Five things plan sponsors need to know about the 401(k) restatement cycle
As a retirement plan sponsor, you have a lot of responsibilities—including keeping your retirement plan document up-to-date with the latest legislative and regulatory changes. The Internal Revenue Service (IRS) requires that qualified retirement plans, like a 401(k), be entirely restated from time to time to incorporate these changes into the plan document.
Many third-party service providers facilitate the restatement process for their customers, but since the IRS dictates the 401(k) restatement cycle, your service provider has very little say when this process will happen. Service providers are working on the restatement process to get their customers’ plans restated within the required window. Keep in mind that the 401(k) restatement cycle is determined by the IRS and is not dependent upon how many years your plan has been in place.
Whether this is your first restatement cycle as a plan sponsor or it’s one of many, you may have a few questions; here are five you might be asking yourself about the upcoming 401(k) plan restatement cycle:
5 questions you may have about 401(k) restatements
What is a 401(k) plan restatement?
A restatement is a complete rewriting of the plan document to incorporate all required legislative rules that have changed since the last time the document was rewritten and re-papered. The change in operational rules are the result of new legislation or new regulations.
Why does my qualified 401(k) plan need to be restated?
Think of the plan document as the plan’s operational rule book. When those rules change, the rule book needs to be updated. Approximately every six years, the IRS requires an updated plan document to reflect the changes in the rules due to legislative and/or regulatory activity. Plans that don’t adopt an updated rule book (restate their plan document) will be subject to IRS-imposed penalties, including the possibility of revocation of the plan’s tax-favored status.
We know what you’re thinking: Don’t the mandatory plan amendments take care of this?
Not really. Even though a pre-approved plan needs to be restated every six years, the IRS still requires that a qualified plan be operated in accordance with the written plan document. Sometimes a statutory or regulatory change will affect a plan qualification requirement. In these situations, the IRS may require an interim (mandatory) amendment to correct the out-of-date language in the plan document. These amendments are called “interim” for a reason—they are designed to fill the gap between restatement periods.
How often do 401(k) plan need to be restated?
Most employers utilize pre-approved documents, which must be restated every six years. Pre-approved documents received IRS approval of the 401(k) plan document and meet all the plan regulations and requirements as outlined by the IRS. These plans were also previously called prototype or volume submitter plans. Generally speaking, these plans feature a base plan document and template-based adoption agreement.
Besides pre-approved plans, an employer may also use an individually designed plan, which is a custom-built plan just for that employer. Individually designed plans are not on a restatement cycle. Each year, the IRS issues a list of required amendments that must be incorporated into the individual designed document. The IRS will review individually designed plans under special circumstances, as well as when plans are first adopted or when they terminate.
If you are unsure whether your 401(k) utilizes a pre-approved plan document or not, reach out to your financial advisor on the plan or your 401(k) document provider.
What happens if I don’t restate my 401(k) plan?
Plan restatements are mandatory to remain in compliance and are not voluntary. If you fail to have your 401(k) plan restated on time, the consequences could be severe for both you as the plan sponsor and for any participants.
For starters, the IRS can disqualify your plan, which means all tax benefits are lost. Employer contributions may not be tax deductible, and employees lose the ability to defer contributions tax-free to the plan. Vested contributions also count in the current year’s income for participants, participants may not roll assets over from the plan to any other eligible retirement plan or IRA, vested employer contributions become subject to additional taxation, and the trust owes taxes on any trust earnings. From there, additional penalties and fees will likely be assessed by the IRS.
The IRS does allow self-correction for plan document failures (including nonamenders), as long as it’s not the initial failure to adopt the plan and the employer corrects the failure by the end of the second plan year following the year the failure occurred.
Do plan sponsors need to give employees notice that the 401(k) plan is being restated?
Employers should provide employees with a new Summary Plan Description after their plan has been restated.
Thinking about changing 401(k) providers?
The 401(k) plan restatement cycle is continually happening, which makes it a good time to consider evaluating your current 401(k) provider. If you have any questions, give us a call at 800-345-6363 or contact your financial advisor.
