Discretionary nature of plan: Overview, definition, and example
What is the discretionary nature of a plan?
The discretionary nature of a plan refers to the ability of the plan sponsor or administrator to make decisions regarding the implementation, modification, and management of the plan based on their judgment and discretion. In the context of employee benefit plans, such as retirement plans or health benefits, a plan may be considered discretionary if the employer or plan administrator has the authority to decide on matters like eligibility, benefits distribution, or the interpretation of plan rules without being strictly bound by set rules or automatic processes.
For example, in a discretionary retirement plan, the employer may have the authority to decide whether to make contributions to the plan in a given year, or how much to contribute, depending on the company’s financial situation. Similarly, in health plans, the employer may have discretion in choosing which healthcare providers or coverage options are available to employees.
Why is the discretionary nature of a plan important?
The discretionary nature of a plan is important because it provides flexibility to the plan sponsor or administrator, allowing them to adjust the plan based on evolving needs, financial circumstances, or regulatory requirements. It enables the organization to tailor the plan to its specific situation, respond to unforeseen challenges, or make adjustments in a way that supports its goals and objectives.
However, this discretion must be exercised within the legal boundaries set by applicable laws and regulations, such as the Employee Retirement Income Security Act (ERISA) in the United States. Even though the plan may be discretionary, administrators must still act in the best interest of the participants and beneficiaries, following fiduciary duties and ensuring transparency and fairness in the decision-making process.
Understanding the discretionary nature of a plan through an example
Imagine an employer offers a discretionary bonus plan where the employer decides annually whether to issue bonuses to employees. The plan’s terms allow the employer to use its discretion to decide the size of the bonuses based on factors like company performance and employee contributions. If the company has a good year, the employer might choose to give higher bonuses, whereas in a year with financial difficulties, the employer might opt not to issue bonuses or issue lower ones.
In another example, a company offers a discretionary retirement plan where the employer determines how much to contribute to employees’ retirement accounts each year. The employer’s decision is based on the company’s profitability, and the employer is not required to make a contribution every year. The discretionary nature of this plan gives the employer flexibility to adjust contributions according to business conditions.
An example of a discretionary nature of plan clause
Here’s how a clause addressing the discretionary nature of a plan might appear in an agreement or employee benefits document:
“The Employer reserves the right to modify, amend, or terminate the Plan at its discretion. The Employer may determine the eligibility criteria, benefit levels, and contribution amounts each year based on business performance, financial conditions, and other relevant factors. The decision to make contributions, as well as the amount of contributions, shall be entirely at the Employer’s discretion, subject to applicable legal requirements.”
Conclusion
The discretionary nature of a plan allows employers or plan administrators to exercise judgment and flexibility in managing employee benefit plans, adapting to changing circumstances, and ensuring that the plans remain aligned with organizational goals. While this flexibility is beneficial for adjusting to financial or operational conditions, it also requires that decisions be made transparently, fairly, and in compliance with applicable laws. Understanding the discretionary nature of a plan is important for both employers and employees to ensure that expectations are clear, and the plan operates within legal and ethical boundaries.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.