Every six years, the Internal Revenue Service (IRS) requires employers with qualified, pre-approved plans to restate their plan documents – reflecting changes that have occurred since the plan documents were created or last restated. For defined contribution plans, the current restatement cycle – called Cycle 3 – opened on Aug. 1, 2020, and will close on July 31, 2022, meaning all plan documents need to be not only restated by then, but also certified by the IRS, and adopted by employers. Missing this deadline will force plans out of compliance and may result in IRS penalties.
The restatement process involves plan sponsors working with document providers such as third-party administrators and ERISA attorneys to re-write plan documents to include changes from all mandatory and voluntary amendments.
Cycle 3 reflects all legislative and regulatory changes passed before Feb. 1, 2017. Changes that were a result of the 2019 hardship distribution regulations, the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act, and the 2020 Coronavirus Aid, Relief and Economic Security (CARES) Act are not part of the restatement but need to be addressed in separate, good-faith amendments often called “snap-on” amendments.
Plan sponsors may be wondering why restatements are necessary when their plans have been recently amended to reflect these recent changes. Those revisions are good faith, interim amendments; after a six-year cycle, the IRS requires that all pre-approved plans be restated to comprehensively address changes made by interim amendments.
Best Practices for a Comprehensive Restatement Process
Beyond compliance, a plan restatement cycle presents the opportunity to assess whether the plan is working in a way that meets the overall goals of a company’s benefits program and that the plan document is consistent with how the plan is being operated. In addition to navigating changes related to laws and regulations, organizations are constantly evolving and experiencing change to their operations, finances, and workforces—and over a six-year period, these changes can be significant. Specifically, changes caused by acquisitions, divestitures, new hires, recruiting strategies, and other events could necessitate amendments to the plan documents. Plan sponsors should be prepared to review the required materials with legal counsel, committee members responsible for plan amendments, and others to ensure that the new plan documents are compliant.
It is possible to include other discretionary amendments — often at no additional cost depending on the service provider — when completing a plan restatement. These may include:
- Adding a safe harbor 401(k) feature to automatically pass non-discrimination testing
- Changing eligibility requirements
- Adding automatic enrollment or escalation
- Introducing a Roth deferral or in-plan Roth rollover option
Insight: Get in Touch with Your Document Provider Early
If you use a pre-approved plan and haven’t heard from your third-party administrator, attorney, or other document providers, reach out to them as soon as possible to begin the plan restatement process. Safe harbor plans that require end-of-year participant notifications may want to complete the process even earlier so participant communications include required language from the updated documents.
In general, document providers will base the plan restatement on existing plan terms unless a plan sponsor has requested specific changes. Plan sponsors should have a firm sense of the plan’s processes and procedures because any discrepancy between the restated plan documents and actual operations may result in costly errors or even plan disqualification. An unchecked box in the adoption agreement, a change in the plan’s definition of compensation, or changes to eligibility requirements can become highly problematic. The IRS does have a corrections program, but pre-planning will go a long way in avoiding this step.
Use this as an opportunity to analyze your plan and ensure it is set up in the best way possible to serve your company’s goals.
Written by Beth Garner and Nicole Parnell. Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com