It’s Time Again to Restate Your Retirement Plans, According to the IRS
Every six years, employers are required to restate their retirement plans. This includes 401(k) plans and all other qualified plans. (Plans that are “individually drafted” need to be restated every five years and are on a different schedule.) The deadline for completing this process is April 30, 2016, but as a practical matter, companies need to start the process soon.
The restatement is mandatory under IRS Regulations to maintain the tax-favored status of these plans.
Restatement is important to companies of all sizes and to plans of all description. What do you need to consider and do at this time?
- If you are using prototype plans, correct, update and modify as appropriate.
- If you have a customized plan, correct and update it.
- Reassess your compliance with IRS rules, and evaluate other risks.
- If you do not have a safe harbor plan, redesign your plan to minimize discrimination testing issues.
Updating Your Prototype Documents Plans
Most 401(k) plans are based on a prototype document that was pre-approved by the IRS. You probably received it from an insurance company, tax advisor or record-keeper. These are designed, in most cases, to be fairly flexible. If you are using a prototype document, make sure you review and make necessary corrections in the restated document. After several years, some of the information may be in error. Some of the more frequent mistakes are the following: a change in ownership, a change in the “control group,” and changes in some internal administrative practices.
Some risks occur merely because of the lapse of time since the last mandatory restatement in 2008. In 2015 or 2016, the company that manages your prototype plan (called a “record-keeper”) will usually update the plan based on the information that it has in its files. But if someone in your company has not been updating the record-keeper on a regular basis, some of that information will be outdated.
Finally, some problems are the result of communication errors between you and the record-keeper.
The cost of correcting any of these errors later can be very expensive to your company so we recommend that you take advantage of this time to carefully review your prototype agreement and make sure that all of the information is accurate. If you would like our assistance in completing this review, please let us know. We have significant experience with prototype plans.
Revising Your Prototype Plan Documents
The restatement gives your company new planning opportunities. Now is the time to review the available options and identify those that you would like to offer your employees. You may discover planning opportunities with your current plan or with a new plan. In many cases, the revisions might increase your competitiveness and lead to greater employee satisfaction.
First, begin by reviewing the options that your current plan offers. The more robust prototype plans may offer new options to employees: automatic enrollment, Roth contributions, Roth conversions, and various safe harbor provisions.
Next, if your plan has limited options, consider moving to a new prototype plan. Some prototype plans have almost no flexibility and you might consider changing your plan altogether. In today’s market, your company should have a more robust plan. It will improve your employee’s saving behaviors and help them plan for their future.
If your plan does not qualify as a safe harbor plan, redesign your plan to minimize discrimination testing issues. Discrimination tests compare the benefits offered to a company’s highly-compensated employees with the benefits that are offered to its other employees. If a plan fails discrimination tests, the company generally needs to distribute “over-contributions” to the highly-compensated employees, or increase its contributions to the other employees. Both are expensive. The restatement allows companies to redesign the plan to minimize those risks.
In short, this is the time to review your prototype plan to determine whether to move to a more robust plan, or take advantage of other features in your current plan offers, and perhaps reduce your risks.
Creating and Updating Your Customized Plan Documents
At this time, some employers choose to develop their own customized plans instead of using prototype plans. Many companies do not know that they can develop their own customized plan. Many advisors might discourage employers from exploring this option. But customized plans are not unusual.
Customization allows the company to choose from a variety of different options and to build a plan that offers enrollment, investment and other options that your prototype plan might not offer but will better match your firm’s objectives. In some cases, a customized plan might be developed for the purpose of improving the options available to the ownership group or a significant set of employees. An experienced employee benefits advisor will be able to provide guidance in developing qualified plans that serve both the employees’ and owners’ best interests.
Consistent Administration of Prototype and Customized Plans
This is also the time to review your plans to make sure that they are being administered according to your expectations. Common problems are participant loans, the definition of compensation and determining eligibility.
If the actual administration of your plan is out of synch with your expectations or your intentions, then the plan should be revised and restated to incorporate your actual expectations.
When to Restate
We recommend that you restate your plan now, and make the changes effective January 1, 2015.
While the law allows companies to restate their plans effective any date, it is administratively difficult to work with any date other than January 1. These annual deadlines are particularly important for “safe harbor” plans. In most cases, employers have “safe harbor plans.” These plans have specific features that eliminate the need to do annual discrimination tests. But a safe harbor plan can only be amended effective the beginning of the plan year.
If you restate your plan now and make the changes effective January 1, 2015, your employees will be able to take immediate advantage of the new features, corrections and improvements that you make.
However, if you delay making the changes, you may not be able incorporate any of the improvements or corrections until January 1, 2016.
So if you are considering making corrections to your prototype, moving to a more robust prototype, developing a customized plan, or simply making corrections or improvements to your plan, start now.
Your Next Steps / How Larkin Hoffman Can Help
- Contact your “record-keeper” or Larkin Hoffman to review your current plan to determine whether it has errors and whether it is being administered according to your expectations.
- If you would like to compare your prototype plan with a more robust plan, contact Larkin Hoffman. We have a prototype plan that has been preapproved by the IRS that has been designed to meet more companies’ needs. You might compare your prototype with the Larkin Hoffman prototype. Our staff will meet with your human resources staff to discuss the different options that you might offer to your employees—options that are already offered in the Larkin Hoffman prototype.
- We might be able to identify key options that are frequently available in the marketplace. You might survey your “record-keeper,” your employee benefits advisors, other plan administrators and your employees to see what options might be available. Identify those features that your employees would like to select.
- You may also retain us to identify potential risks with your current plan, such as designing the plan to minimize discrimination testing issues, complying with safe harbor requirements and defining compensation.
- Regardless of your decision, we can help you prepare a summary plan description and other plan documents and we can train your employee benefits and human resources staff. They’ll become familiar with current deadlines and notice requirements and be able to answer important questions accurately.
If you complete this process now, these changes can be made effective January 1, 2015.
We are fully staffed to meet your needs. Please call or email us with any questions. Now is the time to act.
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