Problem #2: Failure to operate the plan according to its terms

ERISA and the IRC require that a plan have a written plan document that includes the plan provisions such as the eligibility, contribution amounts, distribution provisions, etc. Additionally, the plan document includes certain IRS provisions like age 70 ½ distributions. Plan documents explicitly provide all major plan terms, and it is generally unnecessary to establish a lot of administrative provisions interpreting or clarifying the plan’s provisions. It is important to understand that the terms of the plan control how the plan should be operated, and a HR manual, an employee handbook, an employee offer letter, or an administrative handbook cannot override the terms of the plan document.

It is important for all individuals who work on the plan to be familiar with the plan terms and be informed of any plan amendments. It is a good practice to periodically have a meeting to review the terms of the plan to make sure that no one has gotten confused or forgotten the plan terms. If there is a plan provision that an employer wants to change, the plan provision should generally be amended before the plan provision is changed operationally.

Occasionally, an employer will want to do something more generous for participants than the plan document provides, and thus the employer believes that there is no harm in doing something that is inconsistent with the plan terms. For example, the employer may wish to waive the eligibility requirements for some rank-and-file participants. However, the IRS requires that the operation of the plan conform to the plan document even when the employer is trying to be generous.

The IRS 401(k) Fix-It Guide includes error #2 as a general reminder to operate a plan according to its terms and then highlights some specific issues as part of their twelve common errors list.