2011 SunGard. Why Does My Qualified Retirement Plan Need to Be Amended or Restated?

Transcription

1 Why Does My Qualified Retirement Plan Need to Be Amended or Restated? Commonly asked questions about amending and restating retirement plans

2 A Guide for Employers Table of Contents Introduction... 2 Why do the laws affecting retirement plans continually change?... 2 Why do I need to keep amending my plan?... 3 When do I need to amend my plan?... 3 Why do I need to restate my plan?... 4 When do I need to restate my plan?... 5 What is the 6-year restatement cycle?... 5 What is the 5-year restatement cycle?... 6 Should my restated plan be filed with the IRS for a determination letter?... 6 What happens if I fail to amend or restate my plan on a timely basis?... 7 Should I consider any change in my plan design when I amend or restate my plan?... 7 Do I have to give all participants a new Summary Plan Description (SPD)?... 8 Conclusion

3 Introduction One of the legal requirements for maintaining a 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 pamphlet 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. We have prepared this explanation in question and answer format and have attempted to avoid technical jargon. 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. Why do the laws affecting retirement plans continually change? Americans are becoming more concerned about their retirement. Polls have indicated that retirement income security is second only to healthcare as the leading concern among Americans, particularly those who are at or near retirement age. Congress recognizes that, for many individuals, the most effective means of achieving adequate retirement savings is through a retirement plan where they work. 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 over the rank-and-file. In addition, federal labor laws ensure that retirement plan assets 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 2

4 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. Why do I need to keep amending my 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. As a result, the written terms of your plan may not always match the way your plan is currently being operated. In the past, the IRS has permitted fairly long delays between the time a plan s operation is changed to reflect a modification to the law and the time the written plan must actually be updated. 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. Under procedures adopted by the IRS, plan amendments will generally be required to be made within specified time frames (unless Congress provides for a longer delay or if there are compelling reasons for a delay). In most cases, these amendments are adopted on a goodfaith interim basis. These interim amendments are not usually reviewed by the IRS. The expectation is that periodically the plan will be completely restated and the restatement will be subject to IRS review. When do I need to amend my plan? Unfortunately, there is no easy answer to this question. 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 3

5 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. For example, if you have a calendar year plan and want to add a provision permitting in-service distributions at age 62 as of January 1, 2012, then the plan can make in-service distributions as of January 1, 2012 as long as the plan is amended to permit the distributions by December 31, However, certain plan amendments, such as amendments that might reduce or eliminate benefits, must be signed before their effective date. 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, 2012, then the plan would be required to operate in accordance with the law as of January 1, 2012, and an amendment would need to be adopted by the tax return due date for the 2012 tax year (e.g., March 15, 2013). 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. Why do I need to restate my plan? The number of plan amendments (i.e., separate tackon 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 2003 (for various laws such as the Small Business Job Protection Act of 1996). 4

6 When do I need to restate my plan? 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. Most employers will need to restate their plans every 6 years; however some plans will need to be restated every 5 years. The determination of whether a plan is subject to the 6-year restatement cycle or the 5-year restatement cycle can be complex and is beyond the scope of this pamphlet. However, as a general rule, employers using preapproved plans are subject to the 6-year restatement cycle and employers using individually designed plans are subject to the 5-year restatement cycle. Most employers use pre-approved plans and are therefore subject to the 6-year restatement cycle. A pre-approved 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. Since most employers use preapproved plans, the primary focus of this pamphlet is on the 6-year restatement cycle. What is the 6-year restatement cycle? As stated above, the 6-year restatement cycle applies to pre-approved plans and is likely the cycle that will apply to your plan. 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. Under the 6-year cycle, the underlying master plan language is submitted to the IRS in year 1. The IRS then takes 2 years to review and pre-approve all the master plans that were submitted. Once the plans have been pre-approved, the IRS will then provide a period, generally 2 years, for employers to restate their plans using the latest version of the pre-approved plan. 5

7 The first 6-year restatement cycle for defined contribution plans ended on April 30, Employers would then need to restate their plans again in another six years, and so on. Employers who sponsor defined benefit plans will need to restate their plans during 2010 to early 2012 (and then again in another six years). 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. What is the 5-year restatement cycle? Individually designed plans are subject to the 5-year restatement cycle. These are plans that may not fit on a pre-approved plan, such as Employee Stock Ownership Plans (ESOPs), cash-balance defined benefit plans, and more complex plans sponsored by unions or large corporations. Under the 5-year restatement cycle, a plan must generally be restated every 5 years. However, unlike the 6-year restatement cycle, the 5-year restatement cycle is not based on the type of plan (i.e., defined contribution vs. defined benefit). Rather, the cycle that applies to a plan is generally based on the last digit of the employer s federal taxpayer identification number (EIN). For example, employers who have an EIN ending in 1 or 6 were required to restate their individually designed plans by January 31, 2007 (and will be required to restate them again by January 31, 2012). Employers with an EIN ending in 2 or 7 were required to restate their plans by January 31, 2008 (and will be required to restate them again by January 31, 2013). The above are general rules and there are numerous exceptions. We will provide you with assistance to determine when your plan must be restated. Should my restated plan be filed with the IRS for a determination letter? The IRS has already reviewed the language used in a pre-approved plan. 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 pre-approved 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 it s not always clear. 6

8 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. 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 $300 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. What happens if I fail to amend or restate my plan on a timely basis? 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. 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 any change in my plan design when I amend or restate my plan? You should regularly consider whether your qualified plan meets your goals, as well as the goals of your employees. This is an ongoing process that should be done 7

9 regardless of when plans must be amended or restated. However, in order to be more efficient and reduce your costs, many practitioners may conduct a review of your plan as part of the restatement process. Do I have to give all participants a new Summary Plan Description (SPD)? Yes. The Department of Labor (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. Conclusion A qualified retirement plan is one of the best ways to provide adequate retirement income security for you and your employees. We realize, however, that amending and restating your plan can be burdensome and confusing. We hope this pamphlet helps you understand when and why plans must be amended or restated. Please contact us if you have any questions about your plan or the information in this pamphlet. 8

10 The information provided in this pamphlet is based upon complex requirements of the Internal Revenue Code and Treasury Regulations. It is provided with the understanding that the preparer is not engaged in rendering legal, accounting, or other professional services. Although care has been taken to present the material accurately, the preparer disclaims any implied or actual warranties as to the accuracy of any material herein and any liability with respect thereto.