What Employers Need to Know About the Required Pension Plan Restatement: A Plain Language Explanation

Employers who have adopted a pre-approved Pension Plan – either traditional Defined Benefit or Cash Balance – must restate their plans by March 31, 2025 to stay in compliance with the Internal Revenue Code (“Code”) and Internal Revenue Service (“IRS”) regulations.

If you’re not part of our retirement plan world, both the law and regulations can be complicated and confusing. To help you understand what’s required and how to take advantage of the required Restatement process, here is a Plain Language explanation in a Question and Answer format.

Continue Reading

SECURE 2.0: The Most Significant Retirement Legislation Since the Revenue Act of 1978

Here’s why we think so.

Since the passage of ERISA in 1974, retirement plan legislation has been a series of technical and tax-related changes. The Revenue Act of 1978 started out the same way with its focus on:

  • Increasing economic growth through income tax reductions to stimulate consumer and investment spending, and
  • Improving equity in the tax system and simplifying it.

Sometimes during the legislative process an unrelated provision is added to the law. That’s what happened here. Section 401(k) found its way into the Internal Revenue Code. In one fell swoop, this new Code Section replaced what was then the primary employee retirement saving vehicle, “After-Tax Thrift Plans”, which were retirement savings plans to which employees made contributions on an after-tax basis.

This new Section 401(k) allowed employees to make those contributions on a pre-tax basis. It also provided a comfort level to employees that their accounts would not be locked up until the traditional age 65 retirement age. It also permitted access to those funds with in-service distributions at age 59½, upon severance from employment, or because of hardship or disability.

SECURE 2.0 which Congress passed 46 years later went significantly further. Passed at the tail end of 2022 as an extension of the 2019 SECURE Act, there were 92 provisions in approximately 400 pages with four major themes: had four major objectives:

  • Expanding participant coverage.
  • Encouraging retirement savings.
  • Helping participants preserve income.
  • Simplifying retirement plan rules and administrative procedures.

SECURE 2.0 is also different for two other reasons.

First, there are optional and mandatory provisions. A plan sponsor can adopt the optional ones, or not, based on the plan’s objectives. The mandatory provisions, on the other hand, must be timely adopted by plan amendments to maintain the plan’s tax qualification.

Second, the effective dates of the various provisions are staggered. Provisions are effective in 2023, 2024, 2025, and beyond. These staggered effective dates provide breathing room for the IRS to provide guidance, for the retirement plan industry to make the necessary changes to administrative systems and documents, and for plan sponsors to make the best decisions for their retirement plans.

With that in mind, we’ll be unpacking the new law in a series of blog posts called the SECURE 2.0 Series. Please stay tuned.

Photo by Aleix Ventayol on Unsplash

When your SIMPLE-IRA no longer fits, maybe it’s time for a 401(k) plan…and November 2 is almost here

Kids will outgrow their clothes. Sometimes that happens with retirement plans.

If you have a SIMPLE IRA, it may have fit in the beginning. But if you want to change to a 401(k) plan in 2024, you need to take action by November 2. That’s the date that employers must provide notice to their employees that 2023 will be the last year for the SIMPLE IRA, and that it will be replaced by a 401(k) plan in 2024.

But keep reading because a new tax law which providres for a mid-year replacement is discussed later.

Reasons to Change

A SIMPLE IRA is relatively easy and inexpensive to administer. 401(k) plans, on the other hande, are more complicated and expensive but have features that businesses (and business owners) can take advantage of. 401(k) plans can:

  • Provide larger tax-deductible contributions.
  • Favor owners and highly compensated employees.
  • Require more employment service to be eligible to participate.
  • Provide a graded vesting schedule.
  • Allow for plan loans.
  • Provide better creditor protection.
  • Be able to buy tax-deductible life insurance.

