Most employee benefits require a written plan document setting forth the terms of the plan.  ERISA requires that every employee benefit plan be established and maintained pursuant to a written instrument.  In addition, the Internal Revenue Code also requires many employee benefits be pursuant to a written plan.  For example, cafeteria plans must be in writing under Code Section 125; self-insured health plans must be written under Code Section 105(h); dependent care assistance plans are required to be in writing under Code Section 129; and Code Section 409A requires nonqualified deferred compensation plans to be operated and maintained pursuant to a compliant written document.

The terms of the benefits plan don’t necessarily have to be contained in a single document, more than one document taken together can make up the plan.  A common example of this is a pre-approved qualified prototype plan which usually consists of at least two documents, a basic plan document (BPD) and an Adoption Agreement.  The BPD contains all the qualification requirements and boilerplate language to be a qualified plan under the Internal Revenue Code.  The Adoption Agreement contains various options for the employer to choose regarding the design of the plan and is completed and signed by the employer indicating it has adopted the BPD as part of its plan.  The National Office of the Internal Revenue Service (IRS) approves the BPD and blank Adoption Agreement and issues an opinion letter to the pre-approved plan sponsor upon which adopting employers can rely.  Both these documents make up the “written plan document.”

It is important for an employer to keep its plan documents in a safe place where they can be easily retrieved for a number of reasons.  First, for a plan governed by ERISA, plan participants may request the plan document from the plan administrator and if it is not provided within 30 days, the plan administrator can be liable for a penalty of up to $110/day that it is late.  Second, the language of the actual plan document may need to be consulted to properly administer the plan, decide claims or settle disputes.  Finally, if your retirement plan is audited by the IRS, the agent is likely going to ask for every plan document since the plan was originally adopted.  That is, the IRS will want the employer to prove that the plan was always a qualified plan in form and was timely amended and restated for changes in the law.  It is also very important to be able to demonstrate that the plan documents or amendments were actually adopted by the employer.  To do so the employer should have signed copies of the plan documents and minutes, resolutions or consents evidencing the action of the appropriate body approving the documents on behalf of the employer.

I write this article because throughout my years of practice, I have had occasion to have to remind employers of the importance of maintaining plan documents.  Many times I have asked for retirement plan documents and was provided only an unsigned Adoption Agreement and have to ask for the BPD.  On occasion a client may then have to obtain the document from a third-party administrator (TPA) or other service provider.  Also, at times, clients simply cannot find a signed version of the plan document.  Once, I had a client inform me they had to retrieve their current document from storage.

Often employers mistakenly rely on their TPA or other service provider to maintain signed copies of their plan documents.  Many TPAs have a policy not to maintain signed copies of plan documents but inform clients that it is the responsibility of the adopting employer to safeguard documents.  Additionally, if the employer changes TPAs, the former TPA has no real incentive to help its former client find old documents.  Ultimately, legally, the responsibility falls on the employer even if it has contracted with a service provider to be responsible for maintaining the plan document.

The act of adopting plan documents or amendments should be well documented like any important employer action.  If the employer is a corporation, minutes or consents reflecting the action should be kept in the corporate book or filed where records of shareholder and directors meetings are kept.  Other types of entities such as limited liability companies and sole proprietorships should also keep them with their important records.  This is important because in an audit or investigation, if the employer cannot find a signed plan document, if it has a blank document and a signed resolution showing that it was approved, this might suffice.

I recommend that one or more persons be assigned the duty of maintaining the complete plan document for each written benefit plan of the employer.  This could be the Secretary of the corporate employer or a similar officer.  It could be the plan administrative committee that acts as plan administrator.  It could be an administrative fiduciary.  The point is that the employer should take action to ensure that someone is monitoring the plan documents.  Many service providers are now offering to store electronic versions of plan documents.  The agreements for such services should be reviewed to determine what responsibilities the provider has with respect to the plan documents.  For example, who is responsible for ensuring that the provider has the most current plan documents?  That they are signed?  Are they stored on multiple servers in the cloud to reduce the chance of them being lost or destroyed upon a server failure?  What happens if the provider loses documents?  Even in such an arrangement, someone from the employer should be designated to ensure that the most up to date documents are provided to the service provider for storage.

