are permitted to participate in the plan. If non-collectively bargained employees may participate, the plan documents must specifically so provide. See discussion under Written Agreements below.
IRS Qualified Pension Plan Requirements: These IRS requirements are very complicated and constantly changing. Plans must be filed with the IRS for a determination letter at least every five years during a filing cycle determined by the type of plan (i.e., single employer, multiemployer, individually designed) and for some plans by the employer identification number (EIN).3 Amendments must be adopted by a deadline that depends on the type of amendment. Near the end of each year, the IRS issues a list of amendments that must be included in plans submitted for a determination letter during the cycle beginning the following February.
The failure to adopt timely amendments and/or the failure to timely file for a determination letter can have serious consequences for a plan. The EPCRS provides a mechanism to correct operational and plan document errors.
The IRS has many valuable resources on its website. The following are examples:
IRS Exempt Organization Requirements: ERISA-covered welfare plans are tax exempt entities and documents must comply with the requirements of the applicable IRS Code section. Welfare plans are commonly exempt under §§ 501(c)(9) or 501(c)(5). Education and training plans may also be exempt under § 501(c)(3). These requirements may affect such issues as what benefits may be offered, who participates and mergers.
2. Check for consistency of plan documents.
This sounds easy but is not always the case as court decisions concerning inconsistencies between a formal plan document and the SPD will attest. Before the decision of the U.S. Supreme Court in Cigna Corp. v Amara,4 the SPD was usually found to control in case of inconsistency. Although the Court in Amara determined that the SPD is not a plan document but a communication about the plan, consistency between the communication in the SPD and the formal plan terms is still extremely important. This means checking the formal plan document, SPD, trust and policies. It is easy to forget that a collection policy or QDRO policy may include a definition that needs to be changed when a plan is amended.
3. Read the documents.
I can recall numerous instances in which a plan administrator applied a plan provision based on recall, what the prior administrator told him/her the plan said or what the SPD said. Unfortunately, this is often discovered after a suit has been filed or the DOL/IRS has identified the problem. I find this problem more common in pension plans because the welfare plans I represent tend to have a combined plan document/SPD and because the formal pension plan is so complex that administrative staff often prefer to rely on the SPD. Frequently, the answers to the questions fund office staff ask are easily found in the plan document, but I have found that some rarely refer to the plan document.
Other plan professionals are not immune from this problem. It is important to review a provision each time it is applicable since some nuance in the language may affect the current case but not the last one.
Plan fiduciaries should also review documents to make certain that they are correct and understandable for plan participants.
4. Follow plan documents; apply rules consistently.
This may also seem obvious but one of the most important jobs of an administrative office is to apply a plan accurately and consistently. Yet, this can be a major problem without crosschecks, oversight, and review. Processors should avoid just applying the plan based on their memory or what someone else is telling them. Changes to the plan are often hard to get put into effect. Again, it is obvious, but changes that have not been put down in writing as amendments are going to be put into practice inconsistently, if at all; and legally, they are actually not effective anyway. It is also essential that documents be applied consistently. Inconsistencies may be discovered by the IRS or DOL or may be revealed during discovery in a lawsuit.
In addition, if a benefit is paid when not permitted by a plan, there is a violation unless plan language can be reasonably interpreted by the fiduciaries to provide the benefit at issue. The IRS in particular will check a random sample of pensions to make certain that they have been calculated in accordance with the plan document; the examiners will question ambiguity and interpretations. It is much easier if the plan is written clearly.
5. Watch out for inadvertent cut-backs in accrued pension benefits.
In Central Laborers' Pension Fund v. Heinz, the Supreme Court held that the anti-cutback rule prohibited an amendment "expanding the categories of postretirement employment that triggered suspension of payment of early retirement benefits already accrued."5 The Heinz decision was based on a premise that has broadened the potential scope of accrued benefits. The Heinz Court agreed with the conclusion of the Seventh Circuit that a "participant's benefit cannot be understood without reference to the conditions imposed on receiving those benefits, and an amendment placing materially greater restrictions on the receipt of the benefit 'reduces' the benefit just as surely as a decrease in the size of the monthly benefit payment."6 The Court also noted that such conditions "are elements of the benefit itself and are considered in valuing it at the moment it accrues."7
Therefore, any proposed amendment to the conditions that apply to a pension benefit should be carefully reviewed to confirm that the proposed change does not inadvertently reduce accrued benefits by applying additional conditions to already accrued benefits.
