This alert addresses the Cycle 3 restatement period for defined contribution retirement plans (401(k), profit sharing, stock bonus, ESOP, and money purchase/target benefit pension plans) maintained in the form of an IRS preapproved plan document, formerly known as a prototype document. The Cycle 3 restatement period addressed in this alert does not apply to individually designed defined contribution plans (i.e., plans not maintained on an IRS preapproved plan document), IRS preapproved defined benefit pension plans (which were subject to a separate restatement period that ended April 30, 2020), and IRS preapproved 403(b) plans (which were required to be restated by June 30, 2020). However, for reasons discussed later in this alert, sponsors may find it advantageous to restate their individually designed plan documents using IRS preapproved documents.
Cycle 3 Restatements Must Be Adopted No Later Than July 31, 2022
IRS preapproved plan documents must be restated every six years. Defined contribution and defined benefit plans have different six-year cycles. The last restatement cycle for preapproved IRS documents for defined contribution plans (commonly known as Pension Protection Act (PPA) restatements) closed in 2016 and reflected changes in the law through 2010. PPA restatements now need to be restated as part of the next six-year cycle, commonly known as Cycle 3. Cycle 3 restatements are now available and must be adopted no later than July 31, 2022. Importantly, plans that terminate prior to July 31, 2022, need to be restated at the time of termination.
Employers Should Begin the Restatement Process Now
The next 18 months leading up to the Cycle 3 restatement deadline will pass quickly, and plan sponsors may face new compliance obligations depending on the specific benefits-related policy changes the Biden administration pursues once in office. The restatement process presents an ideal opportunity to consider a number of optional plan-related changes in addition to required plan document updates. Employers should begin the restatement process now to ensure that there will be sufficient time to address the following restatement matters:
- Whether the current plan design (plan type and provisions) is consistent with the employer’s financial and human resources objectives. This is of particular importance for employers who’ve experienced changes in their business, ownership structure, controlled group (if applicable), economic outlook, and workforce since the PPA restatement period.
- Whether the plan document incorporates best practice features designed to mitigate the litigation and liability risks associated with the sponsorship and administration of an ERISA-governed retirement plan. Litigation and liability risks have increased significantly since the PPA restatement period. For example, the proposed restatement should be able to accommodate the plan’s fiduciary structure and operation as reflected in the plan charter and investment policy statement, and should include a contractual statute of limitations on claims, a broadly written internal claims procedure, and a plan-friendly forum selection clause.
- Whether the preapproved document contains indemnification and limitation of liability provisions that are unacceptable or inconsistent with the employer’s internal contracting guidelines and outside vendor agreements.
Whether the Cycle 3 changes in the IRS’s preapproved plan document program are consistent with the plan’s established fiduciary structure and administrative practices. For example, some plans are on PPA documents that contain trust and asset custody provisions. In a significant departure from the PPA restatement documents, Cycle 3 plan documents cannot have trust and custody provisions; accordingly, plan sponsors will need to adopt separate trust and asset custody agreements. This means that plans with individual trustees (as opposed to corporate trustees) will need to have counsel draft a separate trust agreement. Alternatively, plans with individual trustees may select a corporate trustee through a properly conducted RFP process.
Use of IRS Preapproved Documents for Individually Designed Plans
Individually designed plans may no longer apply for an IRS determination letter except in limited circumstances involving new or terminated plans or plan amendments adopted in connection with a merger or acquisition. For this reason, employers that currently maintain individually designed plans should carefully consider converting from an individually designed document format to an IRS preapproved document format if a preapproved document format can accommodate the plan’s design and governance structure. This suggestion should be of particular interest to sponsors of plans that have older determination letters (e.g., letters dated in 2013) or have been amended several times since the last IRS letter. If the IRS preapproved document can accommodate the plan’s design and governance structure and is properly completed, an employer may rely on the IRS determination letter issued in connection with the preapproved plan document.
Important: Some ESOPs May Now Use IRS Preapproved Documents
Prior to the Cycle 3 restatement period, ESOPs could not be maintained in prototype format and would, therefore, be considered individually designed. The new Cycle 3 documents can be used to document some ESOPs. Sponsors of ESOPs should consider converting to an IRS preapproved Cycle 3 format to ensure that the form of the document meets IRS requirements as discussed in the prior section of this alert (relating to individually designed plans).
SECURE Act and CARES Act Amendments
Cycle 3 restatements will not incorporate provisions designed to comply with the final hardship distribution regulations and SECURE Act and CARES Act amendments, although we expect most document vendors to provide interim amendments for these developments as part of their Cycle 3 restatement package. Deadlines for these amendments are December 31, 2021, (for the hardship rules) and the last day of the 2022 plan year for SECURE Act and CARES Act changes. For collectively bargained plans, the deadline for SECURE Act and CARES Act changes is extended to the last day of the first plan year beginning on or after January 1, 2024, (December 31, 2024, for calendar-year plans).
How We Can Help
If we are responsible for maintaining your plan document, we will reach out to you individually for specific guidance relating to plan restatement and other amendment deadlines. If not, we will be happy to review the Cycle 3 restatement documents prepared by your provider to ensure that they accurately and completely reflect your plan design and fiduciary governance structure, and that they contain best practice language that will reduce litigation and liability risks for the plan’s fiduciaries.
If you have any questions regarding this alert, please contact Art Marrapese, Employee Benefits Practice Area chair, at amarrapese@barclaydamon.com, or another member of the firm’s Employee Benefits Practice Area.