Seizing the Advantage with Plan Restatements
It’s a regular event that catches many employers off-guard. With a little preparation, however, 401(k) sponsors can prepare for and even take advantage of this IRS requirement.
Every six years, the IRS requires 401(k) sponsors to restate plan documents if they use a pre-approved prototype or volume-submitter plan as most employers do. Retirement plans can become unwieldy with the addition of “snap-on” amendments required by new laws and regulations. Restating the plan makes it cleaner and easier to administer.
A new restatement cycle began August 1, 2020, but you probably won’t be contacted by your Third Party Administrator until next year as the cycle runs through July 31, 2022. If you act now, you can be ready to enhance your plan when your TPA calls. Undertaking a thoughtful review can help you identify changes to benefit employees and your organization.
A few things to consider and discuss with your TPA or advisor before restatement:
Eligibility/Entry Dates – Does your plan help you recruit valuable employees? Have you lost a valuable recruit due to participation requirements or heard complaints from employees? Your competitors may require minimal or no service for new hires to participate in their 401(k) plans. They may also have frequent entry dates into the plan. Are your plan’s eligibility requirements competitive for your industry?
Participation Rates – Will your employees be ready to retire? Consider adopting automatic enrollment and escalation features to encourage participation and savings. Under the SECURE Act, businesses with 100 or fewer employees receive tax credits if they adopt automatic enrollment for the first time after January 1, 2020. Best practices include automatically enrolling participants at 6 percent and escalating them to 10 percent in subsequent years.
ROTH Deferrals – Increasing numbers of 401(k) plans offer a ROTH deferral option in addition to a pre-tax deferral option. ROTH accounts allow participants – after reaching age 59 ½ and having their deferrals invested for five years – to withdraw these savings and any investment earnings tax-free. If your plan doesn’t include a ROTH option, now is a good time to add this feature.
Employer Contributions – Sponsors have many contributions options. Matches encourage participants to save; non-elective contributions to all participants allow employers to fulfill “gateway” requirements if they wish to direct profit-sharing contributions to certain groups of employees. Safe Harbors – which allow plans to pass discrimination testing and highly compensated employees to defer to the maximum allowable IRS limits – are many and varied, with some permitting a vesting schedule. (A vesting schedule requires participants to fulfill a length of service requirement before they “own” employer contributions.) And, for the company that may at some point want to direct profit-sharing contributions to certain groups of employees, now may be the time to add a new comparability or cross-tested feature to the plan.
Considering your plan’s ability to pass testing, your organization’s financial position and its contributions goals will help you consult with your TPA or advisor to determine the contributions design that will best serve your company.
In-Plan ROTH Rollover – While this feature is not frequently used, it provides flexibility for financial planning. The feature allows participants to move savings from their pre-tax account to their ROTH account in the 401(k) plan. They will need to pay taxes from assets outside the plan, and – even if they are older than 59 ½ – they will need to wait at least five years from the date of the roll-over to take a tax-free distribution from their account.
Retirement Age – At your plan’s retirement age, unvested employer contributions become fully “owned” by plan participants. To make sure participants reaching the retirement age have also fulfilled the years of service required by your vesting schedule, you can define retirement age as the later of the plan-defined retirement age or the term of your vesting schedule – up to five years.
Once you’ve considered these and other plan changes with your TPA or advisor, you’ll receive new documents to review and sign. It’s likely that there will be a fee for your plan’s restatement. Because the restatement is mandatory, you may choose whether your company or plan participants will pay the fee.
Knowing your plan will soon need to be restated and thoughtfully reviewing your plan will allow you to take advantage of the IRS mandate to the benefit of your employees and organization.
This blog is written to help make the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans. Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan, and hence cannot be a guarantee against fiduciary breaches.