Remember as well that the IRS takes the position that a benefit can become accrued even if a plan is not permanently amended. Q&A-1(c)(1) of IRS Reg. § 1.411(d)-4 provides:
. . . if an employer establishes a pattern of repeated plan amendments providing for similar benefits in similar situations for substantially consecutive, limited periods of time, such benefits will be treated as provided under the terms of the plan, without regard to the limited periods of time, to the extent necessary to carry out the purposes of section 411(d)(6), and, where applicable, the definitely determinable requirement of section 401(a)(25). A pattern of repeated plan amendments providing that a particular optional form of benefit is available to certain named employees for a limited period of time is within the scope of this rule and may result in such optional form of benefit being treated as provided under the terms of the plan to all employees covered under the plan without regard to the limited period of time and the limited group of named employees.
In materials prepared by the IRS for the opening of the Multiemployer Plan Determination Letter Cycle in 2009, the IRS took the position that if a plan has offered an ad hoc COLA for three years in a row and then fails to offer an ad hoc COLA, it may have violated the anti-cutback rule of Code § 411(d)(6). In response to questions at a National Coordinating Committee for Multiemployer Plans meeting, the IRS representatives have also taken the position that a series of ad hoc waivers of a plan's suspension of benefits provisions may result in the waiver becoming an accrued benefit.8
1. Keep it as simple as possible.
Administering an employee benefit plan is complicated enough that it makes little sense to make it needlessly more complicated unless there is a compelling reason. I am familiar with plans that have rules and benefits so complicated that the rules themselves substantially increase administrative costs. Also, the more complicated a rule, the more likely a mistake will be made. So weigh the benefit to be gained or the goal to be accomplished by a complicated rule against the cost and potential harm from an error.
2. Comply with Reporting and Disclosure Requirements.
Reporting and disclosure is also increasingly more complicated. There are many notices required under the Code and ERISA, as well as by the IRS, DOL, CMS, etc. Reporting and disclosure references are available from various sources. Search Benefitslink.com for reporting and disclosure calendars from various consulting and law firms. There is also information available on the DOL website. See http://www.dol.gov/ebsa/pdf/rdguide.pdf
Reporting and disclosure violations can have extremely serious consequences. Many notices and disclosures are required by the Internal Revenue Code and the failure to provide the notice is a "qualification failure." Such an error could threaten the plan's qualified status and cost a significant amount to resolve. Other reporting or disclosure failures result in civil or criminal penalties under ERISA. Reporting or disclosure failures can trigger IRS examinations or DOL investigations.
The following are some common reporting or disclosure problems that can have very serious consequences:
- Failure to provide a "deemed suspension notice" when a participant continues to work after normal retirement age. If this notice is not provided, when the participant does retire, the plan must either pay a benefit that has been actuarially increased for late retirement or must pay benefits retroactive to normal retirement age plus interest. In addition, if the participant has been working in employment covered by the plan, generally, the participant must also receive accruals. This is one of the most frequent errors identified by the IRS according to the Service's website.9
- Annual report filed late or not filed or not complete.
- Failure to provide 204(h) Notices when plan benefits have been reduced prospectively.
- Failure to provide timely COBRA notices.
- Failure to provide proper disclosures to participant and spouse at retirement.
- Failure to timely respond to a request for documents.
- Failure to comply with the requirements of ERISA § 404(c) for a participant directed individual account plans.
- Failure to comply with the notice requirements for a 401(k) plan with an automatic enrollment feature.
- Failure to comply with ACA notices and disclosure.
The DOL has taken the position that a plan fiduciary's duty to disclose information to plan participants is not limited to disclosures expressly required by statute or regulation. The DOL has asserted that the general fiduciary duties of prudence and loyalty require that plan fiduciaries provide information to a participant that is material to the exercise of the participant's benefit rights whether or not the participant specifically requested that information. In addition, fiduciaries must convey sufficient information so that participants are not misinformed. See argument and authorities in the Amicus Brief of the Secretary of Labor in Hecker v. Deere & Co., No. 07-3605, 08-1224 (7th Circuit) . Therefore, Trustees must also take care that plan documents and information to participants adequately inform them of plan rules and requirements.
3. Update information and training regarding new requirements.
A constant stream of new requirements apply to employee benefit plans. This requires a plan to have a system to keep track of requirements and compliance since there are often serious consequences for noncompliance. Education of plan fiduciaries and administrative staff and the retention of qualified professional advisors help insure that a plan will keep pace with new requirements.
Agency websites are a good source of information. Recent DOL HIPAA audits generally follow the HIPAA Compliance Checklist available on the website. Review and make use of agency compliance assistance.
