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:
What exactly is a Restatement?
Pre-approved plan documents are required to be rewritten, approved by the IRS, and adopted by plan sponsors every six years. This process is known as a Restatement and it allows the document language to be updated for legislative changes and amendments that occurred since the last document was written.
The IRS has separate cycles for defined contribution plans, defined benefit plans, and 403(b) plans. The defined benefit restatement window recently closed on July 31, 2020, and the Restatement window for defined contribution plans began shortly thereafter. This restatement is being referred to as the “Cycle 3 restatement” because it is the third time defined contribution plans had to be restated.
What types of retirement plans must be restated?
Cycle 3 Restatements are required for profit-sharing plans, 401(k) plans, and money purchase plans. In addition, some ESOP and church 401(k) plans may be able to use a pre-approved plan for the first time with this Restatement. Plans that currently use an individually designed plan may also choose to adopt a pre-approved plan during this cycle.
Has your Cycle 3 document been approved by the IRS?
Yes. The IRS has issued an opinion letter for our Cycle 3 plan document, which means it has been reviewed by the IRS and has been deemed to meet the legal and regulatory requirements for a qualified retirement plan.
What does “IRS approved” actually mean?
It means that the employer has “reliance” that the document meets the current requirement of the law and regulations. There are two important caveats. First, the plan must still be operated in compliance with its document. Second, plan sponsors adopting a pre-approved plan may not make any changes to the document other than making allowable elections or filing in the provided blanks. Reliance would be lost in either situation.
Does the document include recently passed legislation?
Several laws have passed since we received our Cycle 3 approval and could not be included in the new document. The new laws are the SECURE Act and the CARES Act. The new laws will be added as amendments to your plan when IRS guidance is received.
Has the IRS required any structural changes?
Yes. In the past, the IRS had two pre-approved document programs available: prototype and volume submitter. Those programs have been replaced with one IRS pre-approved program that incorporates the options of both. The IRS also required that the Trust Agreement be “unbundled” from the Plan document. In prior documents, the IRS permitted the Plan and Trust to be part of the same document. There are now two documents required as part of the Cycle 3 restatement process: 1) a Plan document that must be adopted by the employer, and 2) a separate Trust Agreement that facilitates the use of an institutional Trustee.
Does the plan document need to be restated if the plan is terminated before July 31, 2022?
The IRS requires that plan documents be brought up to date with current laws and regulations before they can be terminated. The termination of a plan accelerates the due date, i.e., July 31, 2022, for document compliance. A plan restatement is usually the most efficient way to accomplish this.
Will the restatement change the format of the plan’s Summary Plan Description for participants?
Yes. The Summary Plan Description (SPD) must also be updated with the restatement. The new SPD will provide eligible employees with current information about the plan’s features and rules. The SPD must be provided within 90 days of an employee becoming covered under the benefit plan; however, if the plan is new, the SPD can be provided within 120 days
Will the Restatement change the way a plan is administered?
The plan can be administered just as it was in the past. The restatement will be designed to preserve all existing discretionary plan provisions. In addition, the restatement process provides the opportunity to benchmark your plan and determine if cost and benefit improvements can be made.
What happens if an employer fails to restate its 401(k) plan by the July 31, 2022 deadline?
Recent changes in the law and IRS procedures allow an employer to self-correct, i.e., restate the plan, to maintain its tax-qualified status if the following requirements are satisfied: (1) the correction is completed or substantially completed by the last day of the third plan year following the plan year in which the failure began; (2) the plan or plan sponsor is not under examination by the IRS (unless the correction is substantially corrected at the time that the plan or plan sponsor is under examination); and (3) the plan is the subject of a favorable determination letter.