IRS Announces New Corrective Procedure for Failure to Adopt a Plan Restatement

By Joshua A. Diveley

Retirement plan sponsors that adopted a defined contribution plan document pre-approved for use by the IRS generally must restate their plan in full every six years. The next restatement deadline is April 30, 2016. If a plan sponsor does not adopt a restated plan document by the deadline, the plan is considered disqualified and is no longer entitled to tax-favored treatment. This may reduce the permissible deduction for contributions to the plan and make it harder for employees to save for their retirement and make tax-favored rollovers of distributions to other plans or individual retirement accounts.

Previously, the only way an employer could correct a failure to adopt a pre-approved plan by the deadline was to complete a submission under the Voluntary Correction Program. A new option allows a financial institution or service provider to request a closing agreement on behalf of plan sponsors. These would be similar to a group submission under the VCP, but under these closing agreements the organization doesn’t need to have made a systemic error.

For more information regarding the new corrective option, see:

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What Type of Retirement Plans Should Employers Consider?

An Employee Benefits FAQ with Joshua A. Diveley.

With respect to qualified retirement plans, there are generally two types of plans to consider, one being the defined benefit plan and the other being a defined contribution plan.

A defined contribution plan is just that, it defines what the employer and you as the employee are going to contribute to the plan. What you end up getting at retirement is going to depend on what your contributions are and what those market returns are. If it does well, you have more. If it does not-so-well, you have less.

A defined benefit plan is going to be one in which the amount contributed each year is going to vary based on what the end benefit is going to be, so, regardless of what the market returns are, you are still going to know as an employee what your benefit is going to be when you retire. For example, you plan may say that at retirement if you have worked there for 20 years you will receive a 50% compensation benefit based on the average compensation over the last 3 years. So that would be an example of a defined benefit.

Based on those 2 types of main plans there are a lot of variations within each type.

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IRS Announces Deadline for PPA Restatement for Defined Contribution Retirement Plans

The IRS has issued Announcement 2014-16 indicating that employers sponsoring preapproved defined contribution qualified retirement plans, such as 401(k) and profit sharing plans, will have until April 30, 2016 to restate their plans in their entirety.

The IRS was expected to begin providing approval letters to firms preparing proposed plan documents on or about March 31, 2014. Each employer seeking to rely on those preapproved documents will then have until April 30, 2016 to adopt a restated version of the employer’s plan integrating the specific provisions it elects to have included in the plan. The 2016 deadline marks the end of the current 6-year restatement cycle used by the IRS to make sure plan documents are regularly restated by plan sponsors to comply with changes in law. Preapproved plans have been reviewed by the IRS based on the 2010 Cumulative List of Changes containing updates in the law since the prior restatement period. The current changes will include updates required by the Pension Protection Act (PPA) and Heroes Earning Assistance and Relief Tax Act (HEART).

April 30, 2016 also marks the deadline for employers to submit requests for determination letter for the restated plans, if desired, to confirm that the restatement as drafted based on the options elect is in compliance with law.

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