It’s that time again!
Time for what, you ask? To participate in that never ending ritual of
qualified retirement plan restatements! As legislation affecting
retirement plans is enacted, the Internal Revenue Service (IRS)
requires all plan sponsors to restate or "rewrite" their plans to
conform to current law.
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA),
which was signed into law in June 2001, introduced sweeping changes to
the retirement plan arena. The restatement deadline is now upon us to
incorporate the EGTRRA provisions into qualified plan documents.
Some of the key provisions of EGTRRA are:
- Increased benefit and contribution limits;
- Increased elective deferral limits;
- Increased compensation limit;
- Created a "catch-up" provision for older workers, allowing
individuals age 50 and older to make additional elective deferrals;
- Liberalized the rollover rules;
- Created the Roth 401(k); and
- Created additional incentives for small employers to offer
retirement plans to their employees.
Background and History
After new tax legislation is enacted, the law is analyzed by the
IRS to determine how it will affect qualified plans in actual
operation. This analysis usually takes years, and practitioners may be
left to operate their plans on a "good faith" basis during this
period. In other words, plans are required to be operated in the best
possible way based on the prevailing understanding of the current law
even though official regulations and/or guidance has yet to be issued.
As a result, many plan sponsors have adopted "good faith" amendments
to bring their plans into temporary compliance with EGTRRA pending
this restatement period.
Over the last few years, a significant amount of guidance and other
relative information has been released from the IRS about how and when
plans were to be amended for EGTRRA.
Types of Plan Documents
All qualified plans are required to have a written plan document.
The plan document can take various forms including:
Individually Designed Plan Documents:
This type of plan document is custom designed to meet the plan
sponsor’s specific needs. An individually designed plan offers the
greatest degree of flexibility possible.
Volume Submitter Plans: Volume
submitter plans may look like individually designed documents, but
they consist of language that has been pre-approved by the IRS. Volume
submitter plans generally offer more flexibility than prototype plans
but not as much as individually designed plans.
Prototype Documents: Prototype
plans are also pre-approved by the IRS and come with two types of
adoption agreements–standardized and non-standardized. A standardized
prototype is more conservative and prevents the plan sponsor from
designing a plan that will not satisfy any of the various coverage or
discrimination tests, provided it is operated in accordance with its
terms.
Non-standardized plans offer additional flexibility, including the
ability to exclude certain forms of compensation for allocation
purposes or exclude certain employees from plan or contribution
eligibility, within the boundaries of IRS standards.
For the first time, the IRS is allowing prototype documents to
include age-weighted, age-based and comparability allocation formulas.
Previously, plan sponsors desiring to use these allocation formulas
needed to utilize a volume submitter or individually designed plan
document.
Protected Benefits
Special care must be taken to ensure one plan document does not
blindly replace another plan document. For example, if a prototype
plan is used to restate an individually designed plan, there are
special issues to consider such as ensuring certain benefits, called
"protected benefits," are not accidentally eliminated or reduced.
Protected benefits include forms of distributions (such as lump sum
and annuities) and timing of distributions (such as early retirement
provisions).
Restatement Documents
Once the plan has been reviewed, additional requested changes have
been made (if any) and the restated documents are drafted, they should
be read very carefully. The final signature-ready documents may
consist of the following:
- A restated plan document;
- A resolution adopting the restated document;
- A separate trust document (in some cases); and
- An adoption agreement (for prototype documents).
The plan’s summary plan description is also required to be updated
and will need to be distributed to all participants and beneficiaries
to inform them about the restated plan’s provisions.
Deadlines
The actual restatement deadline will partly depend on the type of
document being utilized and the type of retirement plan being
restated.
There is a staggered cycle for submitting documents to the IRS.
This staggered approach applies both to individual retirement plan
sponsors (who adopt plans to benefit their own employees) and
retirement plan drafters (who design prototype and volume submitter
plans which get approved to be utilized by retirement plan sponsors
around the country).
Volume Submitter and Prototype Plans
(collectively referred to as pre-approved plans by the IRS):
Pre-approved plans need to be submitted once every six years.
Pre-approved defined contribution plans were recently approved and may
be utilized for restatements up through April 30, 2010. Pre-approved
defined benefit plans will follow in about two years.
