Plan Document Restatements Essential to Retirement Plan Compliance

Two of the key rules for retirement plans, according to Arthur A. Marrapese III, partner with Barclay Damon in Buffalo, New York, are that tax-qualified retirement plans must be documented and that plan documents must include language that complies with numerous Internal Revenue Code (IRC) provisions. 

Complying with the second rule can be a challenge, because the regulatory agencies that control retirement plans, such as the Internal Revenue Service (IRS) and the Department of Labor (DOL), frequently make changes that affect plans. In addition, enacted legislation can require retirement plan sponsors to update or amend their plan documents.

For example, the Setting Every Community Up for Retirement Enhancement (SECURE) Act became law on December 20, 2019. And just a few months later, President Donald Trump signed the Coronavirus Aid, Relief and Economic Security (CARES) Act into law on March 27, 2020. The pandemic spurred additional legislative requirements for retirement plans, but even less eventful years can bring multiple regulatory changes that affect plan documents.

Restatement Cycles

With that in mind, plan sponsors have options for plan documents. To start, sponsors can use pre-approved plans, which the IRS defines as “a plan sold to employers by a document provider such as a financial institution or benefits practitioner. The document provider is the ‘pre-approved plan provider.’”

An important benefit of having a pre-approved defined contribution (DC) or defined benefit (DB) plan document, according to Marrapese, is that the document provider—not the plan sponsor—requests IRS approval of the plan document. “When the IRS approves a retirement plan document template, it issues an opinion letter that states that the plan’s template language is ‘qualified’ provided the adoption agreement is correctly completed,” Marrapese explains. 

Plan sponsors may also use an individually designed plan document, which is usually drafted by an attorney. Individually designed plan documents are used when a plan has complex features or contribution formulas.

After the initial IRS approval, the IRS requires qualified plans to be updated—or restated—regularly to reflect regulatory and/or legislative changes. Pre-approved plan documents must be restated every six years. To avoid being overburdened by reviewing all plan documents at once, the IRS assigns plan sponsors to a restatement “cycle.” Under this outline, plan documents must incorporate changes that became effective since the last cycle. 

“The most recent cycle for [pre-approved] plans is for plan documents assigned to ‘Cycle 3,’” Marrapese says.

There used to be a rolling five-year cycle to submit individually drafted plans for a determination letter from the IRS, but that program has ended. The IRS does not automatically approve the form of an individually designed plan document as it does for pre-approved plans by issuing opinion letters on them, says Liz J. Deckman, partner with law firm Seyfarth Shaw in Seattle. Rather, she explains, the employer needs to submit an application for a favorable determination letter for the plan in order to have the IRS approve the form of plan.

“There are few opportunities to ask for a determination letter these days,” Deckman explains. “Other than plan termination, generally the only other way to get a letter on an individually designed plan now is if you have never received a determination letter on the plan before.”

All required changes for pre-approved plans can be found in the Cumulative List of Changes in Retirement Plan Qualification Requirements issued by the IRS, says Eric Droblyen, president and CEO of Employee Fiduciary in Mobile, Alabama. The list is available online at www.irs.gov/retirement-plans/cumulative-list-of-changes-in-retirement-plan-qualification-requirements. Cycle 3 restatements must only incorporate changes enacted prior to February 1, 2017, he adds.

For individually designed plans, the IRS issues a required amendments list (RA List) every year to inform plan sponsors and their document providers of changes that need to be made.

The Cycle 3 restatement period for pre-approved DC plans opened August 1, 2020, and closes July 31, 2022. For DB plans, it opened May 1, 2020, and ends January 31, 2025. By early fall 2021, plan sponsors and the organization that maintains their pre-approved plans should be progressing with the restatement, Deckman says. She suggests that sponsors who haven’t heard from their plan providers reach out to learn what the schedule is.

“If providers of plan documents have lots of different clients, they’re going to have a schedule where they’ve slotted different types of sponsors at different points in the year,” Deckman explains. “Sometimes they’re looking at perhaps the first quarter of next year or the second quarter of next year, [but] at least know where you are in terms of their restatement process.”

Required Steps

From a high-level perspective, the restatement process is straightforward. Anna Johnson, director of operations with third-party administrator (TPA) Ascensus in Brainerd, Minnesota, says that, ultimately, the plan sponsor is responsible for ensuring it has an updated document. The service contract with the plan document provider defines how it will support the sponsor.

Once the plan sponsor has reviewed the updated document and confirms the data is accurate, Johnson explains, it will need to officially adopt the restated document by signing it. In addition to an updated basic plan document and adoption agreement, the plan sponsor should also receive a copy of the IRS opinion letter and an updated summary plan description (SPD), as well as any forms or notices that may be required, Johnson adds.

If a plan is terminated before July 31, 2022, it should be restated before the effective date of termination using an approved Cycle 3 document, Marrapese says. The sponsor will also need to adopt amendments for applicable SECURE Act and CARES Act provisions, which are not incorporated into Cycle 3 documents. 

“For ongoing plans, SECURE and CARES Act amendments need to be adopted by the last day of the 2022 plan year—December 31, 2022, for calendar year plans—unless the plan is terminated before that date,” he adds.

Droblyen says TPAs like his firm normally will lead the sponsor through the restatement, which can go in several directions. Some plans will not make significant changes to their existing document. In those instances, Droblyen’s firm “maps over” the document’s previous version and adds only mandated changes. The process can be completed quickly using available software, he says. If the sponsor wants to make any discretionary changes, those are added and then the revised document is subsequently reviewed and signed.

Droblyen says restatements can be “a perfect time to make plan changes.” Including plan amendments during the restatement can help avoid incurring the expense of standalone amendment fees made later.

July 31 might seem far off, but sources counsel against delaying the work. Marrapese says plan sponsors should start the restatement process well in advance of the deadline, perhaps by the end of 2021. An early start will help “ensure that there will be sufficient time to complete a signature-ready document that accurately incorporates the plan’s design, accommodates the plan’s governance structure, and incorporates best practices that are designed to mitigate fiduciary litigation and liability risks,” he maintains.  

Steve Christenson, executive vice president with Ascensus, points out that most service providers are working on restatements now, with hopes to finish initial deliveries months before the July deadline.

“Our best advice would be to begin as soon as possible, as this process began in September 2020,” he says. “A sponsor should provide four to eight weeks lead time for a document provider to restate a document.”

What to Expect From the IRS?

Assuming the restatement process is completed properly and on time, what should a plan sponsor expect from the IRS? Nothing, says Droblyen. “That’s the beauty of an IRS pre-approved plan document—the IRS has already blessed it. So all the options in those documents have already been approved by the IRS,” he notes.

Christenson echoes that assertion, noting that IRS interaction takes place between the agency and the document provider.

However, things will not go as smoothly should July 31 come and go without a completed and signed restatement. At that point, Deckman says, the restatement is too late and the IRS could disqualify the plan. If that happens, amounts in the plan would become taxable and excise taxes and tax penalties could be assessed against the sponsor. “That’s a bad thing,” Deckman warns.

Should the deadline pass, the best strategy is to ask the IRS for forgiveness through its voluntary correction program, Deckman adds. The IRS will charge a fee, but submitting a correction would avoid the penalty inflicted if the agency discovered the post-July 31 adoption date during a plan audit.