Recent Acts Will Require Plan Amendments

Plan modifications brought on by the Coronavirus Aid, Relief and Economic Security (CARES) Act and the Setting Every Community Up for Retirement Enhancement (SECURE) Act mean there could be select changes to plan documents that require amendments.

However, changes differ depending on what type of plan an employer has. There are pre-approved plans that, in the past, have been referred to as either master and prototype (M&P) or volume submitter (VS) plans. According to the IRS, an M&P plan consists of a basic plan document containing non-elective provisions, an adoption agreement with elective provisions that an adopting employer selects, or a trust or custodial account. M&Ps may also be standardized or nonstandardized.

A VS plan is administered by a VS practitioner—or what’s more commonly called a provider now by the IRS—and may have a sample plan document that offers choices over plan terms, a trust or custodial account, or an adoption agreement with elective provisions.

Typically, the IRS now refers to both M&P and VS plans as “pre-approved plans,” which can be either standardized or nonstandardized.

Tom Meagher, a senior partner and practice leader of Aon’s Legal Consulting & Compliance team, notes that employers using these pre-approved plan types may see an update to their programs, to restate current adoption agreements and plan documents on their systems, in accordance with new regulations brought on by the CARES Act and SECURE Act. Until then, plan recordkeepers are responsible for properly, and timely, administering the provisions intended to apply to the pre-approved plan, he adds.

“Pre-approved plan providers may dictate which changes will apply to their pre-approved documents, or they may provide a choice for adopting employers to consider,” he continues. As an example, Meagher notes that most sponsors of pre-approved defined contribution (DC) plan documents may require adopting employers to incorporate the extension of the required minimum distribution (RMD) date to the April 1 following attainment of age 72 for participants who had not reached 70.5 before 2020.

Providers of the prototype plan will generate an amendment automatically, and then roll it out to adopting employers and other third parties for review, says Rachel Smith, an attorney at Goodwin Law. “The document provider answers any questions they may have—and usually recommends an attorney review it—and then they give the plan sponsor a deadline by which the document needs to be returned,” she says.

Due to these changes, the IRS has issued pre-approved plan language relating to RMDs specifically for pre-approved DC plans. This includes language designed for basic plan documents or for an adoption agreement to allow employers to select among options related to the application of the basic plan document provision, Meagher says.

Individually Drafted Plans

Individually designed documents are for retirement plans drafted specifically for one employer and are crafted exclusively for the plan. Companies will implement these plans if they have a unique employee population with a distinctive benefit or composition structure, explains Smith. With such a plan, employers may work with an adviser or an ERISA [Employee Retirement Income Security Act] attorney to keep informed on current law, and to make changes necessary and appropriate to preserve qualification status. An ERISA attorney would work with clients to implement the deadline and understand the client’s approval process, especially with end-of-year deadlines and constricted schedules, she adds.

“For example, the lawyer will tell the client there is a deadline at the end of the year, will generate a draft of the amendment according to the plan terms and will need to get information about when board meetings are coming up and what vacation and holiday schedules are, to make sure the right people are around to sign the document at the right time,” Smith says. “Most required amendments are required to be adopted by the last day of the plan year, which in most cases is December 31, which creates timing constraints because people break for the holidays.”

If qualified plan provisions of the SECURE Act or CARES Act apply to these specific plan types, then amendments are generally not required until the end of the 2022 plan year, and not until 2024 for governmental plans, Meagher says. However, if CARES Act provisions apply, the plan is required to operate in accordance to requirements under the act and will need confirmation from a recordkeeper to ensure the plan is being properly administered, he states.

Determination Letters

For DC and defined benefit (DB) plans, there is little to no ability to obtain a determination letter indicating the plan’s qualified status, since the IRS announced an end to the determination letter program, unless it’s for a plan’s initial qualification or for terminating plans, says Meagher.

In IRS Revenue Procedure (Rev. Pro.) 2019-20, the IRS opened a determination letter window for hybrid plans, including cash balance plans, and for plan mergers, which closes on August 31. For employers that would like to update their determination letter and obtain IRS approval of changes that may have been enacted since their last determination letter—whether those changes are statutory, regulatory or design, this hybrid/cash balance opportunity should be pursued before it closes, Meagher adds.

However, for determination letters relating to plan mergers, the determination letter application period applies to both DB and DC plans. “A ‘plan merger’ for this purpose means a merger or consolidation that combines two or more plans maintained by previously unrelated entities into a single individually designed plan,” he explains. “The plan merger must occur in connection with a corporate merger, acquisition or other similar business transaction among unrelated entities that each maintained its own plan or plans prior to the plan merger.”

Plan sponsors will need to look out for certain timing requirements that must be satisfied before submitting a determination letter request. For example, the plan merger has to occur no later than the last day of the first plan year that begins after the plan year that includes the corporate merger. The application must be submitted within a period beginning on the date of the plan merger and ending on the last day of the first plan year following the date of the plan merger, he says.

Key Deadlines

According to Smith, the only amendment required to be made in 2020 relates to hardship distribution rules. For example, employers can no longer require participants to suspend contributions for six months after a hardship distribution.

Important dates concerning CARES Act operational changes can vary depending on whether an employer chooses to apply some or all of the CARES Act plan provisions to its plans; the date by which the employer’s recordkeeper is in position to administer CARES Act changes; and various features of the plan, such as plan loans or in-service withdrawals, that may be impacted by the CARES Act’s changes, Meagher says. Additionally, many SECURE Act changes are required and are effective presently, but plan amendments may not need to be adopted before the last day of the first plan year beginning on or after January 1, 2022, or, again, 2024 for governmental and collectively bargained plans.

Relaxed deadlines are likely meant to assist workers affected by the pandemic, Smith says. “Plan documents don’t have to be updated in most cases before 2022, which is a nice accommodation by the IRS to let us take the time needed to get those changes into plan documents while still accommodating the needs that the COVID pandemic has produced for plan participants,” she explains.