ERISA Section 402: Plan Document Requirements

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law establishing minimum standards for most voluntarily established retirement and health plans in private industry to protect individuals in these plans. Section 402 of ERISA provides the foundational blueprint for plan governance, mandating that every employee benefit plan be established and maintained through a formal written document. This requirement creates a clear and enforceable framework governing the responsibilities of those who manage the plan and the rights of employees who participate in it. By requiring a detailed written instrument, the law brings predictability and transparency to employee benefits.

The Written Plan Instrument Requirement

ERISA mandates that every employee benefit plan must be established and maintained according to a written instrument. This document provides certainty to participants by clearly defining their rights and obligations. The written document acts as the primary source for determining eligibility, benefits, and the procedures for obtaining them, which helps prevent misunderstandings and ensures the plan is administered consistently and in accordance with its stated terms.

While ERISA does not prescribe a specific format, a “written instrument” can be a single, comprehensive document or a collection of documents that, together, detail the plan’s terms. For instance, an insurance certificate alone is often insufficient, but when combined with a “wrap document” that fills in the missing ERISA-required provisions, it can satisfy the rule.

Failure to have a written plan does not absolve an employer from ERISA’s requirements. Courts have determined that a plan can exist if a reasonable person can ascertain the intended benefits, beneficiaries, source of financing, and procedures for receiving benefits from the surrounding circumstances. However, not having a formal document can lead to significant issues, including the inability to respond to participant requests for plan documents, which can trigger penalties of up to $110 per day. The written instrument is the legal basis of the plan, creating an enforceable promise to provide the specified benefits.

Designating Named Fiduciaries

The plan document must provide for one or more “named fiduciaries” who have the authority to control and manage the operation and administration of the plan. A named fiduciary is the person, committee, or entity explicitly identified as having ultimate responsibility for the plan. This designation establishes a clear line of authority and makes it evident who is accountable for the plan’s governance.

The plan document can designate a fiduciary by identifying a person by name or by title, such as the “Chief Financial Officer” or a “Retirement Plan Committee.” Alternatively, the document can outline a specific procedure for an employer or employee organization to select the fiduciary. This flexibility allows plan sponsors to structure fiduciary responsibility in a way that best suits their organizational model.

Naming a fiduciary is the mechanism by which ERISA assigns and enforces responsibility. This individual or group must ensure the plan operates in compliance with the law and the plan’s own terms. While a named fiduciary can delegate duties, such as investment management or administrative tasks, the ultimate responsibility for monitoring those delegated parties remains with the named fiduciary.

Mandatory Plan Procedures and Provisions

Funding Policy

The plan document must describe a procedure for establishing and carrying out a funding policy and method consistent with the plan’s objectives. This procedure clarifies how the plan’s financial goals will be achieved, whether through employer contributions, employee contributions, or a combination of both. For a retirement plan, this might involve detailing the process for determining annual contributions, often involving actuarial calculations. For a health plan, the policy would describe how premiums or claims will be paid. The document must outline who is responsible for determining the funding arrangement and the basis for those decisions, providing a transparent financial roadmap for the plan’s ability to pay promised benefits.

Allocation of Responsibilities

The plan document must include a procedure for allocating responsibilities for the operation and administration of the plan. This allows the named fiduciaries to delegate specific duties to other individuals or entities. For example, the document can specify a process for hiring a third-party administrator (TPA) to handle daily operations or an investment manager to oversee plan assets. The procedure must clearly define the delegated duties and identify the individuals or entities responsible for performing them. Even with delegation, the named fiduciary retains the oversight duty to prudently select and monitor the performance of those to whom responsibilities have been allocated, ensuring that all administrative functions are carried out properly.

Basis for Payments

The plan document must specify the basis on which payments are made to and from the plan. This dictates the mechanics of how money flows into the plan, such as the methods and timing for employer and employee contributions. It must also detail how money flows out of the plan to participants and beneficiaries. This includes outlining the calculation methods for benefits, the conditions under which benefits become payable, and the procedures for making distributions. For a 401(k) plan, this would involve the rules for loans and hardship withdrawals, while for a health plan, it would describe how claims are paid. This provision gives participants a clear understanding of how their benefits are determined and disbursed.

Amendment Procedure

The plan document must contain a procedure for amending the plan and for identifying the persons who have authority to amend it. Since business needs, laws, and economic conditions change, plans must be able to adapt. This provision ensures a clear process for making changes, preventing unauthorized alterations to the plan’s terms. The amendment procedure must specify who has the power to make changes—for example, the company’s board of directors or a specific officer—and outline the steps for formal adoption. Without this provision, uncertainty could arise regarding which version of the plan document is controlling.