Lots to Know. Lots to Do.

You have until July 31, 2022, to restate pre-approved defined contribution plans such as 401(k)s, profit-sharing, and money purchase pension plans. In case you are wondering,  403(b) plans and defined benefit plans each have their own six-year reinstatement cycles. The defined contribution plan carries the “Cycle 3” designation because it is the third restatement in the IRS’s pre-approved, six-year cycle for qualified retirement plans.

We have included some high-level answers below. However, details of the IRS ruling will need careful study and help from specialists. To repeat:

ADHERENCE IS NOT VOLUNTARY. IT IS MANDATORY.

AND: Did you know that separate amendments or addendums for calendar year plans for Covid-related “hardship” regulations are due no later than 12/31/2021?

Don’t wait to start.

FAQs

This section will answer some pre-approved document questions to help you understand a little more about the topic.

Q. Has the IRS approved the new plan document?
A. Yes. The IRS has published an opinion letter for the Cycle 3 plan document. That means the IRS has reviewed the plan and has ruled that it meets the regulatory requirements of a qualified plan.

Q. What needs to be done now? It’s over a year away.
A. Start gathering your team. See that your plan administrators are preparing for the restatement. Check with your vendors. If you haven’t talked to your favorite employee benefits attorney lately, make sure you’re on their calendars.

Q. Will the plan be restated once again during the next six-year restatement cycle?
A. Based on how the IRS has always operated, all pre-approved plan documents will be restated in the next six-year cycle.

Q. Even if our plans were restated in between?
A. Yes. According to the current thinking, all pre-approved defined contribution plans will have to be restated starting in 2026.

Q. Do we really need a new plan document? We just recently set ours up.
A. Unfortunately, yes. There is a possibility that since the IRS had not yet issued the approval letters, newly created plans could not have satisfied the Cycle 3 restatement requirement. As a result, even recently established plans must be restated.

Q. Can the restatement fees be paid out of the plan assets?
A. Yes. Because this restatement is mandatory, the expense is allowed to be drawn from plan assets.

Consult with trusted specialists for a full set of requirements. It’s tricky.

Be Involved

Your document vendors should be in charge of document drafting, but your knowledge of their responsibilities and your plan will protect you. The document vendors should set deadlines and provide you with progress reports. Put reminders on your calendar to follow up and keep them on task. Also, be sure to ask lots of questions for two reasons, 1) so you are not blind-sided, and  2) so the vendors know you’re staying in the loop.

Here’s another thing. As the economy has weakened, more business owners are being sued for their 401(k) plans. While it’s wonderful to believe this would never happen, it’s an unfortunate reality that some employees are challenging the returns and the expenses on their retirement plans. It’s perhaps a good time to make sure you’re communicating with employees during the restatement cycle and that your plan’s costs and investment returns are competitive.

Know the Plan Sponsor’s Duties

We suggest a careful internal review of all new documents. Have your legal counsel review those. There may have also been changes to existing pre-approved plan docs. Have those examined also.

Communicate clearly with the document vendor regarding any changes. Your plan sponsors should be ready to review all the documents prepared by the document vendor for accuracy, including:

  • Past plan administration questions
  • Current plan provisions
  • New plan provision changes

Lots of choices for Defined Contribution Plans, but don’t forget …

Financial advisors, third-party administrators, and other service providers can draft plan documents, which gives you lots of choices. However, your benefits specialists and legal support teams can make sure that

  • You have incorporated amendments since the previous restatement.
  • You have not overlooked plan provision changes you’d wanted to make.
  • You have not made mistakes in including the changes.

P.S. You may also want to consider that plan vendors often have plan sponsors sign new service agreements at this juncture.


Covid-Related

The Hardship Regulation, SECURE Act, & CARES Act Amendments were passed after vendors submitted documents to the IRS for approval.

Therefore, preapproved documents will generally not contain language

for these laws. Vendors will issue separate amendments or addendums

to address these required and optional amendments.

For calendar year plans, the Hardship amendments must be adopted no later than 12/31/2021. SECURE AND CARES Acts amendments are due by 12/31/2022.


Conclusion and Recommendations

Be sure to sign the finalized restatements before July 31, 2022. Also, check to see if board approval would be necessary. These steps take time, so starting on the Cycle 3 process early makes sense, if for no other reason than that the Cycle 3 plan restatement is MANDATORY. Failure to comply is NOT a good idea.

Here’s our take: We like to advise our clients to start early in the event other “things” intervene and the DC plan details don’t get handled in time. A delay can trigger or be triggered by compensation and eligibility issues, participating employers, service/vesting disagreements, missing amendments, and merger derailments, among other ‘distractions.’ You don’t want to be behind here. Seriously. If your auditors come in, followed by the IRS, the failure-to-comply mess can cause a financial loss anywhere from paying to correct the errors, suffering fines, and facing extra legal fees.

Failure to comply in a timely fashion would also compromise the plan’s tax-qualified status constituting a breach of trust. Another consequence: the unfortunate loss of focus on your business.

Our recommendation is to start as soon as possible. We can advise you, but we encourage you to work with your plan administrators, vendors, and attorney specialists to get it done right on time the first time.

Disclaimer

The above documentation is not legal advice. Please check with your HR vendor, attorneys, and CPA firms. Watch for updates.

 

Defined Contribution Plans

IRS.gov