Employers who have adopted a pre-approved Pension Plan – either traditional Defined Benefit or Cash Balance – must restate their plans by March 31, 2025 to stay in compliance with the Internal Revenue Code (“Code”) and Internal Revenue Service (“IRS”) regulations.

If you’re not part of our retirement plan world, both the law and regulations can be complicated and confusing. To help you understand what’s required and how to take advantage of the required Restatement process, here is a Plain Language explanation in a Question and Answer format.

Q. Why do I need to restate my Defined Benefit Pension Plan or Cash Balance Pension Plan at this time?

A. The IRS established a system that requires employers who have adopted a pre-approved retirement Plan to restate their Plans once every six years to reflect changes in the Code and IRS regulations. This Restatement is called Cycle 3 because it is the third time the IRS has used this system.

Q. How will the Restatement process be handled?

A. Our firm like other retirement plan service firms sponsors a series of retirement Plans for which favorable approval has been received from the IRS. Using a pre-approved Plan can provide employers with an efficient and cost-effective retirement plan document rather than having a document that is individually drafted by an attorney.

Q. What will change in the document?

A. As mentioned above, pre-approved Plans must include the requirements from the prior laws, new laws added by Congress and regulations issued by the IRS. Prior amendments that were executed previously are also included. These are called “Good Faith Amendments” and are not totally new, but up to now have not been formally approved by the IRS.

Q. Do the Cycle 3 documents include SECURE, CARES and SECURE 2.0 language?

A. No. Because these Acts were signed into law after the deadline for the submission of Cycle 3 Pension Plan documents for IRS approval. Instead, the required language for SECURE and CARES is in a separate document addendum. A SECURE 2.0 addendum/amendment will be available after the IRS reviews and approves the language.

Q. Can employers rely on the IRS Opinion Letter?

A. Yes. But it is important to note that pre-approved Plans are only approved as to form. They still must be operated in accordance with the Code and IRS regulation to enjoy favorable tax treatment.

Q. Why does the Restatement consist of?

A.  Our Restatement process consists of the required documents and resources to help the fiduciaries manage their Plans more effectively and efficiently. We refer to it as our “Restatement Portfolio” and includes the following:

Q. What is the Operational Checklist mentioned above?

A.  Several operational provisions that were part of the former Plan document have been moved into a separate Operations Checklist. They are not required to be part of the Plan document. We have included them as a supplement to the Plan document and can be changed without the need for a Plan amendment

Q. Are there any special considerations when replacing one Plan document with another?

A. Yes. Special care must be taken to ensure that certain benefits called “protected benefits” are not unintentionally eliminated or reduced. Protected benefits include forms of distributions such as lump sums and annuities and timing of distributions such as an early retirement provision.

Q. Can the restatement process be used to make changes to the Plan?

A. Most certainly. the Restatement process provides the opportunity to review the Plan to determine if there are provisions that better align with Plan Sponsor objectives and better serve the employees. Plan changes can be efficiently made as part of the Restatement.

Q. Why are we discussing the Restatement now if the deadline is March 31, 2025?

A. The March 31, 2025 deadline may seem like a long time away. But in order to ensure that there is sufficien time to review the Plan as discussed above, we’re beginning the Restatement process now.

Q. Does a terminating Plan need to be restated?

A. Practically speaking, yes.  Plans that are terminating must be updated at the time of termination to reflect all applicable qualification requirements then in effect.  This means the Plan must have all relevant amendments at the termination date. Using a pre-approved Plan is the most efficient method of accomplishing this.

Q. Is the Restatement mandatory?

A. Yes.  A retirement Plan keeps its tax-favored status only by maintaining a document with language that satisfies the law and regulations and operates under the terms of such document.  Failure to restate the document before the March 31, 2025 deadline can result in disqualification of the Plan and/or significant penalties.

Q. What happens if i fail to restate my Plan on a timely basis?

A. If you miss the deadline for restating your Plan, then you can avoid Plan disqualification by using an IRS correction program. If the IRS discovers the missed deadline before you take corrective action, the cost associated to update the Plan will be significantly higher. And starting this year they will. Form 5500 for 2023 now requires employers to provide the serial number of the pre-approved Plan they have adopted. It’s safe to say that the IRS will be looking for the right response.

Q. What does it cost for the Plan Restatement?

A.  The cost of restating a Plan will vary depending on such factors as the type of Plan, provisions, and administrative requirements. No two Plans are exactly alike so an appropriate fee is based on the specific facts and circumstances. The cost to restate the Plan for IRS compliance may be paid by the employer or from Plan assets if permitted by the Plan document.

