IRS Offers New Correction for Missed Plan Restatements

April 30 is the deadline for employers using preapproved retirement plan documents to sign an updated version.

The Internal Revenue Service (IRS) is reminding plan sponsors that April 30, 2016, is the deadline for those using preapproved retirement plan documents to sign an updated version of their 401(k), profit-sharing or other defined contribution (DC) retirement plans.

April 30, 2017, is the extended deadline for any defined contribution preapproved plan adopted on or after January 1, 2016, other than a plan that is adopted as a modification and restatement of a defined contribution preapproved plan that had been maintained by the employer prior to this January 1. This extension is to facilitate a plan sponsor’s ability to convert an existing individually designed plan into a current defined contribution preapproved plan. The IRS announced last July its intent to eliminate the staggered five-year determination letter remedial amendment cycles for individually designed retirement plans. The IRS also said it would limit the scope of the determination letter program to initial plan qualification and qualification upon plan termination.

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Retirement plan documents must be revised when the law changes. A retirement plan will remain qualified and provide tax benefits only if the plan document is updated for law changes by the required deadline. After April 30, if a plan sponsor has neglected to adopt a restated plan, the plan does not comply with the tax laws and may be ineligible for tax benefits.

A plan sponsor’s retirement plan provider should have sent a revised plan document, approved by the IRS, which complies with the Pension Protection Act of 2006 (PPA) and other law changes listed on the 2010 Cumulative List of Changes in Retirement Plan Qualification Requirements.

Previously, the only way an employer could correct not signing a preapproved DC retirement plan by the deadline was to complete a submission under the IRS’ Voluntary Correction Program (VCP). A new option allows the financial institution or service provider to request a closing agreement on a plan sponsor’s behalf.

To reduce employers’ burden of submitting VCP applications, the IRS invites financial institutions or other service providers to submit proposals for umbrella closing agreements that cover individual employers affected by the failure to update their plans by the deadline. These would be similar to a group submission under the VCP, but, under these closing agreements, the organization does not need to have made a systemic error.

(b)lines Ask the Experts – Why Sponsor So Many Retirement Plans?

I just started to work for a mid-sized health care organization, and it turns out that they have 10 different plans with 10 different plan documents!

“Is there any reason in the world a not-so-large organization would be administering 10 separate plans? Just the 5500 filing process—all of the plans are subject to the Employee Retirement Income Security Act (ERISA)—which I am commencing now, is exhausting!” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:      

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The Experts answer to your question is a definitive “Maybe!” Although it is true that a significant number of plan sponsors probably sponsor more retirement plans than they truly need, there could be many reasons why 10 plans are necessary at your particular employer. These reasons include, but are not limited to, the following:

  • The plans are of certain plan types that cannot be merged. For example, 403(b) plans may not be merged with 401(k) or 401(a) plans;
  • The plans contain different provisions (e.g. different plan years, vesting schedules, or other important plan features) that would be difficult/impossible to consolidate into a single plan;
  • Some plans are separate to facilitate compliance testing. For example ADP/ACP testing can generally be conducted on a per-plan basis if the plans that are required to be aggregated pass coverage testing as a whole. In such a situation, it is possible that plans could fail ADP/ACP when tested together, but pass when tested separately; and
  • There are business reasons for maintain separate plans. For example, the plan sponsor may work with collectively bargained employees, and the collective bargaining agreements with those unions may dictate that a separate retirement plan be established for each bargaining unit.

Having said all of this, the Experts would suggest that you work with your plan adviser and ERISA counsel to examine whether 10 documents are indeed truly necessary, especially if this issue has not been reviewed in some time. The administrative costs of sponsoring 10 separate plans are likely to be prohibitive for a mid-sized employer, and the large number of plans increases the likelihood of plan defects and the liability associated with same. By conducting a review of their retirement plan structure, many plan sponsors have been able to successfully reduce the number of retirement plans that they administer.

Thank you for your question, and good luck!

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.  

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to rmoore@assetinternational.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.

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