Also see www.benefitslink.com for free newsletters with articles and links to regulations, cases and other useful information.
4. Carefully draft and review minutes.
Well drafted minutes are important to the proper administration of a plan. In addition, minutes are almost always reviewed by the DOL and the IRS in an investigation/examination. Minutes are also typically requested in discovery in connection with litigation or arbitration. Minutes should provide sufficient detail to record the action of plan fiduciaries but additional detail is rarely helpful, especially when the information is available in other documents. For example, a detailed recounting of the numbers included in a financial statement is typically not necessary unless there is a specific issue with respect to those numbers. Incorporating unnecessary detail increases the likelihood that there will be an error or inconsistency between the minutes and the documents being reported. This will generally be discovered when least convenient.
There are items that minutes should generally include:
- Minutes should describe a due diligence process.
- Minutes should accurately and completely reflect trustee decisions. Where appropriate, the reasons and rationale should be included with respect to decisions.
- Minutes should record when responsibility has been delegated to a committee or individual.
- Trustees should read and correct the minutes and not just rely on plan professionals.
Drama should be avoided in minutes. For example, be cautious in recording that a fiduciary voted against a provision because he/she asserted that it was a breach of fiduciary duty unless that trustee is prepared to take action to prevent the decision that he/she asserts violates the law. Simply voting against an issue generally does not fulfill fiduciary duties. If a fiduciary does not intend to take remedial action, he/she puts himself/herself at risk by declaring the violation in the minutes.
Minutes should be written based on the assumption that they will be reviewed by an IRS examiner or DOL investigator or counsel for a party suing the plan. I recommend to my clients that counsel prepare or review the draft minutes before they are circulated.
5. Maintain complete and accurate records.
Recordkeeping is a core requirement for an employee benefit plan. Some records are required to be kept for an employee's lifetime and others can be disposed of after a few years. Records are used to determine benefits. Good records document decisions. Good records also protect sponsors and fiduciaries. In my experience, poor records are generally an indication of poor administration. I have heard IRS examiners and DOL investigators express similar viewpoints. Accordingly, all plans should adopt a Record Retention Policy.
6. Adopt and administer policies and procedures.
Policies and procedures should be written both to accomplish their policy purpose and to make them capable of being administered correctly and consistently. Written policies and procedures are plan documents and, as noted above, it is a fiduciary duty to act in accordance with plan documents. As discussed above, plan policies and procedures should be available to those who administer them, should be updated as needed and should be consistent with other plan documents. The following are common plan policies and procedures (for multiemployer plans):
- Claims and Appeals Procedure.
- Expense and Reimbursement Policy.
- Record Retention Policy.
- Collection Procedure.
- QDRO Procedures.
- QMCSO Procedures.
- Investment Policy.
- Policies for participation of non-collectively bargained employees.
7. Properly administer insurance and bonds.
Fiduciary insurance is not required by law but fidelity bonds are required under ERISA § 412. Plans should periodically determine that fidelity bonds and fiduciary insurance policies are actually in force10 and that the amounts for fidelity bonds are correct.11 All fiduciary insurance is not equal and a higher amount is not automatically the best coverage. Compare coverage, conditions, riders, exclusions. Many policies now cover fees for DOL or IRS correction programs, which cannot be paid from plan assets. If bonds or insurance are purchased by multiple plans, the cost should be allocated proportionally among the plans.
ERISA § 410 provides that a plan may purchase fiduciary insurance if such insurance permits recourse against the breaching fiduciary. The fiduciary (or an employer or employee organization) may purchase elimination of recourse insurance. The plan may not pay for elimination of recourse insurance. This is a common minor error that can have serious consequences. Check to make certain that the plan has not inadvertently paid the elimination of recourse insurance for fiduciaries.
Written Agreements Defining Participation
Both the IRS and the DOL focus on written agreements including Collective Bargaining Agreements (CBA), Participation Agreements and Reciprocity Agreements. There are a number of easily remedied problems that arise in connection with these agreements.
Section 302 of the Taft-Hartley Act requires that contributions to a plan that is administered by a board of trustees on which the union is represented must be made pursuant to a written agreement with an employer; the agreement specifies the detailed basis on which such contributions are to be made. In addition, such agreements define which employees participate and how service is credited. The IRS, in the context of enforcing the IRS' qualified pension plan rules for multiemployer plans, which include rules for crediting service, devotes significant attention to these agreements. See Multiemployer Plan Examination Guidelines12 and materials concerning the determination letter process.13 The following issues may arise:
- There is no written CBA, labor agreement or participation agreement covering the employee.