KEY TAKAWAY

It is the responsibility of the Plan fiduciary to ensure that the Plan is updated and signed by the  March 31, 2025 deadline. Because the Restatement process can be time consuming, it is important to begin Planning to ensure the Restatement deadline is met. And as mentioned above, it’s now a compliance question on Form 5500.

Here’s why we think so.

Since the passage of ERISA in 1974, retirement plan legislation has been a series of technical and tax-related changes. The Revenue Act of 1978 started out the same way with its focus on:

• Increasing economic growth through income tax reductions to stimulate consumer and investment spending, and

• Improving equity in the tax system and simplifying it.

Sometimes during the legislative process an unrelated provision is added to the law. That’s what happened here. Section 401(k) found its way into the Internal Revenue Code. In one fell swoop, this new Code Section replaced what was then the primary employee retirement saving vehicle, “After-Tax Thrift Plans”, which were retirement savings plans to which employees made contributions on an after-tax basis.

This new Section 401(k) allowed employees to make those contributions on a pre-tax basis. It also provided a comfort level to employees that their accounts would not be locked up until the traditional age 65 retirement age. It also permitted access to those funds with in-service distributions at age 59½, upon severance from employment, or because of hardship or disability.

SECURE 2.0 which Congress passed 46 years later went significantly further. Passed at the tail end of 2022 as an extension of the 2019 SECURE Act, there were 92 provisions in approximately 400 pages with four major themes:

• Expanding participant coverage.

• Encouraging retirement savings.

• Helping participants preserve income.

• Simplifying retirement plan rules and administrative procedures.

SECURE 2.0 is also different for two other reasons.

First, there are optional and mandatory provisions. A plan sponsor can adopt the optional ones, or not, based on the plan’s objectives. The mandatory provisions, on the other hand, must be timely adopted by plan amendments to maintain the plan’s tax qualification.

Second, the effective dates of the various provisions are staggered. Provisions are effective in 2023, 2024, 2025, and beyond. These staggered effective dates provide breathing room for the IRS to provide guidance, for the retirement plan industry to make the necessary changes to administrative systems and documents, and for plan sponsors to make the best decisions for their retirement plans.

Details to follow.

Photo by Aleix Ventayol on Unsplash

Kids will outgrow their clothes. Sometimes that happens with retirement plans.

If you have a SIMPLE IRA, it may have fit in the beginning. But if you want to change to a 401(k) plan in 2024, you need to take action by November 2. That’s the date that employers must provide notice to their employees that 2023 will be the last year for the SIMPLE IRA, and that it will be replaced by a 401(k) plan in 2024.

But keep reading because a new tax law which providres for a mid-year replacement is discussed later.

Reasons to Change

A SIMPLE IRA is relatively easy and inexpensive to administer. 401(k) plans, on the other hande, are more complicated and expensive but have features that businesses (and business owners) can take advantage of. 401(k) plans can:

• Provide larger tax-deductible contributions.
• Favor owners and highly compensated employees.
• Require more employment service to be eligible to participate.
• Provide a graded vesting schedule.
• Allow for plan loans.
• Provide better creditor protection.
• Be able to buy tax-deductible life insurance.

Extended Deadline

As mentioned above, the November 2 deadline has been extended. Starting in 2024, the new SECURE 2.0 tax law allows an employer to replace a SIMPLE IRA mid-year with a safe harbor 401(k) plan. The 401(k)-replacement plan must be effective as of the termination date of the SIMPLE IRA. There are two planning considerations to the new law:

401(k) Deferral Limit. Employees would be restricted to an aggregate elective deferral limit including catch-up contributions during the replacement year. The limit is based on the number of days covered in each plan.

Rollovers/Transfers. The tax rules regarding a rollover or transfer from a SIMPLE to another qualified retirement plan have stayed the same. In general, an employee cannot transfer money tax-free to a 401(k) plan during the 2-year period beginning when the employee first participated in the SIMPLE. The 2-year period begins on the first day on which the employer deposits contributions in the employee’s SIMPLE.

The Right Answer

There isn’t one. Just like the visual metaphor used for this blog post, it’s whatever fits best.

The deadline for restating a 401(k), profit sharing, or money purchase pension plan has come and gone.  So, what can an employer do? It was, after all, the employer’s responsibility to ensure that the plan was updated and signed by July 31, 2022.

