Approximately every 6 years, the IRS requires the vast majority of company-sponsored retirement plans to update their plan documents through a process called “restating” the document. For 401(k) and other so-called defined contribution plans, the timeframe for restating documents is set to begin in the summer of 2020.
DWC – The 401(k) Experts has prepared this list of frequently asked questions to help you better understand the upcoming plan document restatement requirement and how the process will work.
What is a plan restatement?
A restatement is a complete re-writing of the plan document. It incorporates changes from any mandatory or voluntary amendments that may have been adopted since the last time the document was re-written.
Is the current plan restatement mandatory or voluntary?
While some plan sponsors may choose to voluntarily restate their plans from time to time for various reasons, the upcoming plan restatement is mandatory. Plans that do not adopt a restated plan document by July 31, 2022, will be subject to IRS-imposed penalties, which in extreme circumstances, could include revocation of the plan’s tax-favored status.
Which types of plans must be restated?
All qualified retirement plans that use an IRS-pre-approved plan document must be restated approximately every six years; however, they are divided into various cycles depending on plan type. For example, defined contribution plans (such as 401(k) plans), defined benefit plans, and 403(b) plans each have a different six-year restatement cycle. This upcoming mandatory restatement period for defined contribution plans is referred to as “Cycle 3” because it is the third required restatement that follows this six-year cycle.
What is an IRS pre-approved plan?
A pre-approved plan is one the IRS has reviewed and approved all of the options that are available. They issue an opinion letter as evidence of the pre-approved status. All employers who adopt a pre-approved plan document that is covered by such a letter are entitled to rely on that approval issued at the “global” level without applying for their own, individual determination letter. In order to create a “level playing field,” the IRS sends out the new approval letters for all pre-approved plan documents at the same time. The IRS issued the letters for this round of pre-approved documents on June 30, 2020. The window for actually adopting the new documents officially opened on August 1, 2020; however, most of the software systems used to generate them were not updated with the new language until October or November 2020.
Why do we have to restate our plan?
Plan documents are drafted based on laws and regulations set forth by Congress, the Treasury Department (IRS), and the Department of Labor. As those laws and regulations change, documents must be updated to reflect those changes. The deadline for the last mandatory restatement was April 30, 2016, but it was based on documents approved by the IRS in 2014 and only considered legislative/regulatory updates through 2010. Since then, there have been a number of regulatory and legislative changes impacting retirement plans, including the following:
- Expansion of the definition of “spouse” to include those of the same gender;
- Availability of plan forfeitures to offset certain additional types of company contributions;
- Ability to amend safe harbor 401(k) plans once the year has already started;
- Creation of in-plan Roth transfers.
Additional details are available here.
Don't we already have amendments addressing these changes?
Yes. The IRS recognizes that if plans had to be restated every time a regulation changes, we would be continuously re-writing plan documents. Thus, they created cycles during which plans simply adopt so-called “good-faith” or “snap-on” amendments addressing new laws instead of going through a full restatement; however, those amendments are similar to summaries of the language that is otherwise required. At the end of a given cycle, the plan document is re-written to incorporate the full text of the language that the good-faith amendments summarized.
We just restated our plan. Do we really have to do it again?
Yes. Unless your most recent restatement was in late 2020, if you used a pre-approved document, it could not have satisfied the new requirements since the IRS had not yet issued any new approval letters. As a result, you must restate again. The good news is that there is a 2-year window for completing the restatement, and you have flexibility within that window as to when your plan is restated. Keep in mind, however, that two years can pass quickly and certain plan provisions may impose other timing restrictions necessitating earlier restatement.
Our plan is brand new, we just set it up. Do we need a new plan document already?
Yes. As noted above with respect to plans that recently restated, unless your initial plan document was prepared in late 2020, it could not have satisfied the Cycle 3 restatement requirement since the IRS had not yet issued the approval letters. As a result, even plans that were only recently established must likely restate. Again, the 2-year window offers timing flexibility.
Does this restatement mean we won't have any more good-faith amendments?