Extended Deadline

As mentioned above, the November 2 deadline has been extended. Starting in 2024, the new SECURE 2.0 tax law allows an employer to replace a SIMPLE IRA mid-year with a safe harbor 401(k) plan. The 401(k)-replacement plan must be effective as of the termination date of the SIMPLE IRA. There are two planning considerations to the new law:

401(k) Deferral Limit. Employees would be restricted to an aggregate elective deferral limit including catch-up contributions during the replacement year. The limit is based on the number of days covered in each plan.

Rollovers/Transfers. The tax rules regarding a rollover or transfer from a SIMPLE to another qualified retirement plan have stayed the same. In general, an employee cannot transfer money tax-free to a 401(k) plan during the 2-year period beginning when the employee first participated in the SIMPLE. The 2-year period begins on the first day on which the employer deposits contributions in the employee’s SIMPLE.

The Right Answer

There isn’t one. Just like the visual metaphor used for this blog post, it’s whatever fits best.

Missed the 401(k) Restatement Deadline? Here’s Your Plan B for Compliance

The deadline for restating a 401(k), profit sharing, or money purchase pension plan has come and gone.  So, what can an employer do? It was, after all, the employer’s responsibility to ensure that the plan was updated and signed by July 31, 2022.

But if an employer did miss that deadline, there is a Plan B. But first let’s put July 31, 2022, into context. That’s the date the IRS required pre-approved plans to be updated for the last 6 years of legislative and regulatory changes.

It’s referred to as a “Cycle 3 restatement” in the retirement plan world and allows the employer to have “reliance” that the document meets the current requirements of the law and regulations. Here is a link to our FAQs from last year that will bring you up to date.

So what’s the impact on an employer’s plan that didn’t restate its plan by the July 31, 2022 deadline? It’s a good news-not so-bad news situation.

The good news is that the IRS does not consider that the failure to timely restate the plan will itself disqualify it from favorable tax treatment.

The not-so-good news is that the failure transforms that pre-approved plan into an individually designed plan upon which the employer can no longer rely as a qualified plan. The Plan B mentioned above would be for the employer to adopt corrections under the IRS Self-Correction Program and consider whether to obtain formal approval through its Voluntary Correction Program.

You may be wondering if there is a Plan B, is there also a Plan C? Not exactly, and it’s certainly not voluntary. It’s the IRS’ Audit Agreement Closing Program (“Audit CAP”) which is the end result of a plan audit. If the IRS finds the plan to be non-compliant, the employer would be required to submit an updated plan to avoid disqualification. The cost of which would be significantly more than if the missed deadline was dealt with on a voluntary basis.

The takeaway should be obvious: Contact them before they contact you.

Photo Credit: © Can Stock Photo / bdspn

Rethinking 401(k) Plan Success: The power of deferral rates

From the beginning of 401(k) plans, the retirement industry has focused on the performance of individual funds as the key driver of retirement readiness. But a study by the Putnam Institute in 2006 and repeated in 2012 concluded that increasing deferral rates have the greatest potential impact on a 401(k) participant’s account balance at retirement

The Putnam Study, Defined Contribution Plans: Missing The Forest For The Trees?, showed that fund selection was actually the least important factor compared to asset allocation, account rebalancing, and increased deferrals. The most important? Increasing deferral rates.

Putnam arrived at this conclusion by simulating different portfolios of mutual funds in a hypothetical, but typical, 401(k) plan. Here is how the study can be viewed from a plan sponsor’s perspective:

Plan Activity Time Spent Relative Importance
Selecting Funds Most Least
Allocating Assets More Lesser
Rebalancing Accounts Lesser More
Increasing Deferral Rates Least Most

One way – maybe the best way – to increase deferral rates is through auto-enrollment and auto-escalation. Congress thinks so. As part of the recently passed SECURE 2.0 employees are automatically enrolled in a 401(k) plan at 3% of compensation. The amount is increased each year by 1% up to at least 10% but not more than 15% of the employee’s compensation. There’s a plus for the employer: tax credits may be available. 

