Employers who sponsor retirement plans for their employees must periodically restate the plans for changes in applicable laws to maintain the plans’ favorable tax status. The Internal Revenue Service generally requires that plans be restated on a six-year cycle, the last of which concluded in 2016.
The current cycle is the third since the six-year cyclical program of plan restatements was implemented. Cycle 3 restatements of pre-approved defined contribution plans, including most 401(k) and profit sharing plans, must be adopted by no later than July 31, 2022.
The Appeal of Pre-Approved Retirement Plans
Pre-approved plans are retirement plans offered by a document provider (such as a financial institution or benefits practitioner) for adoption by employers. The plan document typically includes a variety of elective provisions from which an employer may choose and effectively customize the plan to best serve the needs of the organization and its employees.
Before making the plan document available for adoption by employers, the document provider will have obtained IRS approval of the plan as meeting the requirements applicable to tax-qualified retirement plans under the Internal Revenue Code.
Pre-approved plans have gained tremendously in popularity because of their relative simplicity compared to individually designed plans; availability at usually less cost; ease with which many plan administrative functions can be outsourced at a reasonable expense; and assurance that the form of the plan document satisfies IRS requirements.
The ability of plan sponsors to rely on a pre-approved document is especially attractive since the IRS no longer accepts applications for approval of individually designed plans except in special circumstances. Unless an employer has an unusually complicated plan design that necessitates the continued use of an individually designed plan, many plan sponsors may find it advantageous to switch from an individually designed plan to a pre-approved document before the current cycle ends.
Scope of the Cycle 3 Restatement
The required restatement provisions cover changes in the laws governing retirement plans, as enacted prior to February 1, 2017. These include, among other matters,
- rules concerning changes to safe harbor 401(k) plans, such as a potential mid-year suspension of safe harbor matching contributions;
- a change in the definition of a participant’s “spouse” to include a same-sex spouse;
- expanded opportunities for participants to make in-plan Roth conversions; and
- modified required minimum distribution rules with respect to qualifying longevity annuity contracts offered under a plan.
Notably, however, the Cycle 3 restatement due by July 31, 2022, does not contain changes in plan qualification requirements enacted since February 1, 2017.
These also include legislative changes made in 2018 to the hardship distribution rules, which must be adopted, for plans offering hardship withdrawals, through a plan amendment by December 31, 2021, before the Cycle 3 restatement deadline of July 31, 2022.
Many plans have already been amended for these provisions. Changes wrought by late 2019’s Setting Every Community Up for Retirement Enhancement (SECURE) Act, including an increase in the age, from 70½ to 72, at which required minimum distributions must begin, and new limitations on the duration of death benefit payouts must be adopted by amendment no later than December 31, 2022.
In addition, changes made by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020, including coronavirus-related distributions and loan provisions, and a temporary suspension of the required minimum distribution rules, will also have to be adopted by amendment on or before December 31, 2022.
Design Considerations and Timing of Cycle 3 Restatements
For employers who do not yet have a retirement plan in place, a pre-approved plan can be adopted at any time. In the case of an employer with an existing plan, apart from maintaining documentary compliance with IRS requirements, the process of restating the plan presents an opportunity to revisit the plan’s design and to make changes to certain of the plan’s elective provisions, as the employer deems suitable.
Changing workforce demographics or business conditions are often the impetus for modifying plan features to better serve the organization’s purposes with respect to its benefits offerings. Most pre-approved plan formats today accommodate a wide array of choices in plan design, which can be modified over time as an employer adapts to changing circumstances. Below are a few examples of plan features an employer might want to change:
- adding, removing or revising participant loan or hardship distribution provisions;
- making in-service distributions available to participants upon attaining age 59½, the minimum age at which early distribution penalties do not apply;
- introducing newly available qualifying birth or adoption distributions into the plan;
- increasing or reducing the period of service an employee must complete before becoming a participant in the plan;
- lengthening or shortening the vesting period applicable to employer contributions;
- modifying the plan’s matching or profit sharing contribution formula;
- implementing, terminating or revising an automatic contribution arrangement; or
- making in-plan Roth conversions available.
While many plan changes can be made at any time of year, it should be noted that certain ones, such as the implementation of a new safe harbor matching contribution feature, can only be made effective as of the first day of a plan year, which will not necessarily coincide with the timing of the required restatement.
If, for example, the sponsor of a calendar year plan wishes to add a safe harbor matching contribution, it must do so effective January 1, and could not delay until the Cycle 3 restatement deadline of July 31 to adopt the new provision. In these circumstances, the restatement could be moved up for completion in the current year, thereby satisfying the timing requirements for both the new safe harbor feature and the restatement.
Employers seeking assistance in these matters may contact me at email@example.com or by phone at 239-344-1192.