Ultimately, it is the employer’s responsibility to establish and maintain the written employee benefit plan document.  Therefore, employers should ensure that all of their employee benefit plans have up to date plan documents that have been properly adopted and are easily retrieved.

The California Secure Choice Retirement Savings Investment Board posted proposed emergency regulations to implement the Secure Choice mandatory payroll deduction IRA program on March 5, 2018, stating it intended to file them with the Office of Administrative Law after 5 days.  However, on March 22, 2018, the Board posted a notice that the rule making process for the proposed emergency regulations would not be initiated until late summer to give the Board time to consult with a yet to be hired third-party administrator for the program and to ensure the most effective coordination.

The program, which the Board has re-named CalSavers Retirement Savings Program (CalSavers), when implemented, will require California employers of a certain size who don’t maintain a tax-qualified retirement plan to automatically enroll employees into CalSavers, a state run, payroll deduction IRA program.  Employers are also required to deduct contributions from employees pay and contribute them to the program unless the employee opts out.  The Board hopes to have the program implemented beginning next year with it applying to employers with 100 or more employees.  In its second year it will apply to employers with 50 or more employees, and in its third year, employers with 5 or more employees.

For more details on CalSavers, come see me speak on “CalSavers:  If You Don’t Have a Retirement Plan, One Will Be Provided For You” at the Capital Forum on Pensions on May 16, 2018.  For more information, follow this link .

The U.S. Department of Labor’s final disability claims procedures become effective for disability claims filed after April 1, 2018. The purpose of the new procedures is to ensure full and fair claims review procedures for any determination of disability in line with protections for certain group health plans under the Affordable Care Act. This means any employee benefit plan governed by ERISA that conditions a benefit upon a determination that a person is disabled must be amended to adopt these new procedures. The procedures do not only apply to long and short-term disability plans but any qualified or nonqualified retirement or deferred compensation plan governed by ERISA that conditions a benefit on a determination of disability. Likewise, group health plans often extend coverage beyond age 26 for disabled children of insureds.

If a plan conditions a benefit on disability as determined by another plan administrator or program, then the plan need not be amended provided the plan making the determination is amended. For example, nonqualified deferred compensation plans often provide that if the claimant has been determined to be disabled by the Social Security Administration, they will be considered disabled for purposes of the plan. However, if the plan provides that the plan administrator can otherwise determine that the claimant is disabled and entitled to benefits, the plan must adopt the claims procedure. Likewise, if a plan provides for a disability benefit if the employee is determined to be disabled but incorporates by reference the procedures of another plan, such as a long term disability plan, then only the incorporated procedures need to be amended.

Plan documents generally must be amended by the end of the plan year that includes April 1, 2018. However, the procedures must be followed for any claims on or after April 1, 2018.

Employers should take steps to review all plans that might condition a benefit on a determination of disability ASAP, and implement a strategy for compliance. Health plans, qualified retirement plans, nonqualified supplemental retirement or deferred compensation plans, severance plans or any other plan that provides for a benefit upon disability should be reviewed.

As the Tax Cuts and Jobs Act wound its way through the legislative process last year, it morphed several times.  Many provisions that were originally proposed were dropped along the way and others were added.  This was certainly true with respect to provisions affecting employee benefits.  Readers should remember that originally the House Bill contained a provision reducing the amount an employee could defer into a 401(k) plan on a basis as part of the “Rothification” of 401(k) plans.  However, this was dropped after the President announced they would not be touching 401(k) plans.  There was also a proposal to tax all deferred compensation at vesting which was also dropped.

Another provision dropped from the tax reform legislation was reform of the rules for hardship distribution in 401(k) plans.  However, these provisions have been enacted as part of the Bipartisan Budget Act of 2018 signed by the President on February 9th.

Six Month Suspension Eliminated

The Budget Act directs the Treasury Department to modify regulations within one year to delete the 6-month prohibition on making elective deferrals to a 401(k) plan once one has received a hardship distribution.  The revised regulation is to apply to plan years beginning after 2018.  Currently, if a participant receives a hardship distribution, he or she is prohibited from making elective deferrals under the plan for 6 months.

