It might come sooner than you originally envisioned. For calendar-year end plans ( i.e. December 31) with a 401(k) safe harbor provision, the plan document should be updated no later than December 31, 2015 with January 1, 2016 effective date.
While the deadline for PPA restatement is generally April 30, 2016, the IRS current view does not favor mid-year plan changes for plans with a safe harbor provision. Updating the document after January 1, 2016 could be considered a mid-year change and will remove the safe harbor status form the plan, a situation most small businesses would want to avoid to have their plan continue working in line with their objectives.
In 2014, the Internal Revenue Service (IRS) announced a new mandatory restatement cycle for defined contribution plans. Some of the most common defined contribution plans include 401(k), solo(k) or indy(k) (owner-only 401(k) plans), Profit Sharing, Money Purchase, and Target Benefit plans. Restatements follow a six-year cycle; the 2014 round of plan ‘rewriting’ is intended to incorporate law changes introduced by the Pension Protection Act of 2006 (PPA ’06). The last restatement for defined contribution plans was in 2008 and incorporated changes introduced by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001).
The restated plan document typically carries forward plan design choices contained in the current adoption agreement, includes choices required by new law, and incorporates requirements of new law drafted into the boilerplate of the plan document.
This restatement presents an opportunity to carefully evaluate current plan provisions to make certain the plan design continues to meet business objectives with flexibility and efficiency. Examples of possible enhancements include changes to eligibility provisions, automatic plan enrollment and deferral escalation to help participants better prepare for retirement, alignment of vesting schedules, matching and/or profit sharing allocation formulas and conditions, withdrawal terms, realignment of plan fees (paid by plan sponsor v. plan participant), and more.
More on PPA The PPA is a short term for the Pension Protection Act passed by the Congress in 2006, so PPA restatement basically means rewriting the plan document to incorporate all of PPA’s provisions. This law included a variety of retirement plan-related provisions, including:
- Automatic Enrollment Provisions
- Automatic Enrollment Opt Out
- Funding Notifications
- Investment Advice Rules
- Contribution Limits
- Qualified Default Investment Arrangements
In addition, this restatement permanently incorporates previous amendments adopted for your previous plan document including:
- Final 415 regulations
- Pension Protection Act (PPA)
- Heroes Earnings Assistance and Relief Tax Act (HEART)
- Worker, Retiree, and Employer Recovery Act (WRERA)
- Katrina Emergency Tax Relief Act of 2005 (KETRA)
- GULF Opportunity Zone Act of 2005 (GOZone)
Restatement clock: If plans had to be restated every time a regulation changes, we would be continuously re-writing plan documents. Recognizing this fact, the IRS created six-year cycles during which plans simply adopt so-called good-faith amendments addressing new laws instead of rewriting the entire plan. Separate cycles exist for defined benefit and defined contribution plans. At the end of a cycle, the plan document has to be re-written to incorporate the amendment language into the plan. The last restatement was called EGGTRA, it started in 2008 and incorporated changes that became law in 2001.
Missed restatement: Not restating the document is considered by the IRS to be a compliance failure leading to penalties and possible disqualification. In addition, if the Service discovers the plan has not been restated before the deadline it can impose significant monetary sanctions. In addition, plan contributions may no longer be tax deductible, with plan earnings becoming subject to tax, and assets losing their eligibility for rollover to tax-deferred retirement accounts.