Do Your Benefit Plan Provisions Match Your Actual Practice?

Almost all plan documents contain some level of administrative provisions outlining how the plan is intended to operate (e.g., number of committee members, quorum, etc.).  Plan sponsors often view these provisions as “boilerplate” with little or no meaning.  In actuality, these are substantive provisions of the plan and failure to follow those provisions can have substantial consequences.

The Consequences

Failure to follow the terms of the plan document is a potential qualification issue under IRS regulations which could lead to disqualification of the plan or sanctions if the IRS chose to pursue it.  Second, failure to follow the terms of the plan document is a fiduciary breach under ERISA.

Perhaps more importantly, failure to follow the plan document can call into question the validity of the actions taken by plan fiduciaries.  For example, if the plan document reserves the right to amend to the plan sponsor’s board of directors and in actual practice amendments are routinely executed by an individual or administrative committee, this may call into question the validity of any amendments so executed (e.g., an amendment eliminating or decreasing an employer matching contribution of freezing a pension plan).

Reviewing Your Plan Provisions

The administrative provisions of each plan should be reviewed to determine whether they are in line with actual practice.  For example, are there plan provisions addressing the number and method of selection of committee members, required quorums, methods for voting and making decisions, frequency of meetings, etc. and do those provisions reflect what is actually happening with the plan?  Provisions regarding the power to make plan amendments should be reviewed to determine whether actual practice is in line with the plan document.  Also, are there functions that are reserved to a plan committee that are actually being fulfilled by other individuals (e.g., appointment of service providers)?

Plan provisions should also not conflict with any committee charters.  Charters should supplement and compliment the plan document.  As with the development of appropriate committee charters, where inconsistencies exist, the plan document should be conformed to meet the needs and reflect the desired practices of the relevant fiduciary rather than conforming the fiduciary’s behavior and practice to the plan document.

Christopher G. Guldberg has been practicing in the employee benefits and executive compensation areas since 1992 and is a senior member of the Firm’s benefits practice. Mr. Guldberg advises on a wide range of benefits issues including design, implementation, operation and termination of tax-qualified retirement plans and welfare benefit plans. He assists with all aspects of regulatory compliance associated with employee benefit plans and regularly advises clients on ERISA's fiduciary and prohibited transactions provisions. He also has helped clients correct benefit plan defects through DOL and IRS voluntary correction programs and has assisted clients with negotiated settlements with regulatory authorities.