Requirement to Exhaust Loans First Eliminated

The Budget Act also removes the replacement under current law that before taking a hardship distribution, a participant must first borrow any available loan amounts under the 401(k) plan, if the plan permits participant loans.  This provision also becomes effective next year.

New Sources for Hardship Distributions

The Budget Act also provides that after 2018, 401(k) plans can be written to permit hardship distributions from additional sources under the plan, namely employer contributions and earnings.  Currently, hardship distributions can only be taken from employee contributions and not even earnings on such contributions.  Beginning next year, plans can permit the earnings on employee contributions to be used for hardship distributions. Additionally, employer contributions such as matching, profit sharing, stock bonus, and qualified non-elective contributions can be used as well as earnings on such amounts.

Whether to permit employer contributions to be eligible for hardship distributions as a plan design feature is the discretion of the employer.  Plans are not required to permit it if allowing hardship distributions.  Making these changes will likely require amendments to the plan.

These are welcome changes that will permit employees to have access to more funds to relieve a financial hardship as a result of such things as illness, death, or national disaster, without draconian restrictions. The effect of the provisions being dropped from the Tax Cuts and Jobs Act but included in the budget Act is that the effective date was delayed by one year.

In January, the IRS announced changes to the fees required for filing under the Voluntary Correction Program (VCP) of the Employee Plans Compliance Resolution System (EPCRS).  The VCP program allows employers to voluntarily bring errors in plan documentation or operation to the attention of the IRS, and propose a correction method, and receive a compliance statement from the IRS stating if the corrections are made within 150 days, then the IRS will not disqualify the plan because of the error.

Filing a VCP submission with the IRS requires the payment of a user fee to the IRS to consider the filing.  In the past, the user fees have been based on the number of participants in the plan.  Prior to the change, the user fee was as low as $500 for a plan with 20 or fewer participants with a high of $15,000 for a plan with over 10,000 participants.  The breakdown of all the former user fees is in the chart below:




20 or less

21 to 50

51 to 100

101 to 1,000

1,001 to 10,000

More than 10,000









Additionally, there were special lower user fees for failing to adopt interim amendments, errors involving participant loans, and minimum distribution requirement failures.

In January of this year, the IRS announced that for submissions filed after 2017 the user fees would be based on the net plan assets in the plan, under the following schedule:



User Fee

$0 to $500,000

Over $500,000 to $10,000,000

Over $10,000,000






While touted as a lowering of the user fees by many reports, because the highest fee now paid is $3,500 rather than $15,000, for most plans the user fees are likely to increase.  A small plan with under 100 participants now has to pay $1,500 as a minimum.  Under the old schedule, such a plan would only pay $500 if it had 20 or fewer participants, or $750 from 21 to 50 participants.  Plans with over $500,000 in assets and more than 100 participants will benefit the most under the new schedule as their user fee drops to $3,000 from $5,000, or more.  And the user fee remains $3,000 until a plan has over $10 million in net assets, at which time it only increases $500.

It is unfortunate that the increase in user fees for smaller plans may have a chilling effect on those plans seeking compliance statements under the VCP.  Smaller plans are most likely to experience an error that needs to be corrected under VCP.  However, the increased cost might cause the plan sponsor to self-correct the plan and “bear the risk.”  I almost always recommend against this approach because without receiving a compliance statement from the IRS, the plan sponsor has no reliance that the IRS will agree with the self-correction. If the IRS doesn’t agree, it will threaten to disqualify the plan and seek a higher employer penalty under the audit closing agreement program of EPCRS based on the amount of tax the government would receive if it disqualified the plan from denied employer deductions, employee income, and the plan’s investments becoming taxable.

Employers often tell me how they want to provide their employees who have helped them build their business an opportunity to benefit from a future sale of the business.  In the past, I have then discussed with them the pros and cons of such techniques as restricted stock, phantom stock, and stock appreciation rights, including the application of ERISA, tax law including Internal Revenue Code Section 409A, securities law, and shareholder rights under corporate law.  Afterward, the employer often decides that they don’t want all employees becoming actual shareholders in the company with the statutory rights that go with it, and opt for a phantom arrangement that provides for them to receive cash only as if they were a shareholder or due to a change in control.

