Plan Amendment Best Practices

Have a recipe for success and follow it. Here are some helpful tips.

By Theresa Conti & Shannon Edwards

Have you ever made a roux? When making a roux, it is very important to follow the steps just right or your sauce will turn out lumpy. The recipe represents the best practices for not ruining your roux. The same is true for administering 401(k) plans. You need to have best practices and procedures in place—a recipe of sorts—to avoid mistakes and errors that could ruin your dish. Having a successful plan that is error-free starts with having a well-designed plan document and properly amending that document when changes are needed. Good procedures and best practices are vital to the document design, adoption and amendment process. The plan document governs the plan and what the plan sponsor can do, cannot do, and must do. Therefore, when the plan document doesn’t meet the needs of the plan sponsor—or worse yet, when the plan sponsor doesn’t check the plan document or understand the plan document—it can lead to errors that can be costly and must be corrected.

AMEND THE PLAN BEFORE CHANGES ARE MADE

There are best practices that we should use when it comes to helping our clients through the process of maintaining and making changes to their plans. The most important one would be to amend the plan before making the change in operations. In a perfect world, we would be notified of a need to consider or make a change before the change is made. However, many times we are the last to know! This is especially true as it relates to our client’s retirement plan documents (especially in the case of merger and acquisition transactions where the plan is rarely considered beforehand).

CHECK THE PLAN DOCUMENT

The fact that we are often the last to know leads to the next best practice for making changes to the plan document and the operation of the plan. Train your clients to ask questions first and not to make assumptions. Make them feel comfortable asking questions so that they don’t feel stupid or like they are a burden. Let them know that you are there to be their resource and they don’t have to know how to read and interpret all the legal mumbo-jumbo in the document. You are there to interpret it for them and are happy to do so. “Check the document” is one of the most important things we teach new team members in training. We don’t answer a client’s question about the plan terms without looking at the document first. Similarly, teaching our clients that the document must be checked is one of the most important procedures we can put in place. For example, recently we had a client who assumed that their safe harbor match was calculated on a per payroll basis. However, the plan document stated that it was calculated on an annual basis with a true-up. They had not been truing it up over the three-year period since they became safe harbor plan—and neither of the previous TPAs had mentioned that they were required to, nor had they calculated the true-up for them. They simply ignored that provision. This error will cost the client money to correct several plan years, and the service provider may have to defend a potential lawsuit for giving them bad or no advice. In this instance, the best practice would have been to first train the client to check the document or at least ask the question. Next the service provider should have been checking the document when completing the annual work, and they should be communicating with the client on a regular basis. And thirdly, the service provider should be reviewing the plan terms with the client regularly to make sure the plan design continues to meet their needs.

• “YOU NEED TO HAVE BEST PRACTICES AND PROCEDURES IN PLACE—A RECIPE OF SORTS—TO AVOID MISTAKES AND ERRORS THAT COULD RUIN YOUR ‘DISH.’”

Are there to be their resource and they don’t have to know how to read and interpret all the legal mumbo-jumbo in the document. You are there to interpret it for them and are happy to do so. “Check the document” is one of the most important things we teach new team members in training. We don’t answer a client’s question about the plan terms without looking at the document first. Similarly, teaching our clients that the document must be checked is one of the most important procedures we can put in place. For example, recently we had a client who assumed that their safe harbor match was calculated on a per payroll basis. However, the plan document stated that it was calculated on an annual basis with a true-up. They had not been truing it up over the three-year period since they became safe harbor plan—and neither of the previous TPAs had mentioned that they were required to, nor had they calculated the true-up for them. They simply ignored that provision. This error will cost the client money to correct several plan years, and the service provider may have to defend a potential lawsuit for giving them bad or no advice. In this instance, the best practice would have been to first train the client to check the document or at least ask the question. Next the service provider should have been checking the document when completing the annual work, and they should be communicating with the client on a regular basis. And thirdly, the service provider should be reviewing the plan terms with the client regularly to make sure the plan design continues to meet their needs.

TAKEOVERS

When taking over a plan, it is important to do an in-depth review of the current plan document’s terms and consult with the client to determine what changes they may want to make. There are some things that cannot be amended out of the plan at all, such as in-service distributions, and there are many things that cannot be changed mid-year. For instance, often the non-elective contribution provisions are included with no last day or 1,000-hour requirement. If we are taking over a plan in the middle of a plan year, we may not be able to amend out that provision until the start of the next plan year. This is something that we should always consider when we are reviewing plan design and suggesting changes that may be affected by who must be included in the contribution allocation. Regardless of what changes can be made and when, it is vital to the plan’s success to have a good understanding of what the client thinks the plan says, what they want the plan to say, and what they have been doing in operation.

CHANGING RULES

Of course, there are also mandatory regulatory and legislative provisions that affect our procedures. Currently we need to pay close attention to the SECURE and CARES Act amendments. Notice 2022-33 generally extended the deadline to adopt the amendments to Dec. 31, 2025. However, it didn’t extend the effective dates for some of the changes made by the laws. Therefore, we need to be able to track in operation what the clients have been doing since the laws were passed and prior to the time that the changes must be documented with an amendment to the document. This is going to be especially difficult for clients that we take over between the effective date of the law changes and the time that the amendments must be completed. We need to be collecting the amendments if the prior service provider has already adopted them—or at the very least information on what the client has been doing in operation as it relates to both laws. These amendments include the new rules for qualified birth or adoption distributions, pooled employer plans, safe harbor plans, long term part-time employees, and required minimum distributions. It is very important to add steps in our takeover and plan amendment procedures to address these changes. 

SUMMARY

While there are more best practices when it comes to maintaining and amending a plan document than we have room to cover here, start with good policies and procedures within your organization. Review the plan document often and compare it to the client’s operation of the plan. Communicate with your client and make them feel comfortable asking questions. Impress on the client the importance of notifying you before making a change. Educate the client on your policies and procedures and why it is so important that they be followed and what the results can be if they are not followed. Make sure the client is familiar with the “recipe” for a successful plan and for avoiding errors so that they don’t end up with an unsatisfactory “dish.”