Do You Have a Valid Plan Document?

As actuaries we deal with data on a daily basis. Most of the time we tend to only think of data as demographic (participant information) or financial (plan assets, contributions and distributions). However, data also includes the plan documents that we rely on to determine who is covered by the plan, what benefits are to be paid to participants, when those benefits can be paid and the form of benefit payments.

During a recent discussion of plan documents, a number of issues were identified. First, do you have a plan? Second, if you have a plan, what are its terms and conditions? And third, when is an amendment applicable? This third item should include a discussion of Code §412(d)(2), but that is a debate best left to another, more comprehensive article devoted solely to that issue.

Assume it is late December and you have just completed the design of a new plan. You sent the design information to the client, who responded via email that the design is perfect and please send the documents required to adopt the plan. You send a draft Adoption Agreement and Board Resolution to the client so they can implement the new plan, with instructions that the documents need to be signed and dated by Dec. 31, 2015. Of course, best practice is to get the client to send you copies of the signed documents by Dec. 31, but clients don’t always follow best practices. 

On Jan. 4, 2016, after the long holiday weekend, you receive a package in the mail from the client with the “signed” documents. Despite having placed “sign and date” stickers at every place in the documents where a signature was required, you find that your client missed the employer signature on the adoption agreement. Your first concern is, do you have a valid plan for 2015? And if not, what do you do now, since the client’s year-end tax planning was based on making a substantial contribution to the plan for 2015?

In the general ERISA context, you probably have a plan for 2015 if the Board Resolution confirming the adoption of the plan is specific enough and references an attached plan document. ERISA requires that the plan have a written document, but when and how that document was adopted by the plan sponsor is not covered directly ERISA. There is nothing in ERISA requiring that a plan document or an amendment be signed. Clearly, in the above example you have a plan document that outlines all of the terms and conditions of the plan and as long as the Board Resolution properly reflects an action of the Board duly adopting the plan, it may not be necessary to have a signed plan document.

While we usually rely on written resolutions as proper documentation, keep in mind that the written resolution is often just a memorialization of the oral decision by the Board. So, it is possible for a plan to be adopted without either a signed plan document or a written resolution confirming its adoption. Of course, the lack of adequate documentation will make it difficult to convince the IRS that you have a properly implemented plan. From a qualification standpoint, you may have a problem because the IRS requires pre-approved plan documents to be signed for them to be valid.

Well, obviously, the above is more of a legal issue than an actuarial one, but as an actuary, you are going to be certifying the funding for this plan. Can you do so if you don’t think the plan existed for the year in question? As actuaries, we have to rely on the validity of the plan documents and other data provided to us by our clients (either directly from the plan sponsor or from the TPA or other professional who is working with the client). The plan document and amendments are part of the “data” that we routinely rely on to complete our work. ASOP #23, Data Quality, says (paraphrasing) that when there is an issue with the data, the actuary should endeavor to improve the data. Not having a signed plan document is clearly a data issue since you don’t know if the document in hand represents the actual plan provisions as adopted by the employer. Or worse, you have more than one plan document with different provisions. Similarly, there is also no way to know if the employer has adopted any amendments to the plan since it was signed. So, asking the client or ERISA counsel for clarification when you lack adequate plan documentation is certainly appropriate practice.

Fortunately, clients rarely take it upon themselves to adopt plan amendments. Instead, one of the professionals working with the plan (legal counsel, TPA, actuary or accountant) makes the recommendation to change the plan and then one of the professionals handles the preparation of the amendment. Of course, there can be several steps in the process, such as legal counsel sending the actuary a draft of the amendment to review, the actuary sends the attorney suggested changes, those changes get incorporated into the amendment, which is then sent to the client for adoption. With this scenario, a copy of the signed amendment might not get back to the actuary and it could be several years before someone notices that the only copy of the amendment in the file has not been signed. Again, you should ask for a signed copy of the amendment from either the client or ERISA counsel in order to have good data on the plan.

Then your final quandary is what to do if no one can find a copy of the signed amendment. If the employer through its normal business practices can demonstrate that the amendment was duly adopted by the employer (i.e., the Board approved the amendment at a meeting for which notes show the approval), then you probably have a valid amendment upon which you can rely. For professional comfort, you may want legal counsel to confirm that the amendment is valid before proceeding to rely on the changes made by the amendment. Best practices should be to have copies of signed plan documents in your file.