ESOP Planning 2008: Plan Documents and Disclosures

One of your most important responsibilities is to ensure that your plan documents are updated as required by law and are consistent with the way the plan is actually being administered. Plan documents include, but are not limited to, the plan document, trust document, summary plan description (SPD), and loan documents. While your review of the plan documents should be an ongoing process, you generally need to make sure that any amendments or restatements are executed by the last day of the plan year if you intend for them to be effective for that plan year. You should start by answering the following questions and using your answers as a starting point to a discussion with your ESOP counsel and ESOP advisor:

• Are all your plan documents consistent? Do your plan document and SPD provide for consistent plan provisions? For example, does your SPD provide for different eligibility provisions than your plan document? Now is a good time to work with your ESOP consultant or counsel to resolve any Conflicts Between the Plan Document and the Summary Plan Description (SPD), because Courts Will Not Always Enforce Plan Document Provisions If They Differ From SPD. In fact, SPD Language Providing Less Plan Benefits can sometimes overrule the Plan Document Language.
  
  
• Are your plan documents consistent with how the plan is being administered? You need to discuss any inconsistencies with your ESOP consultant or counsel.
  
  
• Have you received any amendment recommendations from your advisors that have not been addressed? An example would be a recommendation made during the allocation process to amend the plan to improve the compliance testing results in future years. If recommendations have been made, this review is a good opportunity to revisit the recommendations and determine whether or not they are going to be made (assuming you have not already made them). If you are not going to make the changes, it is a good idea to discuss the reasons with the party who made the recommendations and ensure that everyone is on the same page.
  
  
• Do you have signed copies of your plan documents and amendments? Are they organized and easily accessible? If not, now is a good time to work with your ESOP counsel and other advisors to organize a complete set of signed plan documents. Make sure all your advisors also have a complete set of the plan documents to ensure that the plan is being administered consistently and correctly. This is also a good time to revisit your records retention procedures to make sure you will easily be able to obtain a backup copy of the plan documents, if needed.
  
  
• Do any of your documents need to be updated or restated? ERISA requires that you update the Summary Plan Description (SPD) every 10 years, assuming there are no plan changes. Most likely, your plan will have made some changes and you will need to update it every five years. In addition, you must provide a Summary of Material Modifications (SMM) "no later than 210 days after the close of the plan year in which the modification or change was adopted." The SPD and SMM requirements are examples of What a DOL Auditor is Looking For When Auditing an ESOP.
  
  Also, remember that a recent court case found that posting the SPD on an Intranet was not sufficient to ensure a participant received it, and that failing to ensure receipt can have a bearing on the Standard of Review.
  
  
• Are there plan provisions that are not documented that should be? Examples include a distribution policy and how your plan handles the reallocation of repurchased shares.
  
  
• What plan disclosures are required to be delivered to participants between now and your next plan documents review? Examples include the above-mentioned SPD and the annual Safe Harbor Notice. If you have any intentions of Reducing or Eliminating Safe Harbor Matching Contributions during the plan year, you should make sure you are familiar with the requirements.
  
  
• Has your plan been amended for changes in legislation? Since an ESOP plan document is individually designed, it is your responsibility to ensure that the plan document is updated for legislative changes. There have many changes in Employee Benefits Legislation since ERISA. The Pension Protection Act of 2006 (PPA) was signed into law on August 17, 2006, and according to some experts, contains the most comprehensive reforms since ERISA was enacted in 1974. Here are some of the major changes provided by the PPA that are related to ESOPs:
  
  
  • Made the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) permanent (more favorable contribution limits, improved portability of retirement accounts, etc.)
    
    
  • Accelerated vesting requirements to at least a three-year cliff or six-year graded vesting schedule (There is an exception for ESOPs with a loan outstanding.)
    
    
  • Increased the ERISA Fidelity Bonding maximum from $500,000 to $1,000,000 for most plans with employer securities.
    
    
  • Added regulations requiring additional diversification requirements for public ESOPs. The definition of publicly traded in the IRC Section 401(a)(35) Proposed Regulations has an impact on many ESOP provisions including IRC Section 401(a)(28)(C) - Use of independent appraiser, IRC Section 409(h)(1)(B) - Right to demand employer securities; put option, IRC Section 409(l)(1) - Employer securities defined, and IRC Section 1042(c)(1) - Sales of stock to employee stock ownership plans or certain cooperatives - Qualified securities. The regulations also create some challenges for thinly traded ESOP companies and ensuring that the ESOP receives adequate consideration.
    
    
  • Created a requirement to provide Participant Benefit Statements to participants on an annual basis (or quarterly when assets are self-directed).
    
    
  • Added a Qualified Automatic Contribution Arrangement (QACA), which is another 401(k) safe harbor option that allows contributions to be fully vested in two years (which may be more desirable than the existing safe harbor options that require immediate vesting).
    

  There were many additional changes and opportunities provided by the PPA. The ESOP Law Blog addresses six of the ESOP-related PPA provisions. PPA amendments are generally not due until the last day of the 2009 plan year. The PPA does not distinguish between required and discretionary amendments.
  

  The Summary of Employee Benefits Legislation since ERISA lists the following legislation since the PPA:
  
  

  • Michelle's Law 2008
  • Emergency Economic Stabilization Act of 2008
  • ADA Amendments Act of 2008
  • Heroes Earnings Assistance and Relief Tax Act of 2008
  • Genetic Information Nondiscrimination Act of 2008
  • National Defense Authorization Act for Fiscal Year 2008

  2008 End of Year Checklist and More Year End Checklists provide links to checklists of items for the plan sponsor to address by the end of 2008. Post-Gust Required Amendments contains a list of required amendments and due dates for defined contribution plans since the GUST restatement. If you have a different plan year, some of the due dates will be different.
  
  There may be other requirements and desirable opportunities from prior legislation that should be added to your plan documents. Contact your ESOP consultant or counsel for more information.

The ESOP Planning process includes planning for both the current year ESOP administration process as well as the various events that take place over the life of an ESOP. This article is one in a series of ESOP Planning 2008 articles authored by Aaron Juckett. Aaron Juckett is an ESOP consultant and the founder of ESOP Insourcing LLC, an ESOP administration and consulting firm dedicated to providing ESOP companies with a first-class ESOP experience. If you need assistance with the ESOP Planning process, please call Aaron at 800-837-3112 or email him at ajuckett@esopinsourcing.com.