Every 401(k) plan has a legal plan document. It details exactly how the plan is supposed to be operated.
It includes items such as:
- When an employee first becomes eligible for the plan
- What compensation is to be used to figure out contributions
- What contributions can be made
- How to determine who gets a contribution
- When employees can be paid out of the plan
- How much the employees can withdraw
A summary of the long legal plan document, called a Summary Plan Description, is provided to employees so they know how the plan works.
Think of the plan document as a contract between the business and the employees. The business agrees to provide certain benefits at certain times. The employees have the right to receive the benefits provided by the business.
The plan document also includes the legal wording required by Congress, the IRS and the DOL that provides much of the fine detail of exactly how the plan should operate. From time to time, the government updates the rules. As a result, they require businesses to update their plan documents to reflect the updated rules. These are referred to as required amendments.
From time to time, the business may want to change how the plan works. For example, Beta Bread, Inc. has historically made new employees wait 6 months before they could enter the plan. Beta wants to be more generous and allow employees to enter the plan after only 3 months. While that change is perfectly legal and acceptable, the plan document must change within certain government mandated timeframes in order to the plan document to be considered timely updated. These are referred to as voluntary amendments.
There are different timing rules for required and voluntary amendments. In addition, some voluntary amendments can only be effective prospectively.
The failure to update the plan documents occurs when either a required amendment or a voluntary amendment is not done within the proscribed timeframe.