Every six years, all IRS pre-approved plans must be restated to a new plan document to retain the plan’s tax-qualified status.
Most 401(k) plans and certain other Defined Contribution plans have been operating on an IRS pre-approved plan document for years. The restatement each 6-year cycle keeps plan documents current with legislative changes that must be adopted and gives plan sponsors an opportunity to incorporate new plan provisions that may not have been previously utilized or newly available. The deadline to restate a pre-approved plan is July 31, 2022 in order to avoid losing tax-qualified status. Timely restatement avoids paying penalties and filing fees for late compliance.
Third Party Administrators that maintain plan documents will be reaching out to their clients about the current restatement period and planning the timely completion of this process. Some of the new provisions in the Cycle 3 documents will include:
- Windsor Decision (new definitions of marriage and spouse)
- Reduction of Safe-Harbor contributions
- Using forfeitures to pay for Safe Harbor contributions
- In-plan Roth Conversion
In the past, all ESOPs had individually designed plan documents and an IRS pre-approved document was not an option. However, with the new Cycle 3 documents, a company that sponsors an ESOP may be able to use a pre-approved document for the first time. There are some use limitations. For example, ESOPs with preferred stock cannot use the pre-approved plans and some ESOPs with very custom or unusual provisions may find that a pre-approved plan format is not a good fit. However, use of a pre-approved plan has certain advantages including readability (due to the checkbox format of the plan’s adoption agreement) and the ability to rely on the Document Provider’s IRS opinion letter. The letter issued by the IRS provides some assurance that the document format meets the requirements for favorable tax treatment.
For recently passed legislation such as the Final Hardship Rules, SECURE Act and CARES Act (including special Required Minimum Distribution rule), these provisions are not part of the Cycle 3 document, and have separate plan amendment deadlines by the end of the 2021 and 2022 plan years. Many plans sponsors have already adopted the final hardship rules. Document packages covering the SECURE Act and CARES Act will be provided when available, prior to the adoption deadline.
Please feel free to reach out to Blue Ridge ESOP Associates if you have any questions regarding your plan document and amendment requirements.