- There is a written CBA or participation agreement but it does not provide for contributions to the plan or the contribution provisions are unclear or inconsistent with the contribution made.
- There is a signed participation agreement but neither the plan nor the trust provide for contributions under such an agreement.
- A participation agreement covers non-collectively bargained employees but neither the plan nor the trust provide for the participation of non-collectively bargained employees.
- There is a signed reciprocity agreement but neither the plan nor the trust provide for reciprocity agreements.
The IRS has indicated that if multiemployer plans rules incorporate other documents by reference, the plan's determination letter will not protect the plan from violations of IRS qualification requirements that may be lurking in the provisions of a CBA, participation agreement or reciprocity agreement to which the plan refers. To obtain reliance on the determination letter (including provisions of these documents applicable to the plan), the applicable portion of these agreements must be submitted as part of the determination letter process.
Therefore, for various reasons including agency oversight, determination letters and enforcing collections, the plan should have a process to obtain signed CBAs. The plan should also have a process to confirm that all individuals participating are covered by a signed CBA or participation agreement and contributions are made correctly pursuant to signed reciprocity agreements. Plan documents must provide for participation agreements and reciprocity agreements.
Non-Collectively Bargained Employees: The plan should have a process to identify non-collectively bargained employees, determine that they are able to participate in the plan in accordance with plan documents and the law and make certain that they are covered by a participation agreement. There is a relatively common misunderstanding by plan administrators that an owner of a company or a union employee is covered by a collective bargaining agreement if he/she is a union member. This is not correct. Many of these individuals are non-collectively bargained employees. A number of IRS requirements apply separately to non-collectively bargained employees such as the non-discrimination rules which require separate testing of non-collectively bargained groups. Since non-collectively bargained employees by definition are not covered by a collective bargaining agreement, they must be covered by another written agreement in order to satisfy § 302(c) of the Taft-Hartley Act.
In its Multiemployer Plan Examination Guidelines, the IRS instructs its examiners to determine from plan documents if the plan covers non-collectively bargained employees and/or engages in reciprocity, to request and review the applicable agreements and compare them with the plan documents.
There are many other items I could discuss but the purpose of this article was to touch on some fairly obvious issues that may be overlooked and thereby result in problems for a plan. A general common sense approach to plan administration may miss the mark entirely without some general understanding of agency and legal requirements.
Joyce A. Mader,O'Donoghue & O'Donoghue LLP
1DOL Field Assistance Bulletin 2002-2.
2The failure to act in accordance with plan documents is generally a breach of fiduciary duty under ERISA § 404(a)(1)(D).
3See Rev. Proc. 2014-6.
4131 S. Ct. 1866, 50 EBC 2569 (2011).
5541 U.S. 739, 741 (2004).
6Id. at 744.
7Id. at 746.
8However, see IRS Rev Rul. 92-66 which concluded that Code § 411(d)(6) does not require that an early retirement window benefit be provided permanently to all employees under a plan where the employer amends its plan to make the benefit available for substantially consecutive, limited periods of time. See also DeCarlo v. Rochester Carpenters Pension, Annuity, Welfare and SUB Funds, 823 F. Supp. 115, 120(W.D.N.Y. 1993) (holding that, under IRS Revenue Ruling 92-66, a plan did not eliminate accrued benefits when it declined to issue additional benefits that had been paid for five prior years because the additional benefits were "justified by discrete special circumstances," and there was "no guarantee that the [ ] circumstances [would] exist in the next consecutive year").
9EP Examination Process Guide--Section 2--Compliance Monitoring Procedures--Top Ten Issues--Multiemployer Plans.
10See Chao v Day, 436 F. 3d 234 (DC Cir. 2006). Day, an insurance broker, accepted hundreds of thousands of dollars from twenty-nine ERISA-covered employee benefit plans for the purpose of purchasing insurance for the plans. Day sent invoices to the plans for various insurance policies, the plans paid the bills by sending checks to Day, and Day deposited the checks into his corporate account. Instead of using the plans' checks to purchase insurance, however, Day kept the money and provided the plans with fake insurance policies. The fact the fiduciary insurance policies were not in force was discovered only when one of the plans notified the insurer of a potential claim.
11See ERISA § 412. See also DOL Field Assistance Bulletin 2008-04.
13EP Determinations Quality Assurance Bulletin, Multiemployer Plans: Determination Procedures (April 3, 2008).