Advisory Committee on Tax Exempt and Government Entities (ACT ...

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PROTECTING PLAN BENEFITS:IMPROVING GOVERNMENTAL DEFINED CONTRIBUTION PLAN COMPLIANCESummary of ACT Survey Responses from BenefitsLinkThe respondents indicated that the most frequent qualification failures included:• Document modified incorrectly. Money Purchase features inserted in a Profit-Sharing Plan• Plan Document: When we are contacted by a prospect, the first thing we usuallyfind is that they have failed to timely update the plan document for all of therequired changes ("no one knows who is supposed to have been doing that")• Eligibility failures• The documents have not been updated for any laws. It is pages paper clippedthat don't make any sense whatsoever, or they have no document at all andeverything is done because the person who was there before them told them thatis how it was done• Operational failures. Misinterpretation of plan relating to eligibility - such asexcluding employees because human resources designates them as "notbenefits eligible" without any real criteria. but this is not particular togovernmental plans• If one assumes that a breach of a plan's trust terms tax-disqualifies the plan, themost frequent failure is investments precluded by the trust instrument or Statelaw• When we takeover a plan, we find that many have adopted a pre-approvedprototype document and are not following all of the terms of the document• Plan includes provisions not applicable to governmental plans, but these areoperationally ignored• NO Trust• Failure to properly maintain the document. With the current rapid pace ofstatutory and regulatory changes, it is becoming impossible to keep up with planamendments and notices to participants• Failure to make contributions on a "regular" basis. Plans are established andcontributions are often made only one time for a selected group, or one time for agroup that changes each year (retirees, terminated employees, employees thatreach specific age and service formula) with no additional contributions foremployees in that groupADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 32
PROTECTING PLAN BENEFITS:IMPROVING GOVERNMENTAL DEFINED CONTRIBUTION PLAN COMPLIANCE• Failure to clearly define eligible employees is common. Non-concurrence withemployer policy and procedures based upon a poor understanding of thedocument by administrative employer staff is a result of this problemThe second most frequent qualification failures include:• Not covering all eligible employees• Operational: We have seen provisions in the plan that define specific actuarialequivalence definitions for determining alternate forms of benefits payable atretirement, but, amazingly, the actuary performing the calculations was using adifferent set of assumptions, both mortality and interest rates for these numbers,"based on a conversation we had with the client about 10 years ago"• Coverage discrimination• The governmental entity does not follow the provisions of the Plan. They justmake it up as they go along. They let people in early, change the forms ofdistributions, and allow in-service distributions when they are not allowed• I've had a couple adopt plans that they weren't eligible to adopt - a 401(k) planand a 403(b) plan. The advisors did this• Pre-effective date service is credited under DB plan and employer failed torecognize 415(b) limits• No 415 Language• Failure to operate the plan document according to the plan language. Becausethe IRS has been making rapid changes to plan documents, mistakes are madewhen interpreting plan language because the language changes so frequently.Just checking the language in the plan document leads to error because itmisses the changes made by the amendments• Failure to maintain documents. "Specimen" documents are provided togovernmental employers by product providers or consultants, but are notmaintained or updated. Since approved "prototype" documents are not veryhelpful for this group of employers, most documents do not get updated oramended after the initial adoption• We are aware that many governmental employers have relied upon "Specimen"documents supplied by investment product providers without proper legal adviceor plan design. A prototype plan would provide a simple and effective solution tothis problemThe third most frequent qualification failures include:ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 33
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