Tegrit Group: How to get the most from your retirement plan restatement Featured

11:20pm EDT December 22, 2013
Bonny Lightner, J.D. Manager, Technical and Legal Compliance, Tegrit Group Bonny Lightner, J.D. Manager, Technical and Legal Compliance, Tegrit Group

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If your company sponsors a pre-approved defined contribution retirement plan, such as a 401(k), money purchase or profit sharing plan, your plan documents will need to be completely revised and restated sometime between May 2014 and April 2016.

The IRS requires this restatement process every six years to incorporate all of the regulatory and legal changes that have been imposed by Congress. Without it, the plan will lose its tax-favored status.

Your retirement plan administrator should be having a dialog with you about this already, says Bonny Lightner, J.D., Manager of Technical and Legal Compliance at Tegrit Group.

“We try to get to people right away, especially if they haven’t done anything with their plan in the past six years,” she says. “If plan sponsors know in advance, they can budget for it and have time to be able to really look at it.”

Smart Business spoke with Lightner about what employers need to know regarding restatements, and how to take full advantage of this opportunity.

Which plans must undergo restatement?

About 80 percent of all retirement plans rely on pre-approval letters from the IRS, where the IRS gives its ‘blessing’ to a plan document format with certain limited elections for plan provisions. While all plan documents are extremely complex, a pre-approved document can make a plan less expensive to create and operate than an individually designed document.

All pre-approved defined contribution plans must undergo the restatement process during the upcoming two-year period.

What does the restatement process involve?

This process involves the document drafter — such as a third-party administrator — reviewing, rewriting and updating the plan and summary plan descriptions (SPD), and then assembling and delivering the plan, SPD and related policies to the plan sponsor for approval and signature. Related policies may include separate loan policies, qualified domestic relations orders policies — which are used as part of divorce settlements to divide up a participant’s 401(k) benefits — or withdrawal policies.

How else can business owners benefit from going through a restatement, aside from retaining their IRS tax-favored status?

The plan restatement process is an opportune time for a comprehensive plan review. Don’t just update and restate the document, have your document drafter take an in-depth look at the plan in order to see if it is really meeting your needs. Use this time to:

  • Confirm the document provisions match the actions of how the plan is being operated.

  • Identify whether changes are necessary or wanted going forward, such as wanting to add a Roth feature.

  • Enhance the plan design to be more in line with your objectives, such as tax and retirement objectives, based on workforce demographics. For example, if a person is 50 years or older, he or she can defer catch-up contributions on top of his or her regular deferral amounts. If an employer sees its workforce is aging, the company might want to add that.

  • Maximize the value of the plan by making sure that it still meets the needs of your company and its employees.

This type of consulting may or may not be part of the restatement fee, but either way it’s something to strongly consider. Otherwise, six months down the road, the plan sponsor might say, ‘I really don’t like X provision.’ The change will then require an amendment — and amendments have a fee.

Even if you love your plan the way it is and want to keep all plan provisions the same, you still must have your plan updated during the restatement period from May 2014 to April 2016. The fee to restate the plan for IRS compliance may be paid from the plan’s assets if the plan document permits.

Remember, failure to restate a pre-approved plan could result in loss of the plan’s tax-favored status with the IRS. This in turn could result in loss of deductibility of employer contributions to the plan, immediate recognition of income to plan participants on vested account balances and loss of tax-exempt status to the plan’s trust. Missing the restatement deadline is a serious matter.

Bonny Lightner, J.D., is manager of Technical and Legal Compliance at Tegrit Group. Reach her at (330) 983-0560 or bonny.lightner@tegritgroup.com.

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