“I think the key piece of advice to give to the plan sponsor and adviser communities is that everyone should approach the mandatory restatements as an opportunity—not as some difficult task that must be completed as quickly or painlessly as possible,” Adam C. Pozek, partner at DWC ERISA Consultants, tells PLANSPONSOR.

Pozek’s firm specializes in Employee Retirement Income Security Act (ERISA) consulting, and has expertise in the area of amendments and restatements for defined contribution (DC) plans operating under pre-approved master and prototype (M&P) and volume submitter (VS) documents. He says the retirement plan industry has entered the last of three two-year phases of the six-year mandatory plan restatement schedule established and enforced by the Internal Revenue Service (IRS).

Overall, Pozek suggests mandatory restatements should be used as a time to think deeply about a plan’s goals and objectives, and how operations can be structured to promote better outcomes for plan participants. Current deadlines established by the IRS give employers until the end of April in 2016 to finish the restatement process, Pozek says, noting that it’s “very easy to think that’s a long time away, but deadlines approach very quickly, and there’s a lot of work that goes into an effective restatement.”

“During the first two years of the cycle, the document vendors put together their documents,” Pozek explains. “The vendors will be making sure they include all the appropriate changes related to new laws, new guidance and provisions, and so forth. In the middle phase of the six-year cycle, all of the documents are submitted to the IRS for review.”

The IRS takes two full years to review everything to make sure the new documents meet the agency’s requirements, he notes, and there is typically some back-and-forth between the IRS and the document vendors during this time.

“Then, heading into the final two years of the cycle, which is where we are now, they release the documents to the practitioner community as a whole,” Pozek says. “So those of us in the practitioner community have the last two years in the six-year window to make sure we get all our clients up to date. As you can imagine, it’s a major project for the industry, because pretty much every DC plan has to be restated during this two-year window.”

Pozek says he couldn’t pin down exactly how many retirement plans are on the six-year cycle for using preapproved plan documents, but suggests it’s “a vast majority of defined contribution plans in the United States.” Plans that do not use preapproved documents must be restated every five years, he adds, noting that the population of individually designed plans continues to dwindle.

“The big issue the industry is focusing on in the current restatement is the changes that came into effect due to the Pension Protection Act [PPA],” Pozek says. “That’s going to involve, primarily, going back and picking up more detailed language regarding a lot of the new laws and regulations that have been implemented into retirement plans since 2006.”

For example, automatic enrollment and automatic deferral escalation features both got a major boost coming out of PPA, Pozek notes. “Many plans that wanted to get these features in place had to put some type of good-faith amendment into their plan documents saying, ‘Hey, we want to take advantage of this great new feature that was approved by regulators, and here’s how it will work.'”

Now, with the mandatory restatement, plans are required to go back and provide a fuller description of how their plans are operating post-PPA. “You’re basically dotting your i’s and crossing your t’s in the legal descriptions of the way the plan is operating, covering things like automatic enrollment and the other pieces coming out of PPA,” Pozek says.  

Another area of considerable attention beyond PPA in the ongoing restatements process is the creation of in-plan Roth features, he added. “This was passed as part of the fiscal cliff legislation a couple of years ago, if you recall,” Pozek explains, using in-plan Roth features as an example where restatements are more of an opportunity than a burden.  

“In speaking with our clients, there wasn’t a huge amount of interest in implementing the in-plan Roth features right away,” he says. “But now that we’re guiding our clients through plan restatements anyway, we’re looking closer at that.

“Again, this goes back to treating restatements as an opportunity,” Pozek continues. “So with in-plan Roth, we are asking, why not put it in? This gives the participants yet another element of flexibility to help them get engaged and have success in the retirement plan, so we feel good about moving ahead on it. We’re restating the plan anyway, so we might as well put it in.”

One important theme to keep in mind during plan restatements is that more specificity is not always better. Instead, Pozek says, flexibility is the name of the game.

“There are certainly some areas where the IRS says you have to be very specific about how the plans will operate, and in those situations we absolutely help our clients understand the implications of their choices, and make sure the necessary language is in there,” Pozek says. “But our general philosophy in working on plan documents for our clients is to build in as much flexibility as possible. That way, if the client has a changing business need, the plan already has the flexibility built in to adapt as needed without having to go back and amend the plan again.”

Buddy Horner, manager of retirement plan solutions for Bronfman E.L. Rothschild, says the most important question to ask plan sponsors during the restatement process is: “What are you trying to accomplish with your retirement plan?”

“Based on the answers, we can make recommendations on plan design features and how the documents should be constructed,” Horner said.

