Retirement Plan Restatements - A Primer
General Information About the "Written Plan Requirement"

A principal requirement for maintaining your qualified retirement plan is that the plan be in writing. The written plan sets forth the eligibility requirements for participation, the benefits, and when those benefits may be distributed. In addition, the plan must include numerous other provisions required by the Internal Revenue Service (IRS) and the Department of Labor (DOL). These provisions generally relate to the operational requirements that must be followed in order to remain qualified and to protect the rights of participants.

One consequence of the written plan requirement is that you must amend your plan if you wish to change any of its provisions. In addition, you must amend your plan to reflect changes in the laws governing retirement plans. In some cases, these changes may be handled with "short" tack-on amendments to the plan. In other cases, however, the plan must be rewritten in its entirety (this is referred to as a restatement).

We are providing you with this information because most retirement plans will need to be restated over the next several years. It's important that you understand why your document must be restated.

However, please contact us if you do not understand any of the following explanations or if you are uncertain about the impact of recent laws on your plan.

Tax breaks for employers who sponsor retirement plans have been the primary way that Congress has promoted retirement savings. But the tax laws require that plan provisions be fair and not favor the higher paid employees, even the rank-and-file. In addition, federal labor laws ensure that employee savings are protected from fraud and abuse.

We therefore have multiple laws and multiple regulatory agencies administering them. In addition, there are differing views in Congress. At one extreme is the philosophy that employees should be responsible for saving on their own. The other end of the political spectrum is the belief that employers should be required to provide for their employees' retirement security.

The result is a continual change in the laws due to the constant flux of our political climate, as well as other factors such as changes in the age of our population, corporate scandals, the federal deficit, and even technology. Thus, there are frequent changes in the law but in most cases they are not drastic. In many cases, these changes affect the underlying operation of plans and may not be noticeable by most employers and employees.

Requirements for Amending Your Plan

The law requires that a qualified retirement plan be in writing. This means that as the laws change, your plan must generally be amended to reflect the changes. An immediate amendment is not always required. Congress or the IRS usually provide a period of time after the effective date of a new law for plan sponsors to amend their plans to reflect any changes. The IRS, however, has recently decided that shortening these delays will help foster better compliance with the law because plan sponsors will become more quickly aware of the changes that affect their retirement plans. You may have noticed that there was a required amendment for almost every plan in 2005, 2006 and 2007, a change from the last required amendment dates of 2002/3.

New procedures adopted by the IRS, require plan amendments to be made within specified time frames and are adopted on a "good-faith" interim basis. These interim amendments are not usually reviewed by the IRS. The expectation is that periodically, the plan will be completely restated and that the restatement will be subject to IRS review.

The IRS has provided general deadlines for adopting (i.e., signing) amendments. There are, however, numerous exceptions to these rules.

The general IRS rule is that if the amendment is a voluntary amendment (i.e., a change to a plan that is not required under the law), then the amendment must be signed by the end of the plan year in which the provision is effective

However, certain plan amendments, such as amendments that might reduce or eliminate benefits must be signed before their effective date. There are similar rules for employers who wish to adopt a "safe harbor" type 401(k) plan.

The deadline to adopt an amendment reflecting a change in the law is generally later than the deadline to adopt a voluntary amendment. For most plans, the deadline to adopt a required amendment is the due date of the employer's tax return, including extensions, for the year that ends after the effective date of the change. For example, assume you have a plan that uses the calendar year as its fiscal and plan year. If there is change in the law effective as of January 1, 2008, then the plan would be required to operate in accordance with the law as of January 1, 2008, and an amendment would need to be adopted by the tax return due date for the 2008 tax year (e.g., March 15, 2009). Again, there are numerous exceptions to these general rules. In most cases, these exceptions will require that you adopt the amendment sooner than the date required under the general rules.

When Amendments Become Restatements

The number of plan amendments (i.e., separate tack-on amendments) can become unwieldy due to the frequency of changes to the laws. As the number of amendments increase, it becomes more difficult to read and understand the terms of the plan. In addition, some changes in the laws may require a review of the overall design of your plan to ensure it meets your needs. These, as well as other factors, may require that your plan be restated in its entirety.

The IRS regulations can also require that your plan be restated. Typically, this has happened several years after the enactment of major legislation affecting retirement plans. For example, the IRS generally required plan restatements in 1989 (for the Tax Reform Act of 1986) and in 2003 (for various laws such as the Small Business Job Protection Act of 1996).

