The United States Internal Revenue Service (IRS) requires qualified retirement plans using pre-approved plan documents to be amended and restated every six years. With the deadline for the current restatement cycle, Cycle 3 DC, quickly approaching, it is important to understand what it is, who is affected and why it’s important for retirement plan fiduciaries and sponsors.
What is Cycle 3 DC?
A restatement is a complete re-writing of the plan document to incorporate any law changes and amendments that have taken place since the last restatement. Cycle 3 DC is the current restatement period for 401(k), profit-sharing and money purchase pension plans. The Cycle 3 restatement window opened on August 1, 2020, and the final deadline is July 31, 2022.
While the purpose of Cycle 3 is to update plan documents to reflect statutory and regulatory changes since the last restatement, the IRS’s timeline to review and approve pre-approved plan documents causes a delay. Thus, Cycle 3 documents will not reflect any changes that have taken place since 2017, meaning provisions from recent laws, including the Setting Every Community Up for Retirement Enhancement (SECURE) Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, will not be included. SECURE and CARES plan amendments are likely not to be available until the IRS provides model language for the changes. In the meantime, these changes are addressed in “good-faith” amendments.
When restating your plan document, there are a few important things to keep in mind. First, you may wish to make additional changes to your plan document during restatement. However, if your changes are large in scope, you may experience both a delay and increased cost in your restatement process.
Additionally, if you wish to terminate your plan, your plan document must be updated with all law changes prior to termination – restatement is still required. This is to protect the plan’s tax-favored status at termination, as well as ensure that distributions to participants are eligible to rollover to other qualified plans.
Who is Affected?
Cycle 3 DC does not apply to defined benefit plans or defined contribution (DC) plans that use an individually designed plan document. Rather, Cycle 3 pertains to DC plans using pre-approved plan documents. The IRS characterizes a “pre-approved” plan as a plan that is sold to employers by a document provider, such as a financial institution or benefits practitioner. The document provider requests IRS approval to ensure the plan document meets the requirements of the Internal Revenue Code sections 401, 403(a) or 403(b). Then, after gaining IRS approval, the plan provider makes the “pre-approved” plan available to adopting employers.
Why is Cycle 3 DC Important?
Maintaining plan documents is a fiduciary responsibility for plan sponsors and administrators. Complying with Cycle 3 DC requirements is a key aspect of document maintenance. Beyond fiduciary duty, a plan that fails to adopt a restated plan document by the final July 2022 deadline could face IRS penalties and, in some cases, have the plan’s tax-favored status revoked. Thus, it is vital for plan fiduciaries to know the plan document options available, understand the Cycle 3 DC restatement process, and take proactive steps toward compliant restatement. Fortunately, restatement assistance is available.
Boulay Can Help
The plan document is the foundation of your plan, providing terms and conditions for the plan’s operations, administration and compliance. To avoid the unintended and potentially costly consequences of non-compliance, it’s essential that the plan documents are restated carefully and accurately. For assistance with your efforts to complete the plan restatement process, contact one of Boulay’s Employer Retirement Plan advisors at 952.893.9320 or learnmore@boulaygroup.com.
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