Like Pozek, Horner said the biggest areas of focus in the current restatement process are automatic plan design features and in-plan Roth provisions. He also shared with PLANSPONSOR more opportunities to revisit the plan design during the restatement process:

• Safe Harbor Plan – Should your plan become a safe harbor plan? This is a good question to consider at restatement time, especially if the sponsor is regularly failing ADP/ACP tests or already making a profit sharing or matching contribution. The current contribution, either match or profit sharing, may already be similar to or exceed the safe harbor contribution requirement. A safe harbor plan may help eliminate the need to make refunds or allow individuals to save more in the plan with testing issues out of the way. Additionally, it will reduce administrative burden by eliminating the need to perform certain year-end testing.

• Revamp Cash-Out Policy – If the plan currently doesn’t have a $5,000 cash out limit, the plan fiduciaries may wish to consider this policy. This is especially important for plans that have close to 100 participants, as plans with 100 employees or greater must execute an annual audit. Terminated employees with balances in the plan count as participants and could trigger the administrative burden and expense of an audit. Terminated employees with small balances can be cashed out or rolled over into an individual retirement account (IRA) to keep the participant count less than 100. Accounts with a balance of $1,000 to $5,000 must be rolled over to an IRA. Accounts with a balance of less than $1,000 can be cashed out by the employer if the participant is located. The $5,000 cash out limit can also help employers who have a workforce with a higher turnover rate. It can be a burden to the employer to constantly locate terminated employees with low balances.

• Review Provisions and Remove Unnecessary Legacy Provisions – If the plan still has a joint and survivor annuity distribution option, fiduciaries may wish to remove it, as it can be burdensome to provide the proper notices, select an annuity provider, and monitor spousal consent, for a feature that is seldom used. When restating the plan, sponsors may also wish to review their loan policy. Most retirement plans have a loan feature. The feature can be attractive to younger employees who want to know they can access their savings if needed. But if your plan offers a second loan or even multiple loans you should examine whether they are worth keeping. The purpose of the plan is to save and having to administer multiple loans can be an administrative burden and detrimental to participants trying to save for retirement.

• In-Service Withdrawals – If the plan does not offer in-service withdrawals for participants at age 59½, fiduciaries may wish to consider adding this feature. The feature can benefit someone who the company may wish to keep on part-time or who may wish to scale back prior to full retirement. He or she will have access to their retirement savings to supplement their income if needed.

• Review Discretionary Profit Sharing Allocation – Plan sponsors should also review their discretionary profit sharing allocation method to make sure it is in keeping with how the company wishes to reward individuals at the firm. Common allocations methods include pro-rata allocations, in which everyone receives the same amount of profit sharing. This can be an expensive allocation since, in order for owners to maximize their contributions, eligible employees would need to receive the same contribution amount. Other employers use a Social Security integrated allocation, a method that allows employees making above the wage limit ($118,500 for 2015) a higher profit sharing allocation because their compensation above the limit is not taken into account for Social Security purposes. This plan design allows some favorable treatment of the highly compensated employees (HCEs) in a plan. Finally, there is the new comparability method. This method allows for different percentages of profit sharing for each designated group of employees. This allocation has become very popular, Horner says. The owners may achieve the maximum allocation by providing up to 5% of contributions to the employees. There is additional non-discrimination testing required, however, when this allocation is used.

Horner says thinking deeply about all these points will help keep plan sponsors and other fiduciaries from running afoul of the IRS regulations. Failure to keep plan documents up to date and in compliance could result in plan disqualification, taxes and penalties, he adds.

“The priority is to create a retirement plan that best serves your company and employees,” Horner concludes.

According to Pozek, it is important to maintain good documentation before, throughout and after the restatement process.

“If you’re audited by the IRS, it’s very possible that they may ask to look back at restatements that were made over time,” he notes. “It is a very important factor—and even though the various record retention requirements might allow plan sponsors to purge their records after a certain period of time, we feel the general rule for plan documents should be to essentially plan to keep them more or less in perpetuity. You never know what questions could come up in the future about whether a current or former employee is entitled to a certain benefit, for example.”

Being able to reference the historical documents and to be able to see what the plan provided at certain points in time will go a long way in satisfying IRS auditors, he adds, especially when documentation includes insights about why certain decisions were made.

“Certainly if there are any significant changes made to plan provisions within the restatement window, this is an area where you’ll want to retain any meeting minutes that you can, to have the documentation around the reasoning that went into the decision,” Pozek explains. “This can be very helpful when questions come up down the road. And you know, with electronic storage, that’s an opportunity for sponsors to get rid of the binders and binders of old plan documents. It doesn’t have to be a hard copy—it just needs to show clearly that the documents were signed, and when they were signed.”

Pozek concludes by stressing that collaboration is incredibly important throughout the restatement process, especially from the advisers, auditors and other service providers who know their clients well.

“It’s likely that the plan committee will be looking at the plan from one perspective, and then there is the sponsor’s individual perspective, and then there could be the auditor who does the annual testing, and the adviser has input to add as well,” Pozek says. “It’s a really good idea to get all of these perspectives together early in the process and have a full conversation. That way you’re going to really bring out any nuances that may be important, which could be overlooked if everyone is operating in a silo.”