But if an employer did miss that deadline, there is a Plan B. But first let’s put July 31, 2022, into context. That’s the date the IRS required pre-approved plans to be updated for the last 6 years of legislative and regulatory changes.

It’s referred to as a “Cycle 3 restatement” in the retirement plan world and allows the employer to have “reliance” that the document meets the current requirements of the law and regulations. Here is a link to our FAQs from last year that will bring you up to date.

So what’s the impact on an employer’s plan that didn’t restate its plan by the July 31, 2022 deadline? It’s a good news-not so-bad news situation.

The good news is that the IRS does not consider that the failure to timely restate the plan will itself disqualify it from favorable tax treatment.

The not-so-good news is that the failure transforms that pre-approved plan into an individually designed plan upon which the employer can no longer rely as a qualified plan. The Plan B mentioned above would be for the employer to adopt corrections under the IRS Self-Correction Program and consider whether to obtain formal approval through its Voluntary Correction Program.

You may be wondering if there is a Plan B, is there also a Plan C? Not exactly, and it’s certainly not voluntary. It’s the IRS’ Audit Agreement Closing Program (“Audit CAP”) which is the end result of a plan audit. If the IRS finds the plan to be non-compliant, the employer would be required to submit an updated plan to avoid disqualification. The cost of which would be significantly more than if the missed deadline was dealt with on a voluntary basis.

The takeaway should be obvious: Contact them before they contact you.

Photo Credit: © Can Stock Photo / bdspn

From the beginning of 401(k) plans, the retirement industry has focused on the performance of individual funds as the key driver of retirement readiness. But a study by the Putnam Institute in 2006 and repeated in 2012 concluded that increasing deferral rates have the greatest potential impact on a 401(k) participant’s account balance at retirement

The Putnam Study, Defined Contribution Plans: Missing The Forest For The Trees?, showed that fund selection was actually the least important factor compared to asset allocation, account rebalancing, and increased deferrals. The most important? Increasing deferral rates.

Putnam arrived at this conclusion by simulating different portfolios of mutual funds in a hypothetical, but typical, 401(k) plan. Here is how the study can be viewed from a plan sponsor’s perspective:

Photo by Dino Reichmuth on Unsplash

Because there are now five generations in the workforce for the first time:

• Traditionalists—born 1925 to 1945
• Baby Boomers—born 1946 to 1964
• Generation X—born 1965 to 1980
• Millennials—born 1981 to 2000
• Generation Z—born 2001 to 2020

The challenge to create and provide a 401(k) plan is arguably more difficult now than it ever was.

401(k) plans are part of the big picture which includes dealing with such questions as

• What kinds of challenges are present for today’s employers?
• How do generational workforce differences affect our ability to manage people effectively?
• What are the traits, beliefs, and life experiences that mark each generation, influencing how they work, communicate, and respond to change?

Dr. Bea Bourne, DM, is an expert on generational differences and generational responses to organizational change. She is a faculty member in the School of Business and Information Technology at Purdue University Global. In the infographic that follows, she shares her research regarding:

• How today’s talent stacks up by generation, including their defining values, beliefs, and worldviews
• The significant historical events that shaped each generation
• How to best motivate and manage workers from each generation

In the 401(k) and 403(b) world, we’ve got a tool. It’s called Plan Design and it’s been significantly enhanced by the recently passed SECURE 2.0 legislation. There will be more about that to follow as IRS guidance and recordkeeper platform capabilities develop.

In the meantime, here’s that infographic:

“Compensation” is a timely topic now for employers with retirement plans. It’s that time of the year when decisions are made about retirement plan contributions. The starting point for those decisions is “compensation”.

That starting point is a straightforward matter when employees are involved. It’s some variation of taxable wages reported on Form W-2.

But for sole proprietors, partners in a partnership, or members of a limited liability partnership, compensation is more complicated. It’s “Earned Income”, the Internal Revenue Code’s version of a calculus equation. Here’s why.

Take a look at the standard retirement plan definition of “Earned Income” and you’ll see what I mean:

“Earned Income” means the net earnings from self-employment in the trade or business with respect to which the Plan is established, for which personal services of the individual are a material income-producing factor.  Net earnings will be determined without regard to items not included in gross income and the deductions allocable to such items.  Net earnings are reduced by contributions by the Employer to a qualified plan to the extent deductible under Code section 404.  Net earnings shall be determined with regard to the deduction allowed to the taxpayer by Code section 164(f) for taxable years beginning after December 31, 1989.

It’s a set of calculations best left to your accountant, but here are three basic concepts you should keep in mind.

