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
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
- 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.
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
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.
The actual restatement deadline will partly depend on the type of
document being utilized and the type of retirement plan being
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
- 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
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
- 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
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
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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