Photo by Dino Reichmuth on Unsplash

Why a one-size-fits-all approach to 401(k) plans doesn’t work

Because there are now five generations in the workforce for the first time:

  • Traditionalists—born 1925 to 1945
  • Baby Boomers—born 1946 to 1964
  • Generation X—born 1965 to 1980
  • Millennials—born 1981 to 2000
  • Generation Z—born 2001 to 2020

The challenge to create and provide a 401(k) plan is arguably more difficult now than it ever was.

401(k) plans are part of the big picture which includes dealing with such questions as

  • What kinds of challenges are present for today’s employers?
  • How do generational workforce differences affect our ability to manage people effectively?
  • What are the traits, beliefs, and life experiences that mark each generation, influencing how they work, communicate, and respond to change?

Dr. Bea Bourne, DM, is an expert on generational differences and generational responses to organizational change. She is a faculty member in the School of Business and Information Technology at Purdue University Global. In the infographic that follows, she shares her research regarding:

  • How today’s talent stacks up by generation, including their defining values, beliefs, and worldviews
  • The significant historical events that shaped each generation
  • How to best motivate and manage workers from each generation

In the 401(k) and 403(b) world, we’ve got a tool. It’s called Plan Design and it’s been significantly enhanced by the recently passed SECURE 2.0 legislation. There will be more about that to follow as IRS guidance and recordkeeper platform capabilities develop.

In the meantime, here’s that infographic:

“Compensation” for Sole Proprietors, Partners, and LLP Members … It’s complicated.

“Compensation” is a timely topic now for employers with retirement plans. It’s that time of the year when decisions are made about retirement plan contributions. The starting point for those decisions is “compensation”.

That starting point is a straightforward matter when employees are involved. It’s some variation of taxable wages reported on Form W-2.

But for sole proprietors, partners in a partnership, or members of a limited liability partnership, compensation is more complicated. It’s “Earned Income”, the Internal Revenue Code’s version of a calculus equation. Here’s why.

Continue Reading

The box that has to be checked by July 31: Retirement Plan Restatement

That’s the box that has to be checked by July 31, 2022. It’s the date the IRS requires that your 401(k) plan, profit sharing plan, or other defined contribution plan be restated to be in compliance with recent tax law changes. Here is a plain language explanation in Q and A format to help you understand why July 31 is one of those “don’t miss” dates: Continue Reading

July 31, 2022 Restatement Deadline for 401(k) Plans Approaches: Carpe Diem

I never thought my high school Latin could come in handy, let alone in our ERISA world. Heck, there wasn’t even ERISA back then. But here goes.

The July 31, 2022 deadline for defined contribution plans such as 401(k), Profit Sharing, ESOPs, and Money Purchase Plans to be restated is not that far away. You’ll find the details here.

If you miss the deadline to restate your qualified retirement plan, the IRS can disqualify it, and take away all its tax benefits. This means contributions might not be deductible or employees will have them immediately included in income. Therefore, restating your document should be a high priority. The IRS does provide a “late adopter” procedure for employers who missed the deadline to requalify the plan. However, IRS User Fees and additional professional fees make the late adopter procedure substantially more expensive than restating the plan before the deadline.

Now here’s where the Carpe Diem, or Seize the Day!, part comes in. The Restatement will update the plan for all law changes since the last Restatement six years ago.

The 401(k) industry hasn’t stood still either. In the recent years, there have been plan design enhancements, technology improvements, fund changes, provider consolidations, more effective employee communication tools, etc., etc.

Use the required Restatement process as an opportunity to see if you can make your plan better.

Picture Credit: © Can Stock Photo / blasbike

ERISA Record Retention: How long is long enough?


ERISA record retention may not be of those sizzling retirement plan topics for some folks. But please don’t stop reading.

It’s an important issue in today’s ERISA’s environment in which Plan Administrators and other fiduciaries must meet complicated compliance reporting requirements, oversight from regulatory agencies, and sometimes litigation.

So here is some basic information about document retention for ERISA plans in a Q and A format.

Continue Reading