Many employers who sponsor qualified retirement plans, such as 401(k) plans, do so by adopting a prototype plan document or volume submitted plan document, for which the documents have been pre-approved by the IRS as meeting all the requirements to be qualified plans pursuant to the Internal Revenue Code.1 Employers who choose not to use a pre-approved plan document must adopt an individually designed plan and may then apply to the IRS for a favorable determination letter.
Approximately every six years, the IRS requires that all pre-approved qualified retirement (401(k)/defined contribution and defined benefit) plans update their plan documents and information in a process known as restatement. The current restatement cycle applies only to pre-approved 401(k)/defined contributions plans. Defined benefit plans and individually designed plans have separate timeframes. The current restatement cycle ends July 31, 2022. This marks the third time the IRS has required plans update their information under this regime and is referred to as Cycle 3.
Generally, each cycle reflects new laws and regulations that affect plan sponsors and beneficiaries. The updates reflected in this cycle will capture any legislative and regulatory changes made before Feb. 1, 2017. Additional plan amendments as a result of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020, such as for hardship distributions, will be addressed in a separate restatement cycle as they were not enacted before the 2017 Cycle 3 deadline. Failure to comply with the Cycle 3 restatement requirements puts a plan’s tax-favorable status in jeopardy.
Recently, the IRS provided guidance on what a plan sponsor should do if the restatement deadline is missed. Although the guidance is directed to defined benefit plans (Cycle 1 deadline was July 31, 2020) and 403(b) plans (Cycle 2 deadline was June 30, 2020), it seems reasonable that the guidance would also apply to defined contribution plans.
In the event the restatement deadline is missed, the plan loses its status as a pre-approved plan and becomes an individually designed plan. The plan sponsor may self-correct, as provided in the Employee Plans Compliance Resolution System (EPCRS),2 by adopting a pre-approved plan within three years from the missed deadline. In addition, to self-correct, the plan must have a favorable prior letter. The IRS guidance provides that a prior letter includes a favorable opinion letter issued to the pre-approved plan prior to the missed restatement deadline. Under the self-correction procedures, the plan sponsor may adopt a restated pre-approved plan that includes the required changes for Cycle 3 in place of the converted individually designed plan.
We encourage you to connect with your Baker Tilly advisor regarding how the above may affect your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.