Unfortunately, no. The IRS approval letters for Cycle 3 plan documents only consider legislative and regulatory changes enacted prior to February 1, 2017. That means the following changes will still have to be addressed in separate, good-faith amendments rather than in the plan documents:
- Hardship distributions regulations (effective January 2019),
- SECURE Act (passed in December 2019), and
- CARES Act (passed in March 2020)
Many plans have already been amended for the hardship distribution regulations, so they will not be required to adopt that amendment again. DWC is preparing the SECURE and CARES Act amendments to include with the Cycle 3 restatements.
What is the restatement deadline?
The IRS has announced that the Cycle 3 restatement window will begin on August 1, 2020 and have a final deadline of July 31, 2022.
How will DWC help us with our plan document restatement?
The plan document forms the foundation for the plan and its compliant operation. As a result, it has always been our philosophy that a plan restatement should be more than simply transcribing the current provisions and adding the newly required language. We consider a mandatory restatement to be a great opportunity to work with our clients to review actual operations, company objectives, annual test results, etc. to explore whether there are any changes that can make the plan operate more efficiently and/or increase the value of the plan to you and your participants..
Our restatement process follows these general steps:
- DWC prepares a Summary of Plan Provisions (SoPP), which shows a side-by-side comparison of the current plan provisions with those anticipated to be included in the restated document. It also notes any items that may warrant further conversation based on our experience with the plan.
- DWC sends the SoPP to the plan sponsor (with a copy to the plan’s investment advisor and/or other service providers) to review and schedules a call to discuss. For plan sponsors who do not want a review call, we simply ask for an email response confirming acceptance of the provisions as summarized.
- To the extent any changes are discussed and/or requested, DWC revises the summary of plan provisions to reflect those updates and sends back to the plan sponsor for final approval.
- Once the provisions have been approved, DWC prepares the restatement package for internal peer review prior to delivery for signature.
- The final plan document restatement package includes specific instructions for the timely execution, and we separate each page requiring execution into a separate PDF file called “Signature Pages” to make it quick and easy to complete.
- On receipt of the executed signature pages, DWC notifies the plan’s recordkeeper of any provisions that changed as part of the restatement and that require updates to the recordkeeping system.
What does DWC include with its plan restatements?
The plan document restatement packages that we prepare generally include the following, as applicable, based on each plan’s provisions:
- Adoption agreement reflecting the specific provisions selected for the plan
- Basic plan document that includes the detailed legal language describing each of the provisions
- Final summary of plan provisions that provides a side-by-side comparison of plan provisions pre and post restatement
- Summary plan description for distribution to plan participants
- FAQ that further summarizes important plan provisions for participants
- Signature pages PDF that includes all pages requiring sponsor signature
- Administrative polices for participant loans and qualified domestic relations orders
- Good faith amendments (currently, for the SECURE and CARES Acts)
As a plan sponsor, do I have to spend a lot of time on this restatement process?
DWC will take care of the heavy lifting for you. We will spend time on your document to assure it is properly prepared, reflects current company goals, and takes advantage of any new options. Your role is simply to respond to our inquiries, approve the SoPP, and execute the plan documents when delivered.
Is there a fee for this plan restatement?
The plan document forms the foundation of your plan’s operations and compliance. If not prepared carefully and accurately, it can lead to unintended consequences and non-compliance that can be expensive to correct. That is why we have created a detailed process to work through each restatement. Given the detailed nature of the project, it is not a quick one. While we do charge a fee for each restatement, it is the same industry-leading, competitive fee that is already reflected in our service agreements.
Can we pay for the restatement fee from plan assets?
Yes. Since this restatement is mandatory, the expense is eligible to be paid from plan assets.
What are the next steps in the restatement process?
As we mentioned above, the IRS issued the pre-approval letters on June 30, 2020; the restatement window opened on August 1, 2020; and software systems were updated through the Fall. That means we are now full speed ahead on working through Cycle 3 restatements for our clients.
If you have any questions in the meantime, please do not hesitate to contact your DWC consultant or email us at restatement3@dwc401k.com.
