Qualified Plan Restatements

Since 1994, Congress has passed several pieces of significant legislation affecting qualified retirement plans. Due to this legislation, plans must be rewritten entirely or "restated," as the government refers to this process. Many of the law changes are advantageous to employers maintaining a retirement plan. However, with the benefit of the law changes comes the burden of having to incorporate the law changes into the employer's retirement plan document. The plan may also need to be redesigned to make certain it continues to comply with the law and to meet your needs.

Congress and the Internal Revenue Service (IRS) generally provide a period of time after the effective date of new legislation for an employer to include the exact terms of the legislation in the plan document. The time that your plan documents must be revised to reflect all the new requirements is fast approaching.

This newsletter explains the plan restatement process. Your qualified plan remains the best way to save money on taxes and, at the same time, provide retirement income for employees - a reward for the employees at all levels of your business. Additionally, the qualified plan remains one of the best ways to attract and retain quality employees.

We recognize that you are not an expert in pension law. Therefore, we have prepared this explanation in question and answer format, using as little technical wording as possible. It is important to us that you understand why your document must be restated. However, please contact us if you do not understand any of the explanations or if you are uncertain about the impact on your plan.

What are the new laws which affect my qualified retirement plan?
A variety of new laws affecting qualified retirement plans have been passed by Congress since 1994. These include the Small Business Job Protection Act of 1996 (SBJPA), the Taxpayer Relief Act of 1997 (TRA' 97), the Uniformed Services Employment and Reemployment Rights Act of 1995, which contained provisions passed due to the General Agreement on Tariffs and Trade (GATT). Together, these laws are sometimes referred to as the "GUST" law changes.

The passage of each of these laws has been followed by the release of lengthy IRS guidance. This guidance interprets the requirements of the particular law and frequently imposes new and detailed rules on qualified retirement plans.

The various law changes are effective beginning as early as 1994. However, these laws also allow the IRS to extend the time by which a qualified plan must be restated to comply with these new laws.

Have the new laws affected all types of plans?
Yes. All qualified plans are impacted by the new laws and all plans will need to be restated. This includes profit sharing, money purchase, 401(k), defined benefit, target benefit, stock bonus, and employee stock ownership plans.

Must my plan be entirely restated?
Yes. The IRS has determined that there are enough changes caused by the new laws to warrant a plan restatement, rather than an amendment of only some plan provisions. A completely restated plan will be easier to read, easier to administer, and easier for the IRS to review.

Do plans have to be restated immediately?
No. Until the IRS mandated deadline, a plan may "operationally comply" with the new laws. This means that an employer must administer the plan properly, according to the plan's existing terms, plus any new law changes. Therefore, while the plan may be restated later, it should be operated as if it has already been rewritten to incorporate and comply with the new laws.

When must I restate my plan?
You must restate the plan no later than the last day of the "remedial amendment period."

The "remedial amendment period" is the period the IRS has determined is sufficient to enable an employer to incorporate all law changes into the written plan document. The remedial amendment period for the current law changes generally ends on the last day of the plan year beginning in 2001. For a calendar year plan, this is December 31, 2001.

For a plan other than a calendar year plan, the 2001 plan year is the plan year which begins during the 2001 calendar year. For example, for a plan with a November 30 year end, the 2001 plan year begins on December 1, 2001, and ends on November 30, 2002.

Should this restated plan be filed with the IRS for a determination letter?
Generally, it is important that the IRS issue a favorable "determination letter" confirming that the plan is qualified for favorable tax treatment. A determination letter application asks the IRS to review the plan document and to provide the employer a written notification that the plan satisfies the legal requirements for a qualified plan. A determination letter is the employer's "insurance policy" that the plan is qualified in the form of the plan document.

The IRS charges a fee to review a determination letter application. This fee is between $125 and $1,250, depending on the plan's characteristics and the type of plan document.

What happens if I fail to restate my plan on a timely basis?
If you fail to meet the deadline for restating your retirement plan, the IRS can disqualify the plan and take away all of its tax benefits, including the tax deduction for the employer. Therefore, restating a retirement plan on a timely basis must be a high priority for any employer maintaining a qualified retirement plan.

Should I consider any change in my plan design when I restate my plan?
Yes. In addition to changing or simplifying some of the legal requirements for a qualified plan, the recent legislation also has provided new plan design opportunities. For example, an employer may decide to make its 401(k) plan easier to administer by adopting either a SIMPLE 401(k) or a "safe harbor" 401(k) to eliminate nondiscrimination testing. A retirement plan should achieve the employer's goals. Therefore, you should regularly consider your plan's goals and whether your retirement plan meets those goals, as well as the goals of your employees.

Do I have to give all participants a new Summary Plan Description?
Yes. A complete restatement of the plan document requires that all participants receive a new Summary Plan Description (SPD). The changes to your plan will be significant, and the law requires that plan participants be fully informed of those changes. Therefore, at the time your plan is restated, the SPD will also need to be rewritten.

The information provided in this newsletter is based upon complex requirements of the Internal Revenue Code and Treasury Regulations. It is provided with the understanding that solely by providing this newsletter, the provider 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.