The Importance of Establishing Sound Plan Policies and Procedures
By Michelle Freiholtz, MBA, QKC, QKA®, CIP
You’ve established your retirement plan. Contributions are coming in and distributions are going out. Everything seems to be running smoothly . . . until your recordkeeper sends an alert indicating that you may not be operating your plan according to all the terms of the document. Or perhaps the IRS finds irregularities in your plan while conducting a routine audit. Or maybe a participant has contacted the Department of Labor about late deferral deposits. These scenarios don’t automatically indicate that you are operating your plan improperly. But wouldn’t you rest easier if you knew that you are following clear, well-thought-out processes that could keep your plan out of trouble?
It would be great if you didn’t have to deal with these types of issues. And while there’s no foolproof action that eliminates all problems, you can reduce the risk by establishing detailed policies and procedures to help ensure that your plan is in compliance. You should also periodically evaluate and adjust these processes throughout the life of your plan.
The IRS has a list of questions to help guide employers during the creation of their policies and procedures. For example, your plan document will the define age and service requirements that your employees must satisfy before becoming eligible for the plan. But it does not tell you how to implement these provisions. So you should establish a procedure that identifies who will maintain personnel records, how to verify age and service, and how to notify employees when they are eligible. You should also consider creating processes that address contributions, distributions, testing, reporting, and other concerns.
Employers that violate compliance rules or the terms of their plan document may risk disqualification. Fortunately, employers may use the IRS’s Employee Plans Compliance Resolution System (EPCRS) to fix mistakes and avoid disqualification. There are three correction programs under EPCRS, but the self-correction program (SCP) is the only one that doesn’t require disclosure of the issue to the IRS and payment of a fee. Under the EPCRS, only employers with reasonable policies and procedures in place can use SCP.
Sound procedures may also reduce the amount of time and energy you spend administering your plan. For example, assume that a participant terminates employment with a vested balance in your plan. They still need to receive notices and statements—and required distributions must be processed. What happens if the participant moves and fails to tell you their new address? You must make all reasonable attempts to locate the participant. The Department of Labor has released some best practices you may use to develop solid procedures, which includes communication strategies with participants—even before they terminate—to reinforce the importance of updating their information. And your procedures may include specific steps that you will take to locate former employees that you lose track of.
You may establish reasonable practices in a variety of ways. For instance, simply stating that “my third-party administrator typically takes care of X, Y, and Z” is probably not effective. Rather, written processes that reflect your careful consideration of plan administration will more likely show that you have “established” reasonable standards. Of course, you must also follow the provisions that you create. While establishing policies and procedures won’t eliminate retirement plan risks, they can go a long way toward minimizing administrative headaches and avoiding compliance concerns.
