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
Volume Submitter Plans: Volume submitter
plans may look like individually designed documents, but they consist of
language that has been, to a large extent, pre-approved by the IRS. Volume submitter plans
can be modified for an adopting employer and therefore 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.
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).
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
- 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.
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)
Special rules apply to plan sponsors that want to change from an
individually designed plan document to a pre-approved plan document or vice
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 and the adopting employer, 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 as to the standardized language of the plan document only. However, adopting employers 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.
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
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
- 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
- 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
- Made permanent the increased contribution and deduction limits passed
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.
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
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