It’s Time Again to Restate Your Retirement Plans, According to the IRS

11/07/2014 / Mary Komornicka and Mark Geier

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someone in ‎your company has not been updating the record-keeper on a regular basis, some of that ‎information will be outdated.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
  1. 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.  ‎
  2. 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.  ‎
  3. 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.  ‎
  4. 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.  ‎
  5. 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.  ‎

Mary Komornicka

Attorney, Employee Benefits ‎

Jill Binder

Paralegal, Employee Benefits ‎

Mark Geier

Chair, Corporate Department ‎