Now, thanks to tax reform under the Tax Cuts & Jobs Act, there is a tool that can help with the tax burden of employees receiving compensatory stock by giving them up to five (5) years to pay the tax on the receipt of the stock.  If a qualified employee receives qualified stock from a qualified corporation as a result of exercising a non-statutory stock option (NSO) or settling a Restricted Stock Unit (RSU), the qualified employee can file an “83(i) election” to defer the tax for five (5) years unless a disqualifying event occurs in the interim.

An NSO is any stock option granted by a qualified employer that is not an incentive stock option (or statutory stock option) or provided under an Employee Stock Purchase Plan that qualifies for special tax treatment under Code Section 422.  An RSU is the right to receive stock in the future.

Generally, without an 83(i) election, employees are subject to income tax on the difference between the fair market value of the stock on the date of exercise of the option less the exercise price, if any.  Likewise, employees are subject to income tax from receiving stock on the settling of an RSU on the fair market value of the stock on settlement less any amount the employee paid for the RSU.  A Section 83(i) election allows the qualified employee to defer the tax for five (5) years.

Qualified Employee – A qualified employee is a U.S. based employee that regularly works more than thirty (30) hours per week that is not:  already an owner of at least 1% of the stock of the corporation; an employee that is or has ever been the CEO or CFO; a spouse, child, grandchild or parent of a 1% owner, CEO or CFO; or among the four (4) highest paid officers of the corporation.

Qualified Stock – Qualified stock is stock in the employer corporation received by a qualified employee in connection with the exercise of an NSO or settlement of an RSU in exchange for services to the employer during a year when the employer was an eligible corporation.

Eligible Corporation – An eligible corporation is one that during the calendar year in which the NSO or RSU was granted:  No stock of the corporation is readily tradeable on an established securities market during any preceding calendar year and the corporation has a written plan under which at least 80% of all U.S. based full-time qualified employees are granted NSOs or RSUs with the same rights and privileges to receive more than a de minimis amount of qualified stock.

Upon receipt of the stock, the qualified employee has thirty (30) days to make the 83(i) election by filing it with the IRS and giving a copy to the employer.  If made, the tax that would have been incurred will not be taxed until five (5) years from the year it would have been taxable without the election unless one of the following intervening events occurs earlier:

  1. The first date stock of the employer becomes publicly traded;
  2. The date the employee ceases to be a qualified employee;
  3. The date the qualified stock becomes transferable including to the employer;
  4. The date the employee revokes the 83(i) election.

The intent of Section 83(i) is to help with the “phantom income” problem that employees of private corporations have when being compensated with stock.  Without the Section 83(i) election, the employee is taxed on the exercise of an NSO on the difference between the fair market value of stock on exercise and the exercise price.  The income is considered wages subject to income tax withholding and employment taxes.  Likewise, upon receiving stock from the settling of the RSU the employee is taxed on the fair market value of the stock on the date of settlement.  Both situations cause phantom income because while the employee has taxable income, he/she has not received any cash to pay the additional tax or withholding which must come from other income.  Additionally, unlike employees of public corporations, the employee of a private corporation cannot just sell some of the stock received on the open market to get cash to pay the tax.

A Qualified Equity Grant Plan under Section 83(i) could be just the tool for a small private corporation that expects to be acquired in the next couple of years, to allow its full-time employees to share in the acquisition transaction.  For example, the qualified corporation could grant RSUs to all full-time employees in Year 1, with a fair market value of $2.00/share to be settled in Year 2.  In Year 2, the employees could make the 83(i) election deferring tax for five (5) years. However, in Year 4, all the employer’s stock is acquired by a buyer (including the employees’ stock which is transferrable upon a sale) for $5.00/share.  The employees now have money to pay the tax on the ordinary income of $2.00/share from receipt of the stock, plus the capital gain on the $3.00/share of appreciation based on the purchase of their stock by the buyer.  Thus, the employees have participated in the sale at capital gain rates and have cash to pay the tax on what would have been phantom income in year 2, if not for the Section 83(i) election.

If you think you may be interested in establishing a Qualified Equity Grant Plan or other compensatory equity or bonus plan, please contact me.