If you’re an employer who sponsors a 401(k) or profit sharing plan, it’s time to amend and restate your plan.
Qualified retirement plans must operate in accordance with their plan documents. Ongoing legal and regulatory changes in retirement plan rules frequently require plan sponsors to amend and restate their plans to keep their documents compliant with the IRS.
As a result, there are frequent changes in the laws and regulations that require changes to plan documents. In most cases, these changes are not major ones and can be handled by “snap-on” or interim amendments. Periodically, however, the plan must be rewritten in its entirety because of the number and complexity of the changes which is referred to as a “Restatement”.
The IRS requires that prototype documents and volume submitter plans must be rewritten, reviewed and approved by the IRS, and readopted by employers once every six years to conform with tax law changes. The IRS has now directed 401(k) plans to begin a new restatement cycle that started on May 1, 2014 and ends April 30, 2016.
It’s important that you understand why your plan document must be restated. What follows is a non-technical explanation in Question and Answer format.
Why do I need to keep amending my plan?
Qualified plans are governed by a set of Federal laws enacted by Congress and regulated by various agencies. The IRS is responsible for oversight of the tax aspects of retirement plans, and the DOL is responsible for reporting, disclosure and fiduciary aspects of retirement plans. The result is a continual change in the laws due to changing legislation and regulations issued to oversee compliance with the laws. As a result, there are frequent changes in the law but in most cases they are not major ones. A requirement to have a qualified retirement plan is that it must be in writing. This means that as the laws change, your plan must generally be amended to reflect the changes.
Why do I have to restate my plan now?
On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006 (“PPA”) which is the most comprehensive pension reform legislation since ERISA was enacted in 1974. The PPA, which comprises approximately 400 pages, significantly affects plans in many ways including:
- Strengthening plan reporting and participant disclosure rules.
- Requiring stricter funding rules for single-employer and multiemployer defined benefit pension plans.
- Resolving legal uncertainty surrounding cash balance and other hybrid defined benefit plans.
- Allowing plan fiduciaries to give investment advice to participants.
- Making permanent significant tax retirement savings incentives enacted under prior law.
When must our plan be restated?
All retirement plans were required to comply with the PPA in operation according to the effective date of each provision beginning in 2006. Employers were required to adopt interim EGTRRA amendments covering these provisions over the past several years which your retirement plan adopted. Employers must now amend and restate their written plan documents to conform to the way the plan has been operated, by incorporating the changes made by the PPA.
The IRS issued a Revenue Procedure that implemented a formal (and complicated) system under which all plan documents are required to be restated by specified dates depending upon the type of plan document and the employer EIN. This Revenue Procedure does, however permit Plan Sponsors who use pre-approved plans, i.e., prototype and volume submitter, to extend the due date to April 30, 2016.
Why does the restatement consist of?
Once the plan has been reviewed, additional requested changes have been made (if any) and the restated documents are drafted, they should be read very carefully. The final signature-ready documents may consist of the following:
- A restated Plan Document or Adoption Agreement;
- A resolution adopting the restated document;
- A separate trust document in some cases; and
- A restated Summary Plan Description that must be distributed to all participants and beneficiaries.
Are there any special considerations when replacing one plan document with another?
Special care must be taken to ensure that certain benefits called “protected benefits” are not unintentionally eliminated or reduced. Protected benefits include forms of distributions such as lump sums and annuities and timing of distributions such as an early retirement provision.
Should my restated plan be filed with the IRS for a Determination Letter?
An employer may apply for a Determination Letter, a document issued by the IRS formally recognizing that the plan meets the qualifications for tax-advantaged treatment. The IRS has already reviewed the language used in the pre-approved plans mentioned above, prototype and volume submitter.
Those employers using pre-approved plans automatically have assurance that the language used in their plan satisfies the IRS requirements (assuming no changes are made to what was approved).
Employers who adopt pre-approved plans that have coverage or nondiscrimination issues or have made modifications to the document will generally want to apply for a Determination Letter.
Can we rely on the Determination Letter?
Yes. The Determination Letter can be viewed as a type of insurance policy. If you follow the approved terms of the plan and the operational processes that were submitted for review (if such processes were submitted), then the IRS will not disqualify your plan. This is true even if the IRS made a mistake in approving a particular plan provision or process (as long as the Determination Letter application was accurate).
Does the IRS charge a fee for a Determination Letter?
The IRS generally charges a User Fee to review a “Determination Letter” application. This fee is between $200 and $ 1,800, depending on the plan’s design and the type of plan document. However, this fee may be waived for certain small employers that establish new plans.
What does it cost for the plan restatement?
The cost of restating a plan will vary, depending primarily on the type of plan. Factors that affect the plan restatement cost include:
- Plan design
- Plan sponsor demographics
- Number of contribution types;
- Type of plan document structure
- Preparation of IRS Determination Letter submission, if applicable
No two plans or companies are exactly alike so an appropriate fee is based on the specific facts and circumstances. The cost to restate the plan for IRS compliance may be paid from the plan assets if permitted by the plan document.
What happens if I fail to amend or restate my plan on a timely basis?
If you miss the deadline for amending or restating your plan, then you can avoid plan disqualification by using an IRS correction program. Under this program, the IRS will require that you pay a sanction and submit an updated plan. The sanction can vary depending on the circumstances. However, it is significantly higher if the IRS discovers the missed deadline than if you voluntarily go to the IRS when you discover the missed deadline. In addition, there would be the cost associated for our services to update the plan and prepare the application to the IRS.
Should I consider making any plan design changes now?
Yes. You should review your plan as part of the restatement process. Plan design changes can be more efficiently done as part of the restatement process.
It is the responsibility of the plan fiduciary to ensure that the plan is updated and signed by the April 30, 2016 deadline. Because the restatement process can be time consuming it is important that this task is included in the planning process to ensure the restatement deadline is met.
Image: Can Stock Photo, Inc.