The IRS recently implemented new rules regarding the restatement of plans. The goal is to even out the workload of the IRS and provide some predictability on when plans must be restated. The method the IRS adopted is to require that plans be restated according to a "staggered" approach. Employers using "preapproved" plans are subject to the 6-year restatement

Plan Sponsors that are Innovative Pension Clients use "pre-approved" plans and are therefore subject to the 6-year restatement cycle. A "preapproved" plan is a document that is used by many employers and is reviewed by the IRS for legal sufficiency prior to the time it is adopted by any of those employers. These plans are generally referred to as prototype plans or volume submitter plans. An "individually designed" plan is one where the IRS has not reviewed the terms of the plan prior to the adoption by an employer.

Under the 6-year restatement cycle, plans will generally need to be restated once every 6 years. However, there are different 6-year restatement cycles for defined contribution plans (profit sharing, money purchase, 401(k) profit sharing, target benefit) and for defined benefit plans. The reason for the different cycles is to provide staggered deadlines for updating and IRS review.

The 6-year restatement cycle for defined contribution plans began in 2005. Thus, the IRS is expected to provide the pre-approval in early 2008 and employers will be required to restate their defined contribution plans in 2008 and 2009. Employers would then need to restate their plans again in another six years (2014 and 2015), and so on. For defined benefit plans, employers will likely need to restate their plans in 2011 and 2012 (and then again in 2017 and 2018).

While the exact dates may fluctuate, they will not move very much. Thus, employers using pre-approved plans can now count on a plan restatement being required at least once every 6 years. We will provide you with assistance to determine when your plan must be restated.

Should My Plan be Filed With the IRS for a Determination Letter?

The language used in your "pre-approved" plan is just that. Thus, employers using "pre-approved" plans automatically have assurance that the language used in their plan satisfies the IRS requirements (assuming no changes are made to what was approved). However, there are other IRS requirements that are not always satisfied simply by using "preapproved" language. In many cases, plans can be designed to automatically meet these other requirements. If that is the case, then you may not want to incur the expense of submitting your plan to the IRS for a "determination letter." But its not always clear. Many sponsors do still submit their plans to the IRS for review. There are two types of review that are available:

1. review of the terms of the plan to make sure it includes all required language, and
2. review of some of the processes used in the actual operation of the plan (these generally relate to whether a plan discriminates against non-highly compensated employees). The IRS will send you a "determination letter" if its review process results in approval of your plan.

Review of Language and Process is more expensive than just Language!

The "determination letter" can be viewed as a type of insurance policy. If you follow the approved terms of the plan and the operational processes that were submitted for review (if such processes were submitted), then the IRS will not disqualify your plan. This is true even if the IRS made a mistake in approving a particular plan provision or process (as long as the determination letter application was accurate). In other words, you are permitted to rely on the "determination letter" with respect to the operation of your plan unless and until there is a change in the law or regulations.

The IRS generally charges a fee to review a "determination letter" application. This fee is between $200 and $1,800, depending on the plan's design and the type of plan document. However, this fee may be waived for certain small employers that establish new plans. Innovative Pension charges an additional fee to prepare the document package for submission and prepare all the demonstrations and documentation required for a process letter.

Oops, My Restated Document Wasn't Signed by the Deadline. What Now?

If you fail to meet the deadline for amending or restating your qualified retirement plan, the IRS can disqualify the plan and take away all of its tax benefits. This means contributions might not be deductible or employees will have them immediately included in income. Therefore, restating your plan on a timely basis must be a high priority. Signing your document following timely delivery by Innovative Pension is vital!

If you miss the deadline for amending or restating your plan, then you can avoid plan disqualification by using an IRS correction program.

Under this program, the IRS will require that you pay a sanction (as well as update your plan). The sanction can vary depending on the circumstances. However, it is significantly higher if the IRS discovers the missed deadline than if you voluntarily go to the IRS when you discover the missed deadline.

Should I Consider Design Changes When it is Time to Amend My Plan?

Your plan should undergo regular reviews to make sure it meets your goals, as well as the goals of your employees. This is an ongoing process that should be done regardless of when plans must be amended or restated. However, in order to be more efficient and reduce your costs, Innovative Pension will contact you to conduct a review of your plan as part of the restatement process.

Do I have to give Participants a new Summary Plan Description (SPD)?

The DOL requires that employees be informed about any material changes that are made to your plan. In many cases, this means that you provide employees with updates to the SPD as changes are made to the plan. In addition, the DOL also requires that you restate the SPD periodically. It is generally more efficient to satisfy this requirement by rewriting your SPD at the same time your plan is restated.