John C. Hughes, The Daily Record Newswire
Most businesses, large and small, maintain a “401(k)” and/or “profit sharing” plan. Most of those plans exist on documents that are considered by the IRS to be “preapproved” documents. All preapproved 401(k) and profit-sharing plan documents must be restated in their entirety and properly adopted by the sponsoring employer(s) by April 30, 2016.
This issue affects every business that maintains a 401(k) plan. In this regard, it is the business itself that maintains the plan (and is responsible for the associated potential liabilities for violations of the law), not the plan service provider(s) that are retained by employer to assist with plan matters in certain respects.
The two year “window” for adopting new preapproved defined contribution plan documents opened in spring 2014. An employer’s prior adoption of the legally required stand alone amendments will not fulfill its document restatement obligation.
Businesses that do not adopt a restatement on time will suffer a “qualification failure.” A qualification failure generally results in a plan’s loss of its favored tax status. Additionally, if not remedied properly and in time, a qualification failure may result in the IRS’ imposition of significant monetary penalties on the employer.
Many employers failed to adopt a new restatement before the last restatement deadline in 2010. It is important for employers to keep their eye on the April 30, 2016 deadline in order to avoid unnecessary expenses, and the logistical burdens associated with undertaking to correct a qualification failure.
The document restatement must be accomplished properly. The new plan document should be carefully completed, and its terms consistent with the existing plan provisions and the law. The following are a few examples of issues for businesses to consider during this process:
• Was the plan timely updated for prior changes in the law?
• Does the plan properly reflect any design changes that were made over time?
• Is the plan achieving the businesses’ design objectives?
• Are the plan’s operations consistent with its terms?
• Do several business entities participate in the plan, and/or are there several business entities that are part of the “controlled group” or “affiliated service group?”
• If the plan is a “multiple employer” plan, does the plan document properly reflect that arrangement?
• Does the plan excludes certain groups of employees, such as part-time and/or temporary employees? This type of exclusion must be written in a legally permissible manner.
• Does the restated plan document properly reflect any previous plan mergers?
• A properly worded board of directors’ consent or resolution should, in most cases, be prepared and executed approving the plan document restatement.
• The restated plan document should appropriately and legally reflect any special effective dates, as well as any other special provisions unique to the particular plan.
• There are constraints relative to amending a 401(k) “safe harbor” plan mid-year. Employers should be sure to exercise caution relative to a mid-year restatement’s effect on a plan’s safe harbor status.
The IRS issues “determination letters” to employers generally approving a plan’s restatement. An employer that wishes to obtain a determination letter from the IRS relative to its preapproved plan document restatement must apply for such by April 30, 2016.
Employers should exercise caution in submitting determination letter applications to ensure that their plan is legally up-to-date and “clean,” and that the application is appropriately completed. Notably, there have been recent changes to the determination letter application process.
Any business that sponsors a preapproved defined contribution plan, which will be almost any business that maintains a 401(k) plan, should undertake efforts to ensure they properly complete the required restatement process within the parameters of the law.
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John C. Hughes is a shareholder in The ERISA Law Group, P.A. in Boise, Ida. He practices in the area of employee benefits/ERISA, primarily counseling and assisting employers with compliance issues relative to all types of benefit plans.
