As an ERISA attorney my heart sinks when I receive benefit plan documents from a client that are not properly signed and dated. This happens not infrequently, although less often as time passes, due to the prevalence of electronic signatures. Electronic signatures that comply with the federal ESIGN statute and comparable state statues are valid for ERISA documents, unless the plan document specifically requires manual signatures.
Signing an ERISA plan document or amendment is not a mere formality. Rather, the tax-qualified status of the plan is contingent on properly executed plan documentation and could be revoked were the unsigned document revealed in an IRS audit. This was made clear in a recent IRS Chief Counsel Memorandum that contradicts the holding in an earlier Tax Court Memorandum, Val Lanes Recreation Center Corporation v. Commissioner (T.C. Memo 2018-92 (2018)). Each is summarized below, followed by some practical compliance steps.
The Val Lanes Case
In this case, the IRS revoked the tax-qualified status of an ESOP that had been set up by a business that operated a bowling alley in West Des Moines, Iowa. The IRS selected the ESOP for audit in 2005. It questioned several items, including the independence of the appraiser, who was the same CPA who set up the ESOP for Val Lanes. But what the IRS finally tagged Val Lanes on was that it could not produce a signed copy of a USERRA plan amendment required under Section 414(u) of the Internal Revenue Code. The Service requested the amendment during review of the ESOP’s request for a favorable determination letter, and conditioned the favorable letter upon timely adoption of the amendment. The accountant prepared the amendment and sent it to Val Lanes’ principal, Mr. Essy, for signature. He retained an unsigned copy, but neither he nor Mr. Essy could locate a copy of the signed amendment, and the Service revoked the qualified status of the ESOP.
In a declaratory judgment proceeding challenging disqualification, Mr. Essy testified that he always signed amendments and other plan documents that the accountant sent to him. He also testified that the roof of the bowling alley failed in bad weather, resulting in extensive water damage to company records including those related to the ESOP. The accountant testified to the best of his recollection that his client signed the necessary amendment. Also relevant was that, in an unrelated matter, the IRS had seized computers and documents from the accountant’s home and offices and that the missing amendment might have been among the seized items.
The Tax Court found that the 414(u) amendment had been timely adopted despite absence of physical proof, pointing to the fact that Mr. Essy had signed a restated plan document, and to what it deemed to be a “credible explanation” as to why the signed copy was missing. Thus, Val Lanes appears to create a “pattern and practice” doctrine that a plan sponsor could use as an alternative to producing a signed plan document or amendment.
IRS Chief Counsel Memorandum
The Val Lanes decision raised concern among IRS benefits counsel and in 2019, the Office of Chief Counsel issued a Memorandum that basically limited the Val Lanes holding to the unusual facts of the case (flooding, seizure of accountant’s computers), and stated that it remains appropriate for IRS exam agents and others to pursue plan disqualification if an employer cannot produce a signed plan document. (IRS Chief Counsel Memorandum AM 2019-002 (December 9, 2019)). The Memorandum also clarified that the employer bears the burden of proof as to whether it executed a plan document as required, when it is unable to produce an executed plan or amendment.
Practical Compliance Steps
The Memorandum is intended primarily for IRS internal use, however employers are wise to heed its message: the “pattern and practice” argument that succeeded in the Val Lanes case simply is not available to employers in the ordinary course of events. Rather, they must put in place, and consistently follow, procedures to ensure that plan documentation (including original plan documents, amendments and restatements) are timely signed and dated and must retain and be able to access electronic or other copies of the signed and dated originals. Other compliance steps might include the following:
- Take stock of all of your current benefit plans and make sure that you can locate signed and dated versions of all iterations of the plan document and all amendments.
- If executed signature pages are missing, follow up with the plan recordkeeper, third party administrator, or other third party who prepared the document or amendment, to see if they have copies.
- If copies cannot be located, determine whether it might be due to extraordinary events such as those in Val Lanes (i.e., fire, flood, other natural disaster, office burglary, major illness or death of key personnel). If so, document the relevant facts, and document normal procedures for signing plan documents and amendments, and otherwise prepare to bear the burden of proof as to whether the document or amendment was signed.
- For new plan documentation and amendments, establish internal procedures for handling – identify who will be the signing party or parties and outline what steps will they take to ensure they retain and store a copy of the signed and dated document.
- Ask existing and new recordkeepers, third party administrators and other third parties who prepare plan documents these questions:
- What is their format for storing signed documents,
- how long they retain them, and
- how you may access them during and after the length of your company’s relationship with them.
- As to the second bullet point, notwithstanding required periods for retaining tax documents, and other document retention guidelines, we recommend saving copies of signed and dated benefit plan documents and amendments indefinitely.
- Don’t rely on the third party to retain your documents, make sure that you safely store each document you sign and date before you send it back to the third party. Follow up with the third party to obtain their official, final signed and dated document or amendment as stored in their records, and save that. However keep your provisional signed and dated copy in the meantime in case the follow up process breaks down.
Take these steps not just for retirement plan documents but for health and welfare documents as well. The tax-qualified status of your plan may hang in the balance.
The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. (c) 2020 Christine P. Roberts, all rights reserved.
Photo Credit: Top photo: Cytonn Photography; Val Lanes: MapQuest.