Qualified retirement plans are required to operate per the plan document. Most retirement plans use a pre-approved plan document. The IRS requires that all pre-approved “volume submitter” qualified retirement plans be amended and restated to comply with Federal laws enacted by Congress and regulated by various agencies to maintain their tax qualification status.
Plan restatements are divided into staggered six-year cycles depending on the type of plan (i.e., Defined Benefit Plans or Defined Contributions Plans):
- 403(b) Plans were required to be restated by June 30, 2020.
- Defined Benefit Plans/Cash Balance Plans were required to be restated by July 31, 2020.
- Defined Contribution Plans are required to be restated by July 31, 2022.
IRS Announcement 2020-7 confirmed the dates for the next restatement cycle, known as Cycle 3, for pre-approved defined contribution plans. The 24-month period began August 1, 2020, and 401(k), Profit Sharing, and Money Purchase Plans must be restated by July 31, 2022, to avoid jeopardizing the plan’s tax-qualification status and other IRS penalties. The IRS issues a Cumulative List of Changes detailing what must be included in the document to assist with the restatement process.
- New lifetime income offerings in Target Date retirement funds.
- Allowable mid-year safe harbor modifications.
- Use of forfeitures to fund safe harbor contributions.
- Change relating to the application of same-sex marriage rules.
- What is a plan restatement? A restatement is a complete re-writing of the plan document. It incorporates changes from any mandatory or voluntary amendments that may be adopted since the last time the document was re-written.
- What Agencies regulate retirement plans? The IRS is responsible for overseeing the tax aspects of retirement plans, while the DOL is responsible for reporting, disclosing, and administering the fiduciary aspects of retirement plans.
- What is Cycle 3? Cycle 3 includes legislative and statutory changes made before February 1, 2017. In addition, all pre-approved 401(k), Profit Sharing, and Money Purchase plans need to be amended, certified by the IRS, and adopted by the plan sponsor before the deadline of July 31, 2022.
- Why the six-year cycle? The IRS recognizes that if plans require restatements every time regulations change, the plan document would have to be continuously re-written. Hence, they created “cycles” so that plans could adopt “good faith” or “snap-on” amendments addressing new laws instead of going through a complete restatement. At the end of a given cycle, the plan document is re-rewritten to incorporate the full text of the language that the good-faith amendments summarize.
- Are plan restatements mandatory? Yes. Plans that do not adopt a restated plan document will be subject to IRS-imposed penalties. In extreme cases, revocation of tax-favored status could occur, or a special IRS correction program to maintain their tax-qualified status is required.
- What is a plan document? A plan document governs a retirement plan’s features and day-to-day operations. The plan document is a comprehensive document that sets forth the rights of the plan’s participants and beneficiaries and guides the plan sponsor and plan administrator in making decisions and executing their responsibilities. For example, it sets forth what benefits are available, who is eligible, how benefits are funded, who is the named fiduciary, how the plan can be amended, and the procedures for allocating plan responsibilities.
- What is a pre-approved document? A pre-approved or “volume submitter” document has fixed provisions and an adoption agreement from which a plan sponsor may select plan features and is pre-approved by the IRS.
- What is the difference between a plan document and an adoption agreement? The basic plan document consists of all the non-elective provisions and thus cannot include any options or blanks for completion by the plan sponsor. On the other hand, the adoption agreement contains options (and blanks) for completion and sign-off by the plan sponsor.
- Does the Cumulative List of changes include the SECURE ACT, CARES ACT, and Hardships Distributions (effective January 2019)? No. Since all were effective after 2017, these changes will be addressed in separate good-faith amendments rather than in Cycle 3 restated plan documents.
- What are the components of a restatement? The basic plan document, adoption agreement, and a summary plan description to provide to participants are all components of the restatement process. Also, the trust agreement will now be separate from the plan document going forward.
- What if the plan was recently established? The IRS sets restatement cycles without regard to a plan’s initial effective date. Hence, the plan may need to be restated.
- What if a plan is terminating? Any plan that is terminating must be updated with all required law changes. Therefore, the plan must be restated as part of the plan termination process before July 31, 2022.
- Who is responsible for plan restatements? The plan fiduciary’s responsibility is to ensure that the plan document is updated and signed promptly.
- Can the plan restatement fees be paid from the plan assets? Yes. Since the restatement is mandatory, the expense is eligible to be paid from the plan assets.