Individually Designed Plans: These
plans have a five-year staggered cycle beginning in 2006 depending on
the last digit of the employer’s taxpayer identification number. The
IRS has created five cycles: A, B, C, D and E. Each cycle will create
a 12-month period in which plan sponsors of individually designed
plans may submit their plan documents to the IRS for approval. Prior
to each cycle, the IRS announces on what issues plan sponsors may
request a ruling.
Currently, Cycle C is underway (February 1, 2008 through January
31, 2009) for single plan sponsors that have a 3 or an 8 as the last
digit of their taxpayer identification number or sponsors of Code
Section 414(d) governmental plans.
Special rules apply to plan sponsors that want to change from an
individually designed plan document to a pre-approved plan document or
vice versa.
IRS Determination Letter
In order to receive a measure of assurance that a given plan is in
full compliance, as it relates to the documents, a plan may be
presented to the IRS to receive a "determination" as to its
acceptability and qualification under current pension law. To receive
a determination letter, the plan must be submitted to the IRS along
with standard forms and supporting data.
Pre-approved plans, which meet the IRS’s standards, are issued
favorable opinion letters by the IRS. Adopting employers of
pre-approved plans may generally rely on the opinion letters without
applying for their own determination letter. Sponsors of pre-approved
plans that have coverage or nondiscrimination issues or have made
modifications to the document will generally want to apply for a
determination letter.
Plan Restatement Cost
The cost of restating a plan will vary, depending primarily on the
type of plan. Some variables that may influence plan restatement cost
are:
- Nature of plan design;
- Nature of plan sponsor demographics;
- Nature and number of contribution types;
- Type of plan document structure; and
- Preparation of IRS determination letter submission, if
applicable.
Since no two plans or companies are exactly alike, an appropriate
fee is generally determined through overall plan evaluation. Necessary
expenses to restate the plan for IRS compliance may be paid from the
plan assets if permitted by the plan document.
Determination Letter User Fees
The IRS charges a fee to review the plan and issue a determination
letter. This fee is called a "user" fee and ranges from $300 to $1,800
depending upon the type of plan, the type of document being utilized
and the scope of the request.
A Form 5307 (pre-approved plans) submission carries a user fee of
$300 to $1,000. A Form 5300 (individually designed plans) has
additional complexities and the user fees are between $1,000 and
$1,800 for single retirement plan sponsors.
There is an exemption from the user fee for certain small employers
who sponsor a plan that has at least one non-highly compensated
employee and, for defined contribution plans, the plan was effective
on or after January 2, 1997.
Pension Protection Act of 2006
President Bush signed the Pension Protection Act of 2006 (PPA) into
law in August 2006. Some have called this tax act the most sweeping
reform of pension legislation since ERISA was enacted in 1974. Indeed
it contained many adjustments to the rules affecting defined benefit
and defined contribution plans including:
- Enhanced a number of the rules around the funding of defined
benefit pension plans;
- Liberalized the rules around funding such that plan sponsors can
contribute more heavily in positive economic years and build a
"cushion," keeping their plan solvent in more difficult times;
- Created clear rules around automatic enrollment in defined
contribution plans;
- Mandated additional participant disclosures;
- Expanded hardship distributions to meet the financial needs of
any person who is listed as the participant’s beneficiary under the
plan;
- Provided greater access to professional advice about investing
for retirement; and
- Made permanent the increased contribution and deduction limits
passed by EGTRRA.
We are a number of years away from officially restating retirement
plans for PPA. However, the IRS will likely mandate amendments to be
adopted in the coming years for existing retirement plans to insure
that the PPA rules are being followed ahead of the official
restatement.
Conclusion
Sponsoring and maintaining a qualified retirement plan is a serious
matter. So many individuals, participants and beneficiaries alike,
eagerly look forward to the day when they will realize their hard
earned benefits. Protecting these benefits is something to be taken
seriously.
Ensuring the tax-favored status of those benefits is the
fundamental principle upon which the restatement requirement is
founded. We are committed to providing the support, attention and
professional expertise needed throughout this restatement period to
make it a positive experience for all.
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