Are Your Policies and Procedures Just A Myth?

So far 2010 is getting the reputation as being the year to get it done! Now that you have recovered from amending your plan for the Pension Protection Act, getting your end of the year participant notices out, working on plan restatements due by January 31, and possibly getting ready for the April 30 restatement deadline for volume submitter plans, this is a good time to review certain policies and procedures that your plan may have (or should have) adopted. The purpose of this article is to address some of those policies and procedures and outline some of the issues we have found.

Too often, we find that plan sponsors rely on policies and procedures which are not updated or, in some cases, have not been drafted. These policies and procedures include: (i) qualified domestic relations order procedures; (ii) loan procedures; and (iii) more recently, military distribution procedures.

Recently, we were asked to determine whether a domestic relations order satisfied the definition of a qualified domestic relations order (“QDRO”). Surprisingly, when we asked for a copy of the QDRO procedures, we found that it had not been drafted. Since written procedures are required under ERISA, we worked with the plan sponsor to create a set of procedures. For other plan sponsors, we find that their QDRO procedures were drafted 20 years ago and have not been updated. For those plan sponsors, we have worked with them to update those procedures. Each plan sponsor must make sure that their QDRO procedures enable them to determine whether a domestic relations order is a QDRO and that this determination can be done in a timely, efficient, and cost-effective manner.

Loans are also a source of problems for many of our plan sponsor clients. This can especially occur when the loan procedures are unclear and/or have not been followed. For example, some loan procedures simply set forth the Internal Revenue Code §72(p) requirements for participant loans. However, plan sponsors do not know those requirements or forget to check the procedures before approving a loan. Some of the problems we have seen range from too many loans being taken out (as the procedures only provide for one loan to be outstanding), repayments not made during a leave of absence, and inadequate security. Having clear and concise loan procedures and reviewing them regularly has helped our plan sponsor clients avoid problems.

Lastly and most recently, a plan sponsor asked us to review their military distribution procedures. The Heroes Earnings Assistance and Relief Tax Act of 2008 created additional distribution options for certain participants who will be on a military leave of absence. For plan sponsors who have a large amount of military personnel, well-drafted procedures can help avoid errors in how these distributions are processed.

Policies and procedures can be difficult to follow, especially when they are not drafted. Therefore, take the time to find those policies and procedures and make sure they are consistent with how you are administering the plan.

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