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One of the most important responsibilities of an ESOP administrator is ensuring that the Plan Document, Summary Plan Description, and other key documentation are updated as required by law.

But it’s not enough to merely meet document requirements; your ESOP paperwork also needs to consistently reflect the way the plan is actually being administered and reflects the intent of the company to meet benefit plan objectives.

Remember that generally, amendments and/or restatements must be executed by the last day of the plan year if you want to apply them to the current plan year.

That means, as year-end looms, now is the time to make sure all documents associated with your plan are up to date, compliant, and consistent.

Here’s what you need to know, along with a few actionable recommendations to get you started on your ESOP document review.

Which ESOP Documents Are Most Important?

The two most important documents are your ESOP Plan Document and your Summary Plan Description (SPD). The plan document is the “source of truth” used by administrators, advisors, and your ESOP legal counsel. The SPD, on the other hand, is the primary document for plan participants to understand how the ESOP will relate to them.

Any changes or updates to a plan document are referred to as Amendments, while a change to an SPD is called a “Summary of Material Modification.” In most cases, a plan amendment is likely to result in a change that affects plan participants — so in most cases, any amendment would have a corresponding Summary of Material Modification. If these documents are in conflict, don’t hesitate — get expert help correcting the discrepancy right away.

ALSO READ: Finish Your ESOP Year Strong & Plan Next Year’s Administrative Timeline

Maintaining compliance with the Employee Retirement Income Security Act of 1974 (ERISA) is fundamental to ensuring your plan retains its tax-qualified status. Note that Department of Labor regulations require the SPD to be written in plain language so the average plan participant can read and understand it.

Certain aspects of these documents are straightforward and prescribed by regulatory code, but many are discretionary. If you worked closely with a team of ESOP experts to design your plan, they likely walked you through the required and discretionary elements to guide your choices, build an ERISA-compliant ESOP, meet long-term stakeholder needs, and avoid the need for future plan changes.

Those choices may have included the way your plan defines employee compensation, its vesting schedule, and requirements to enter the plan, among other details. If you’re not 100% certain that your plan is designed optimally for your company’s current needs, now is the time to discuss with your ESOP advisor, make necessary updates, and get them executed correctly and timely. The objectives of the company change in relation to the benefits offered to employees, and there may be a desire to change the way the ESOP works in order to meet these objectives.

What Other ESOP Documents Need Review?

Your ESOP trust document and any documents related to ESOP loans should also be reviewed on an annual basis. The trust document serves as a supplement to the plan document, and demonstrates proof of guidance to your ESOP trustee and plan administrator for investing plan assets and other important decisions. 

And since loan-related decisions, such as how quickly to pay down debt to the seller, can have ripple effects on share prices — and, in turn, your repurchase obligation — they deserve regular review as well.

If that leaves you wondering whether your distribution policy needs review, too… and really, it doesn’t have to be a requirement to qualify as a good idea. Changing business conditions can impact a company’s ability to pay out distributions, and it’s not unreasonable to consider switching from lump-sum payouts to installments over the course of years. But distribution policy changes should always be documented and clearly communicated to all stakeholders, including plan participants to ensure everyone is on the “same page” when a distribution is owed to an employee.

It’s essential to keep in mind that all plan documents can impact one another. It’s up to you to ensure they all work in concert, comply with regulatory requirements, and communicate clearly to participants.

The price of failure to keep up on plan documents and compliance can be steep — including legal challenges mounted by plan participants, IRS audits, fines and penalties, corrective payouts or other actions, and even plan disqualification.

Start Your ESOP Document Review Here

Here are a few questions to ask as you review documents related to your ESOP:

Are they consistent? Make sure both documents provide for the same eligibility provisions. For example, maybe you required a year on the job to become a participant, but have now decided to get more recruiting power from your ESOP by entering participants on day one of employment. That’s great — but it affects all participants, so needs to be reflected in a Summary of Material Modification to the SPD as well as an amendment to the plan document. 

Do they reflect the way the plan is administered? This is a critical legal and compliance question, so if you detect any inconsistencies, discuss them right away with your ESOP advisory team.

Do you have signed copies of all plan documents and amendments? You should have an organized, easy-to-locate, complete set of signed ESOP documents. Your advisor team should as well. If that means you need to revisit your records retention procedures, you won’t regret doing it sooner rather than later.

When was the last time you updated or restated your documents? ERISA requires an updated SPD every 10 years — assuming no changes to the plan. It’s more likely that the plan will be changed in some way and will probably need updating every five years.

Are there newly added practices, policies, or provisions that need to be documented? For example, have you needed to review and change your distribution policy, or address the way the plan handles reallocation of repurchased shares?

Are there aspects of the plan that have not been properly administered? Items like annual benefit statements, diversification options for older participants, and fidelity bond requirements for fiduciaries and those who handle ESOP funds are not insignificant matters. ​​You should review these items regularly with your ESOP administrator to ensure compliance.

Is the plan in step with any new ESOP legislation? Because ESOP plan documents are typically individually designed, the plan administrator is responsible for keeping up to date with changing regulatory requirements.

What if You Need Help?

Your ESOP advisors and/or third-party administrator is the right place to start if questions arise. If it’s been too long, or you discover in your review process that you have compliance or other concerns, don’t delay in reaching out for help. 

Experienced advisors are already plugged into the ESOP community. They’re always monitoring legislative developments, researching current best practices, and generally watching out for their customers to make sure all forms, filings, and updates are doing their jobs to keep your plan compliant, sustainable, and supporting your business goals. Get ahead of next year’s requirements today when you download our free month-by-month ESOP administration workbook. Click the link below to get yours today.

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