Impact of plan design


Plan design seems a rather mundane process but getting it wrong can turn what is an important benefit into what seems like an endless headache.

Making the wrong choices can make a plan expensive both in terms of dollars and time spent. For the "highly-compensated" poor plan design can severely limit the amount that can be contributed.

These days the typical plan document comes in the form of a plan prototype accompanied by a plan adoption agreement containing 30 to 40 pages of options to select from. Many of these prototypes are designed to address the needs and desires of the product sponsor rather than for the benefit of the company sponsoring the plan.

For example, the document might specify that a year of service is attained by being employed for 6 months while a more flexible document might also have a months-of-service and hours worked requirement. Why would this matter?

Let’s say your company has a lot of seasonal workers that work 2 or 3 months a year and you often re-hire the same workers year after year. Under the 6 month eligibility rules workers that returned to work year after year would be in the plan because they are deemed to be employed even though they are not working but 2 to 3 months per year. With no requirement for hours, the plan could potentially cover hundreds of workers unintentionally. As they don’t actually contribute to the plan they can cause testing problems and even might receive a share of any profit sharing contributions that are made.

This is just one example of an unintended consequence of poor plan design and a reason to make sure you work with experienced people. We have over 25 years experience in plan administration and design and offer prototypes that offer great flexibility at a very reasonable cost.


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