Drafting Qualified Retirement Plan Provisions | Practical Law

Drafting Qualified Retirement Plan Provisions | Practical Law

Information on drafting provisions typically included in a retirement plan governed by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code and Practical Law resources to assist employers and practitioners with preparing a compliant qualified retirement plan document.

Drafting Qualified Retirement Plan Provisions

Practical Law Legal Update 0-528-5696 (Approx. 4 pages)

Drafting Qualified Retirement Plan Provisions

by PLC Employee Benefits & Executive Compensation
Published on 14 May 2013 • USA (National/Federal)
Information on drafting provisions typically included in a retirement plan governed by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code and Practical Law resources to assist employers and practitioners with preparing a compliant qualified retirement plan document.
For a retirement plan to be considered "qualified" and awarded favorable tax treatment under IRC Section 401(a), the plan must:
  • Be in writing.
  • Include provisions required by the IRC.
ERISA also requires that a retirement plan have a formal, written plan document that:
  • Describes the benefit structure.
  • Guides the plan administrator in the day-to-day operations in the plan.
  • Controls and manages the plan's operation and administration.
Because of these requirements, retirement plan documents must generally contain everything the plan administrator and ERISA fiduciaries need to operate the plan in compliance with ERISA and the IRC.
PLC's Qualified Retirement Plan Provisions Toolkit provides resources to assist an attorneys with drafting qualified retirement plans that comply with the IRC and ERISA. The toolkit also provides links to standard clauses containing model plan language.
For a checklist that provides information on drafting the provisions typically included in a retirement plan governed by ERISA and qualified under the IRC, see Drafting Qualified Retirement Plans Checklist. While selected portions from this Checklist follow, see the full Checklist for links to standard clauses that provide model plan language and drafting tips.

Plan Provisions

Qualified retirement plans typically contain the following sections:
  • Definitions.
  • Eligibility and participation.
  • Contributions.
  • Limitations on contributions and benefits.
  • Vesting.
  • Investment of plan assets.
  • Valuation of plan assets.
  • Distributions.
  • Plan administration.
  • Miscellaneous provisions.

Definitions

Qualified retirement plans typically include definitions of terms that have a unique meaning under the terms of the plan, ERISA or the IRC and are frequently used in the plan document.

Eligibility and Participation

Because most qualified retirement plans are voluntarily established, employers do not have to allow all employees to participate in the plan, subject to certain legal limitations. The conditions for participation and any exclusions and restrictions on participation should be described in the plan document.

Contributions

Each type of contribution permitted under the plan and how these contributions are allocated should be specified.

Limitations on Contributions and Benefits

Provisions addressing any limitations on the amounts of benefits, contributions and compensation of certain participants in the plan should be included.

Vesting

Retirement plans must specify when participants earn the right to payment of their accrued benefits based on services rendered as an employee during a period of time. These provisions must be drafted in compliance with the permitted vesting schedules required by the IRC and ERISA.

Investment of Plan Assets

The plan document should include provisions addressing the investment of plan assets.

Valuation of Plan Assets

Retirement plans should include plan provisions that address the time and manner in which assets and earnings and losses are valued under the plan.

Distributions

Retirement plans should contain detailed provisions describing the circumstances under which participants or beneficiaries may receive distributions of their accrued benefits. This also includes any permitted in-service distributions or in-plan Roth rollover contributions.

Plan Administration

Retirement plans should include certain provisions relating to plan administration, including provisions that address:
  • Plan fiduciaries.
  • Delegation of duties.
  • Plan interpretation.
  • Fiduciary standard of care.
  • Claims and appeal procedures.
  • Funding requirements.
  • Record retention.

Miscellaneous Provisions

Retirement plans should include provisions addressing a range of miscellaneous items to guide the plan administrator and the fiduciaries in the prudent administration and operation of the plan, including:
  • The plan sponsor's right to amend and terminate the plan.
  • Procedures under which beneficiaries may be designated to receive participants' plan benefits.
  • If applicable, whether costs and expenses incurred in administering the plan are permitted to be paid from plan assets.
  • An anti-alienation and assignment clause.
  • A statement regarding participants' rights upon a plan merger or transfer of assets.
  • A statement that participants' rights are unsecured against the general assets of the company.
  • A statement providing that if a provision of the plan is held illegal or invalid, the remaining provisions of the plan will not be affected.
  • The governing state law, to the extent not preempted by ERISA.