It's time again to participate in that never ending ritual of qualified
retirement plan restatements. As legislation affecting retirement plans is
enacted, the Internal Revenue Service (IRS) requires all plan sponsors to
restate or "rewrite" their plans to conform to current law.
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
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, you will be required to
restate the plan within the next two years. Failure to complete this restatement
before the deadline of April 30, 2016, could result in the disqualification of
your plan and result in possible taxation for participants and your loss of
deductions and penalties.
In addition, an interim amendment to the plan may be required by the end of
the year to comply with IRS guidance released in April regarding same gender
After tax legislation is enacted, the law is analyzed by the IRS to determine
how it will affect qualified plans in actual operation. This analysis usually
takes years, and practitioners may be left to operate their plans on a "good
faith" basis during this period.
In other words, plans are required to be operated in the best possible way
based on the prevailing understanding of the current law even though official
regulations and/or guidance has yet to be issued. As a result, many plan
sponsors have adopted "good faith" interim amendments to bring their plans into
temporary compliance with PPA, other laws and new guidance issued by the IRS
pending this restatement period.
PPA was a sweeping piece of legislation enacted in 2006 which made major
changes in the tax laws relating to retirement plans. It is the largest piece of
legislation included in the plan restatement. The restatement takes the language
from the prior Economic Growth and Tax Relief Reconciliation Act (EGTRRA)
restatement document and includes any new laws added by Congress and any
guidance issued by the IRS through the fall of 2010 including:
The Pension Protection Act (PPA)
The final Section 415 regulations
The Heroes Earnings Assistance and Relief Tax Act (HEART)
The Worker, Retiree, and Employer Recovery Act (WRERA)
The Katrina Emergency Tax Relief Act of 2005 (KETRA)
The GULF Opportunity Zone Act of 2005 (GOZone)
Types of Plan Documents
All qualified plans are required to have a written plan document. The plan
document can take various forms:
Individually Designed Plan Document: This type of plan
document is custom designed by an attorney exclusively for an individual
employer to meet its specific needs. An individually designed plan offers
the greatest degree of flexibility possible.
Pre-Approved Plan Document: There are two types
of pre-approved plan documents—volume submitter plans and prototype plans.
Volume submitter plans generally offer more flexibility than prototype plans
but not as much as individually designed plans. Pre-approved plan documents
are available for most types of plans including 401(k), profit sharing, new
comparability and defined benefit plans.
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. Most pre-approved plan documents have now been rewritten and
approved by the IRS. Beginning on May 1, 2014, the window for restating
documents opened. The IRS provides a period of two years for all employers who
use a pre-approved plan to finish the restatement.
Pre-approved defined benefit plans are on a different six-year restatement
cycle than defined contribution plans. Individually designed plans are on a
five-year cycle and must be restated every five years.
In order to receive a measure of assurance that an individually designed plan
document is in full compliance, the plan document may be voluntarily submitted
to the IRS to receive a determination that its terms and conditions satisfy all
applicable IRS tax-qualification requirements (referred to as a "determination
With pre-approved plans, the IRS has already reviewed the plan language and
determined that it meets the requirements for tax qualification. The IRS issues
an "opinion letter" for prototype plans and an "advisory letter" for volume
submitter plans to the plan document provider who files with the IRS for
pre-approval of the plan. As long as an employer does not modify the
pre-approved provisions, the employer will have reliance on the opinion or
advisory letter issued to the plan document provider.
During the last restatement cycle, any employer could ask the IRS for a
determination letter on a pre-approved plan. Effective last year, the IRS will
no longer issue an opinion or advisory letter to employers who adopt prototype
or volume submitter documents with no changes. These plan sponsors are entitled
to rely on the opinion or advisory letter as if they had a determination letter
of their own.
If an employer adopts a volume submitter plan document which has minor
modifications, a determination letter may be requested with a simplified filing.
If the modifications are not minor, the IRS will consider the plan to be
individually designed and will require a more complex determination letter
application. If a prototype plan document is modified, it is considered an
individually designed plan. If the pre-approved plan has been modified for
unique circumstances, a determination may be desirable but never required.
Special care must be taken to ensure one plan document does not blindly
replace another plan document. For example, if a prototype plan is used to
restate an individually designed plan, there are special issues to consider such
as ensuring certain benefits, called "protected benefits," are not accidentally
eliminated or reduced. Protected benefits include forms of distributions (such
as lump sum and annuities) and timing of distributions (such as early retirement
The restated plan document will incorporate all of the changes that were made
in your document between the last restatement and this restatement. An inventory
of all amendments and their effective dates will need to be compiled so these
changes can be accurately reflected in the new document. In addition, now is an
ideal time to make any plan design changes that you may have been contemplating
which can be incorporated into the restated document.
After the document is completed, it should be thoroughly reviewed. The IRS is
very strict when it comes to following the plan document. If your plan document
does not reflect the operation of your plan, you may have a serious issue that
could affect the qualification of your plan. Any issues discovered during the
restatement process should be addressed as soon as possible.
In addition to the plan document, you may need to have a new summary plan
description (SPD) drafted which describes the terms of the plan in a manner
designed to be understood by an average plan participant. The SPD will need to
be distributed to all participants in the plan.
Most corporate attorneys consider the adoption of a plan or the restatement
of a plan to be an important action which should be ratified by the board of
directors or managing partners in the case of a partnership. As such, you should
document the restatement with the board of director's minutes, consent
resolution or similar written acknowledgement.
In most cases, the resolution instructs the president or other officer to
execute any documents necessary to accomplish the restatement. Finally, an
authorized officer of the plan sponsor should sign the restatement. If a new
trust agreement is also included with the document, the trustees should sign as
Because a large number of plans need to be restated within the two-year
period, not all restatements will be started right away.
Same Gender Marriage Interim Amendments
On June 26, 2013, in United States v. Windsor, the Supreme Court
invalidated Section 3 of the Defense of Marriage Act (DOMA) which limited
marriage to opposite sex couples for purposes of federal law (including
retirement plan administration).
On September 16, 2013, the IRS issued a ruling holding that same-sex
marriages legally entered into in any state recognizing such marriages (referred
to as the "state of celebration") would be recognized for federal tax purposes.
The ruling also held that the state of celebration would control for federal tax
purposes, even if the couple lives in a state that does not recognize the
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. In any case, the plan
must comply in operation 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 as marriage between a man and a
woman, some plans may refer to the DOMA definition and some may define marriage
as marriage under "applicable law." The first two definitions will need an
amendment, the last may not.
Millions of employees rely on their employers to provide retirement benefits.
Part of the responsibility for providing those benefits is maintaining the plan
in accordance with current tax laws. A plan must be operated in accordance with
all laws and regulations and the plan documentation must reflect the laws
currently in effect.
The IRS may disqualify a plan that does not comply with the plan restatement
requirements, which could result in taxation for the participants and loss of
deductions and penalties for the employer.
We are committed to providing the support, attention and professional
expertise needed throughout this restatement period to make it a positive
experience for all.
This newsletter is intended to provide general
information on matters of interest in the area of qualified retirement plans and
is distributed with the understanding that the publisher and distributor are not
rendering legal, tax or other professional advice. Readers should not act or
rely on any information in this newsletter without first seeking the advice of
an independent tax advisor such as an attorney or CPA.