So you missed the 7/31/22 deadline for restating pre-approved 401(k) plans…now what?
So you missed the 7/31/22 deadline for restating pre-approved 401(k) plans…
Now what? Employers who missed the deadline need to do two things… Decisions on whether to allow an employer to restate despite missing the deadline will be made by the IRS and will be determined on a case-by-case basis. Some exceptions may be made, and there are a couple of options available through the overarching IRS Employee Plans Compliance Resolution System (EPCRS). The first will require formal approval from the IRS through its Voluntary Correction Program (VCP), which permits a plan sponsor to pay a fee and receive the IRS’s approval for correction. Others may be given the opportunity to self-correct these failures. Through the second program option, the Self-Correction Program (SCP), plan sponsors are permitted to voluntarily correct failures without first obtaining formal approval from the IRS (see IRS Rev. Proc. 2021-30). The difference here is that the SCP does not require payment of fees or sanctions to the IRS, and this option is only available for employers whose defects have existed for less than the previous three years. Defects older than three years may only be corrected under the VCP. Let’s take a closer look at pre-approved plans – what are they, and what constitutes them? The terms of pre-approved (e.g. traditional retirement/401k) plans must meet the criteria set forth by the Internal Revenue Code Section 401(a) and regulations specific to that. It is possible to purchase retirement plans with pre-approved language that satisfies these requirements through third-party service providers and financial institutions. These types of plans include an adoption agreement and a basic plan document. The adoption agreement consists of many different formats, including eligibility, contribution types, and vesting. Basic plan documents include the non-elective provisions of the plan and general includes more technical language regarding the plan’s operation. So…what does this all mean? To understand the impact of missing the deadline for restatement of pre-approved plans, let’s take a look back. On May 23, 2022, the IRS issued an edition of Employee Plans News addressing the impact of missing the deadline to restate a pre-approved defined benefit or 403(b) plan. This same IRS guidance may be used in analyzing the failure to timely restate a pre-approved defined contribution plan. Based on this guidance, one of two outcomes will result: • Loss of Pre-Approved Plan Status: Failure to timely restate a pre-approved plan results in the plan’s loss of status as a pre-approved plan. Essentially, the employer can no longer rely on the pre-approved plan’s opinion letter from the IRS approving the plan document’s compliance with the tax code. It does NOT mean that the plan is automatically out of compliance with the tax code. Being a pre-approved plan is only one method of meeting the requirement to have an updated written plan document. • Individually Designed Plan Status: An individually designed plan can still satisfy the tax qualification requirements for a retirement plan. However, without the favorable IRS opinion letter from the pre-approved plan to rely on, the plan must be reviewed to determine whether there are form defects, especially with any prior interim or discretionary amendments. In determining whether the interim and discretionary amendments were timely and proper, the rules for individually designed plans would apply. In simple terms, what it boils down to is that failing to qualify as a pre-approved plan is not a qualification issue by itself. An employer’s lack of timely restatement of its pre-approved plan does not mean it couldn’t then qualify for an individually designed plan-it simply means that there would be additional written documentation required to meet the criteria for individually designed plans. Again, individually designed plans that fail to meet these specific requirements can be self-corrected under the provisions outlined under IRS Rev. Proc. 2021-30, Part IV. Ultimately, it is the determination of the IRS whether to allow it. For details on selecting and adopting a pre-approved retirement plan, making changes to existing pre-approved plans, tips for adopting pre-approved plans from a plan provider, and Pre-Approved Plan FAQs, visit the IRS website.
1. Review whether a correction will be required to maintain the plan’s favorable tax status, and
2. Implement any required correction.
