Chapter 1 — Plan Administration

The first step in adopting a qualified plan is to prepare the legal documents. In most cases this means drafting a trust agreement, a plan document, and — for corporate employers — a Board of Directors’ resolution formally adopting the plan and trust.

The employer then chooses between two approaches:

• Master or prototype plan: many financial institutions and professional organizations submit pre-designed plans to the IRS for approval. These sponsors allow individual employers to adopt their pre-approved plan at lower cost. A master plan specifies the funding vehicle; a prototype plan leaves the funding vehicle to the employer’s choice. Because these plans are already IRS-approved, they save time and money.
• Individually-designed plan: employers with unique needs or objectives may have their attorney draft a custom plan. This offers greater flexibility but requires more time and cost, and a determination letter should always be obtained.

The IRS issues determination letters confirming whether a retirement plan qualifies under the tax code. A favorable determination letter is not legally required, but failing to obtain one — and later discovering the plan does not qualify — can have severe tax consequences for both the employer and participants.

For individually-designed plans, a determination letter should always be sought. For master or prototype plans, many employers skip the determination letter because the plan has already been pre-approved. However, if the employer amends a master or prototype plan to fit its specific needs, the previously issued determination letter no longer applies and a new one should be obtained.

A plan administrator must be designated. If no administrator is named in the plan document, the employer serves as administrator by default. The plan administrator is responsible for the total operation of the plan, including all reporting and disclosure requirements to the IRS, the Department of Labor, and participants.

After completing the legal documents, the employer must notify employees in writing. For IRS purposes, the plan is not considered adopted until employees receive written notification. This may be done by letter or descriptive booklet.

The Department of Labor requires each participant (and each beneficiary receiving benefits) to receive a Summary Plan Description (SPD). Timing requirements:

Qualified plans are broadly classified as trust plans or insured plans.

Trust plans require two documents: a plan document and a trust document. The employer’s contributions are paid into a trust and invested by the trustee according to the terms of the trust document. Retirement benefits are either paid directly by the trustee or the trust assets are used to purchase annuities from an insurance company, which then makes payments to retired participants.

With insured plans, the insurance company provides the investment vehicle and most administrative services. The most common types of fully-insured plans are:

• Group annuity plans
• Deposit administration group annuity plans
• Individual policy plans
• Group permanent plans

Once the plan is established, the plan administrator, employer, and — in some cases — the participants must make regular filings with three agencies:

The PBGC insures defined benefit plan benefits up to statutory limits, protecting participants if the employer becomes insolvent and cannot fund promised retirement benefits. Defined contribution plans are not covered by PBGC insurance because benefits depend on account balances rather than fixed promises.