The Basics

First, the Internal Revenue Code considers sole proprietors, partners in a partnership, and members of an LLC taxed as a partnership as employees for purposes of participating in a retirement plan. This means even though they are owners, they cannot establish their own retirement plans to the exclusion of other employees or partners.

Second, net earnings for these individuals include the partner’s distributive share of partnership income or loss (other than some separately computed items) and any guaranteed payments received from the partnership.

Three, for the aforementioned limited partner, net earnings from self-employment include only the guaranteed payments the individual receives for services rendered to or for the partnership.

Takeaways

As a third-party administrator of retirement plans, we offer a few takeaways for you to consider.

1. Basis of 401(k) Contributions. Partners or members of LLCs taxed as partnerships often make 401(k) contributions during the year based on guaranteed payments. But at the end of the year, they find out that the partnership or LLC has a net loss. Thus, they have no earned income for retirement plan purposes and cannot make any 401(k) contributions or receive any employer contributions. Sometimes it’s better to wait until the year-end to know that there will be sufficient earned income.

2. Related Businesses. Sometimes for tax purposes, there is a structure of related LLCs that participate in the retirement plan. Thus, members of the related LLC will receive income or losses from more than one. These amounts need to be netted for purposes of determining earned income.

 3. Control Groups. On a related (pun intended) note, entities that are members of a control group must be taken into account irrespective of whether they are participating employers. Not only for purposes of determining earned income but also for the purposes of meeting ERISA compliance requirements.

Under-contributing or over-contributing contributions to their retirement plans can create issues. Sole proprietors, partners, and LLP members should always review their situation with their accountants before making a contribution.

What exactly is a Restatement?

Pre-approved plan documents are required to be rewritten, approved by the IRS, and adopted by plan sponsors every six years. This process is known as a Restatement and it allows the document language to be updated for legislative changes and amendments that occurred since the last document was written.

The IRS has separate cycles for defined contribution plans, defined benefit plans, and 403(b) plans. The defined benefit restatement window recently closed on July 31, 2020,  and the Restatement window for defined contribution plans began shortly thereafter. This restatement is being referred to as the “Cycle 3 restatement” because it is the third time defined contribution plans had to be restated.

What types of retirement plans must be restated?

Cycle 3 Restatements are required for profit-sharing plans, 401(k) plans, and money purchase plans. In addition, some ESOP and church 401(k) plans may be able to use a pre-approved plan for the first time with this Restatement. Plans that currently use an individually designed plan may also choose to adopt a pre-approved plan during this cycle.

Has your Cycle 3 document been approved by the IRS?

Yes. The IRS has issued an opinion letter for our Cycle 3 plan document, which means it has been reviewed by the IRS and has been deemed to meet the legal and regulatory requirements for a qualified retirement plan.

What does “IRS approved” actually mean?

It means that the employer has “reliance” that the document meets the current requirement of the law and regulations. There are two important caveats. First, the plan must still be operated in compliance with its document. Second, plan sponsors adopting a pre-approved plan may not make any changes to the document other than making allowable elections or filing in the provided blanks.  Reliance would be lost in either situation.

Does the document include recently passed legislation?

Several laws have passed since we received our Cycle 3 approval and could not be included in the new document. The new laws are the SECURE Act and the CARES Act. The new laws will be added as amendments to your plan when IRS guidance is received.

Has the IRS required any structural changes?

Yes. In the past, the IRS had two pre-approved document programs available: prototype and volume submitter. Those programs have been replaced with one IRS pre-approved program that incorporates the options of both. The IRS also required that the Trust Agreement be “unbundled” from the Plan document. In prior documents, the IRS permitted the Plan and Trust to be part of the same document. There are now two documents required as part of the Cycle 3 restatement process: 1) a Plan document that must be adopted by the employer, and 2) a separate Trust Agreement that facilitates the use of an institutional Trustee.

Does the plan document need to be restated if the plan is terminated before July 31, 2022?

The IRS requires that plan documents be brought up to date with current laws and regulations before they can be terminated. The termination of a plan accelerates the due date, i.e., July 31, 2022, for document compliance. A plan restatement is usually the most efficient way to accomplish this.

Will the restatement change the format of the plan’s Summary Plan Description for participants?

Yes. The Summary Plan Description (SPD) must also be updated with the restatement. The new SPD will provide eligible employees with current information about the plan’s features and rules. The SPD must be provided within 90 days of an employee becoming covered under the benefit plan; however, if the plan is new, the SPD can be provided within 120 days

Will the Restatement change the way a plan is administered?

