By Jeff Chang
Having worked with dozens of cities and special districts, we are familiar with the focus and attention placed on memorandums of understanding (MOUs) and management employment contracts – especially provisions relating to retirement benefits and compensation. Unfortunately, because responsibility for the maintenance of retirement plan documents often does not reside with the individuals handling the labor negotiations or the processing of increased employer contributions, it is fairly common to find the agency’s retirement plan documents have not been timely or properly updated to reflect retirement benefit changes or enhancements made in recent MOUs or employment contracts.
As we discussed in an earlier post, the failure to follow the terms of the plan document can cause a 401(a), 457(b) or 403(b) to lose its tax-favored status resulting in serious adverse tax consequences to the participants. If, for example, an MOU previously provided for a 5% employer contribution to the agency’s 401(a) plan and this was also reflected in the actual plan document, the plan would need to be timely amended to reflect any increase or decrease in the rate of contribution. If the agency simply increased its contribution to the plan in accordance with the new MOU, without amending the plan, the plan would not be administered in accordance with its terms.
A similar, and quite common, problem also occurs when an agency enters into an employment agreement with a management employee (e.g., a city manager) that calls for a certain level or amount of employer contribution to a 457(b) or 401(a) plan and the agency neglects to adopt the necessary plan document, amendment, or resolution to implement the commitment. Not all changes in contribution levels (e.g., changes under a discretionary defined contribution plan) require plan amendments, but they may require a new employer resolution that authorizes the changed level. Once again, you can’t make contributions on behalf of agency employees that are not authorized by or under the plan document.
These “disconnects” between contributions made to a plan and what the plan says can be corrected. However, things can become a bit awkward or uncomfortable when the employees, entitled by MOU or contract to an increased employer contribution, are told that such contributions are not permitted by the plan.
One way to avoid these situations is to make sure that you have appointed the appropriate plan administrator – someone familiar with the plan’s operation, who will proactively ask for plan documents reflecting how the plan is currently being operated.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at jeff.chang@bbklaw.com or (916) 329-3685.
