Plan document compliance to be specific. It’s the IRS requirement that a retirement plan document must be up to date to qualify for favorable tax treatment.
IRS pre-approved plans must be rewritten, reviewed, and approved every six years. Once approved, employers who use them must adopt the new plan documents by a certain date.
This is called the Restatement process, and as noted in the headline, this Restatement is called Cycle 3 with a July 31, 2022 deadline. The Questions and Answers that follow provide a plain language explanation of what you should know about Cycle 3.
What is 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 plan sponsor 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 you fail to restate your 401(k) plan by the July 31, 2021 deadline?
If you miss the deadline to restate your qualified retirement plan, the IRS can disqualify the plan 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. Restating your plan should be a high priority.
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