Approximately every six years, the IRS requires that pre-approved qualified retirement plans update (or restate) their plan document to reflect recent legislative and regulatory changes. Plan restatements are divided into staggered six-year cycles depending on the type of plan (e.g. defined benefit plans or defined contribution plans, such as 401(k) and 403(b) plans). In Announcement 2020-7, the IRS confirmed that the next restatement cycle for pre-approved defined contribution plans is a 24-month period that began August 1, 2020 and will close on July 31, 2022. This restatement cycle is known as the “Cycle 3” restatement, as it is the third required restatement under the pre-approved retirement plan program.

What is a plan restatement? A restatement is a complete re-writing of the plan document. Along with mandatory regulatory changes, the restated document incorporates all voluntary amendments adopted since the last time the document was updated.

What is a pre-approved document? A pre-approved document is one that has fixed provisions and pre-approved choices that can be selected by the plan sponsor. The fixed language and choices have been reviewed and approved by the IRS.

Why is a plan restatement needed? Plan documents are drafted based on laws and regulations imposed by Congress, the IRS, and the Department of Labor (DOL). Plan documents must be updated to remain in compliance with changing laws and regulations. Since the previous restatement cycle ended on April 30, 2016, there have been several regulatory and legislative changes that impact retirement plans. To assist with the restatement process, the IRS issues a “Cumulative List of Changes,” instructing what must be included in the restated document. For this current cycle, the Cumulative List of Changes was issued in 2017. As a result, the list does not include any recent changes due to the SECURE Act or CARES Act. These changes will be addressed in separate good-faith amendments rather than in the Cycle 3 restated plan documents.

What if a plan was just established? The restatement cycle is set by the IRS without regard to a plan’s initial effective date. Since the Cycle 3 document language was just recently approved, even newly-established plans may need to be restated.

What if a plan is terminating? The IRS requires that all documents be brought up to date with current laws and regulations before they can be terminated. As a result, your document must be amended and/or fully restated as part of the plan termination process.

What happens if a plan is not restated? Plans that do not adopt a restated plan document by the July 31, 2022 deadline will be subject to IRS-imposed penalties. Failure to timely restate the plan will also jeopardize the plan’s tax-qualified status.

Can restatement fees be paid from plan assets? Since the plan document restatement is required to maintain the plan’s tax-qualified status, the DOL allows the restatement fee to be paid from plan assets.

This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.