The plan can be administered just as it was in the past. The restatement will be designed to preserve all existing discretionary plan provisions. In addition, the restatement process provides the opportunity to benchmark your plan and determine if cost and benefit improvements can be made.

What happens if an employer fails to restate its 401(k) plan by the July 31, 2022 deadline?

Recent changes in the law and IRS procedures allow an employer to self-correct, i.e., restate the plan, to maintain its tax-qualified status if the following requirements are satisfied: (1) the correction is completed or substantially completed by the last day of the third plan year following the plan year in which the failure began; (2) the plan or plan sponsor is not under examination by the IRS (unless the correction is substantially corrected at the time that the plan or plan sponsor is under examination); and (3) the plan is the subject of a favorable determination letter.

The July 31, 2022 deadline for defined contribution plans such as 401(k), Profit Sharing, ESOPs, and Money Purchase Plans to be restated is not that far away. You’ll find the details here.

If you miss the deadline to restate your qualified retirement plan, the IRS can disqualify it, and take away all its tax benefits. This means contributions might not be deductible or employees will have them immediately included in income. Therefore, restating your document should be a high priority. The IRS does provide a “late adopter” procedure for employers who missed the deadline to requalify the plan. However, IRS User Fees and additional professional fees make the late adopter procedure substantially more expensive than restating the plan before the deadline.

Now here’s where the Carpe Diem, or Seize the Day!, part comes in. The Restatement will update the plan for all law changes since the last Restatement six years ago.

The 401(k) industry hasn’t stood still either. In the recent years, there have been plan design enhancements, technology improvements, fund changes, provider consolidations, more effective employee communication tools, etc., etc.

Use the required Restatement process as an opportunity to see if you can make your plan better.

Picture Credit: © Can Stock Photo / blasbike

ERISA record retention may not be of those sizzling retirement plan topics for some folks. But please don’t stop reading.

It’s an important issue in today’s ERISA’s environment in which Plan Administrators and other fiduciaries must meet complicated compliance reporting requirements, oversight from regulatory agencies, and sometimes litigation.

So here is some basic information about document retention for ERISA plans in a Q and A format.

What are the legal requirements?

The short answer is that all plan-related materials should be kept for a period of at least six years after the date of filing of an ERISA-related return or report, and the materials should be preserved in a manner and format (electronic or otherwise) that permits ready retrieval. In addition, all records that support the plan’s annual reporting and disclosure should be retained.

What documents should be retained?

There is a potpourri of ERISA documents that should be retained. Some, but not all, include the following:

• Original signed and dated plan document and all original signed and dated plan amendments.
• Copies of all corporate or partnership consents.
• Copy of the most recent determination letter from the IRS.
• Evidence of the plan’s fidelity bond;
• Documentation supporting the trust’s ownership of the plan’s assets;
• Copies of all communications to employees, e.g., Summary Plan Descriptions, Summaries of Material Modifications, and any other materials provided to participants.
• All financial reports, including Trustees’ reports, journals, ledgers, certified audits, investment analyses, balance sheets, and income and expense statements.
• Copies of Form 5500.
• Copies of nondiscrimination and coverage test results.
• Payroll records used to determine eligibility, contributions, and vesting.
• Copies of benefit calculations and vesting.
• Copies of all documents relating to plan loans, withdrawals, and distributions, including spousal consents, if applicable.
• Distribution records, including Form 1099s.
• Corporate income tax returns to reconcile the employer’s tax deductions.

Who is responsible for retaining plan records?

While it is fairly common for a Plan Administrator to contract with outside service providers, such as our firm, to provide certain reports and prepare the 5500 filings, the Plan Administrator remains ultimately responsible for retaining adequate records that support these reports and filings. In addition, the Department of Labor requires employers to maintain records sufficient to determine the amount of benefits accrued by each participant such as payroll and other employee census data.

What are best practices?

Instead of relying on the “6-Year Rule” discussed above, best practices would be to maintain certain records for the life of the plan. The thicker and more accessible the paper trail, the easier it will be for the plan to respond to an inquiry from a participant or the Internal Revenue Service and the Department of Labor. Both agencies can request information from “back in the day.”  It’s far easier to have the records in the first place than to have to recreate them.

THE TAKEAWAY

Plan Administrators should work with their service providers to design and maintain a record retention plan. Be sure it covers both paper records and electronic data. Once you have a record retention (and a destruction) plan, integrate that plan into your plan administration process.