If you’re an employer who has adopted a pre-approved defined benefit pension plan, it’s time to amend and restate your plan. All defined benefit plans using pre-approved plan documents must restate their plan before April 30, 2020. 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.
Q. Why do I need to restate my defined benefit pension plan or cash balance pension plan at this time?
A. The IRS established a system that requires all employers who have adopted a pre-approved retirement plan to restate their plans once every six years to reflect changes in the Internal Revenue Code and IRS regulations.
Q. Is there a deadline for defined benefit pension plans?
A. Yes. All pre-approved defined benefit pension plans must be restated by April 30, 2020 to remain in compliance with the Code and IRS regulations. The name given to this requirement is known as the PPA Restatement.
Q. What exactly is the PPA Restatement?
A. The PPA Restatement is named after the Pension Protection Act of 2006 which was passed by Congress. A restatement is a re-writing of the Adoption Agreement. It incorporates changes from any plan amendments that may have been adopted since the last time the document was prepared.
Q. How will the restatement process be handled?
A. Firms such as ours sponsor a series of retirement plans for which we have received favorable approval from the IRS.
Q. What will change in my document?
A. Pre-approved plans take the language from the prior laws, includes the PPA and new laws added by Congress and regulations issued by the IRS. Prior amendments that were executed previously are also included. These are called “Good Faith Amendments” and are not totally new, but up to now have not been formally approved by the IRS.
Q. Can we rely on the IRS Determination Letter?
A. Yes. But it important to note that pre-approved plans are only approved as to form. They still must be operated in accordance with the law and IRS regulation to enjoy favorable tax treatment.
Q. 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.
Q. Are there any special considerations when replacing one plan document with another?
A. Yes. 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.
Q. Should I consider making any plan design changes now?
A. 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.
Q. Does a terminating plan need to be restated?
A. Practically speaking, yes. Plans that are terminating must be updated at the time of termination to reflect all applicable qualification requirements then in effect. This means the Plan must have all relevant amendments at the termination date. Using a pre-approved plan is the most efficient method of accomplishing this.
Q. Is the restatement mandatory?
A. Yes. A retirement plan keeps its tax-favored status only by maintaining a document with language that satisfies the law and regulations and operates under the terms of such document. Failure to restate the document before the deadline can result in disqualification of the plan and/or significant penalties.
Q. What happens if i fail to amend or restate my plan on a timely basis?
A. If you miss the deadline for 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 will be 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 to update the Plan and prepare the application to the IRS.
Q. What does it cost for the plan restatement?
The cost of restating a plan will vary depending primarily on such factors as the type of plan, plan design, plan provisions, and administrative requirements. 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 by the employer or from plan assets if permitted by the plan document.
It is the responsibility of the plan fiduciary to ensure that the plan is updated and signed by the April 30, 2020 deadline. Because the restatement process can be time consuming, it is important to begin planning to ensure the restatement deadline is met.
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