If you sponsor a 401(k) or other type of defined contribution retirement plan for your employees and use a "pre-approved" type of plan (i.e., prototype and volume submitter), you will be required to restate the plan within the next two years. Failure to complete this restatement before April 30, 2016 could result in the disqualification of your plan and possible taxation of participant contributions, disallowance of Company deductions, and even penalties or, at the very least, paying a $750-$5,000 submission fee (depending on the size of your plan) to participate in the IRS Voluntary Correction Program for late amenders.
For pre-approved plans, these required restatements take place on a regular six-year cycle. The current cycle of defined contribution plan restatements is being referred to as the "PPA restatement" after the Pension Protection Act of 2006 (PPA). More than 80% of all plans use prototype or volume submitter pre-approved documents. Currently, we are in the second six-year cycle for defined contribution plans.
Beginning on May 1, 2014, the window for restating documents opened. Pre-approved defined benefit plans are on a different six-year restatement cycle than defined contribution plans and are currently pending IRS approval. Individually designed plans are on a five-year cycle and must be restated every five years.
The last major required restatement was referred to as EGTRRA (Economic Growth and Tax Relief Reconciliation Act). Again this latest restatement is referred to as PPA. Since EGTRRA, the Internal Revenue Service has mandated that all qualified plans adopt numerous amendments from the following sources:
- Pension Protection Act of 2006 (PPA)
- Heroes Earnings Assistance and Relief Tax Act (HEART)
- Worker, Retiree, and Employer Recovery Act (WRERA)
- Katrina Emergency Tax Relief Act of 2005 (KETRA)
- GULF Opportunity Zone Act of 2005 (GOZone)
- Final 415 regulations
The PPA restatement will update the EGTRRA document to include these amendments (and others). Additional changes include:
- Changes to contribution limits from prior legislation
- Qualified default investment alternatives (QDIAs)
- Investment advice rules
- Automatic enrollment provisions
- Fee disclosure rules
In addition to an updated plan document, you most likely will need to have a new summary plan description (SPD) drafted which describes the terms of the plan in plain language that can be understood by an average employee. A new SPD would need to be distributed to all employees.
On June 26, 2013 the Supreme Court's Windsor decision was issued in which it invalidated Section 3 of DOMA. What this means for sponsors of retirement plans is If your plan document is not restated by December 31, 2014 you will need to adopt another amendment because of IRS guidance released in April regarding same-sex marriage.
The IRS recently issued a notice that provides information on interim plan amendments that may be required to comply with the Supreme Court decision. In general, if the language in the plan document does not comply with the Windsor decision, the plan must be amended by December 31, 2014. Notwithstanding, the plan must operate with the new rules beginning on June 26, 2013, the date of the Supreme Court decision.
The need to amend the plan will depend on the definition of marriage in the document. Some documents may define marriage consistent with DOMA, some may define it as between a man and a woman, and some may define marriage as marriage under "applicable law." The first two definitions would require an amendment; the last would not.
Individually designed plans are typically submitted to the IRS for its blessing. If it's determined that the plan as written complies with all qualification requirements, the IRS issues a "determination letter".
This is not required for pre-approved plan users. Our firm's document vendor previously submitted our prototype and volume submitter plans to the IRS, and the IRS issued an "opinion letter" for our prototype document and an "advisory letter" for our volume submitter document. This is a very cost effective approach to writing plans versus the individually drafted approach. Pre-approved plans incorporate almost all plan design nuances one could anticipate. Consequently, individually drafted plans are rarely required. Also, due to a backlog in reviewing plans submitted for determination letters (which is estimated to be 12-18 months), the IRS is actually persuading plan sponsors to adopt pre-approved plans.
Our office has already begun the PPA cycle for our clients. As a result, the process should be mostly painless. Since we continually monitor the success of the plan, its needs, objectives, and design, numerous changes to the PPA document will not be required. With that said, we have asked our clients to have us incorporate any necessary changes they require into their PPA document. A word of caution to those employers whose plan administration services are being provided through a bundled service arrangement, such as, with a payroll provider or investment company, to pay close attention to any notification received from these service providers addressing the PPA restatement. These providers place the responsibility for making sure plan documents are timely amended solely on the employer.
Additionally, employers who established either a SEP or Simple plan by adopting a pre-approved prototype document are also required to update their plan documents to reflect the PPA changes. Many employers are under the misconception that once these types of plans are established that there is no further administration involved.
Some plans, like plans with a Safe Harbor election, cannot be restated until 2015 because these plans cannot make significant changes during the year. But that won't preclude us from preparing new documents for a January 1, 2015 adoption date.
For any questions about the content on this article, please email David Waddington at DWaddington@FriedmanLLP.com or contact your engagement partner.