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? For example, does your SPD provide for different eligibility provisions than your plan document? Now is a good time to work with your ESOP attorney to resolve any conflicts.

  • Are your plan documents consistent with how the plan is being administered? You need to discuss any inconsistencies with your ESOP 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 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. You may have other plan documents that are either required to be or should be restated. Your review should include an analysis of which plan documents need to be restated and when.

  • 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.

  • Has your plan been amended for changes in legislation? Since an ESOP plan document is individually designed, it will be your responsibility to ensure that the plan document is updated for legislative changes. This post discusses a summary of ERISA legislation from the Employee Retirement Income Security Act of 1974 (ERISA) through the Pension Protection Act of 2006 (PPA). 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:

    • Makes 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.)
    • Accelerates 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.)
    • Increases fidelity bond maximum from $500,000 to $1,000,000 for plans with employer securities
    • Adds additional diversification requirements for public ESOPs
    • Creates a requirement to provide benefit statements to participants on an annual basis (or quarterly when assets are self-directed)
    • Adds 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.

    2007 End of Year Checklists discusses a checklist of items for the plan sponsor to address by the end of 2007. 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 counsel or ESOP advisor 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 articles authored by Aaron Juckett. Aaron Juckett is an ESOP consultant and the founder of ESOP Insourcing LLC.