As the EGTRRA restatement window closes for pre-approved DC plans and begins to open for pre-approved DB plans, I thought I would pontificate on the importance of the plan document. Qualified plans are required to be maintained pursuant to a written plan document. Operating the plan inconsistent with terms in that document is an operational failure that can threaten a plan’s qualified status.
Seems like a pretty straight-forward rule. Guess again. From time to time, the question of intent is brought into the mix and various forms of extraneous documentation are presented as justification to act in a manner inconsistent with the terms of the plan. ERISA litigator Stephen Rosenberg has a great post on the matter here.
The Supreme Court weighed-in on intent in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan (No. 07-636), a case involving a QDRO dispute,
“By giving a plan participant a clear set of instructions for making his own instructions clear, ERISA forecloses any justification for enquiries into expressions of intent, in favor of the virtues of adhering to an uncomplicated rule. Less certain rules could force plan administrators to examine numerous external documents purporting to be waivers and draw them into litigation like this over those waivers’ meaning and enforceability.”
The opinion in Cross v. Bragg, 2009 WL 2196887 (4 Cir. July 24, 2009) throws a different wrinkle into the mix. The plan sponsor amended its plan to provide for a more generous benefit formula. Later, it claimed the amendment was a scrivener’s error and received approval from the IRS to reform the plan as if the amendment never occurred. When a participant sued for benefits under the more generous formula, the Court held that the terms of the written plan were clear and must be applied as written and invalidated the reformation despite IRS approval.
This issue comes up outside the courtroom as well. I recently worked with a small employer whose balance-forward plan was audited by the IRS. It turns out that for several years, investment gains were allocated inconsistently. Although correcting what was clearly an operational failure would result in taking earnings away from non-highly compensated employees to allocate to the account of the 100% owner, the auditor required correction nonetheless and threatened sanctions for the error.
Unlike the pirate’s code, the plan document really is more like actual rules and not just guidelines.