The sponsor of a tax-qualified retirement plan and the plan’s fiduciaries have a number of obligations once a plan is established. Many of these obligations relate to the day-to-day operation of a plan. However, plan document maintenance issues are sometimes overlooked.
This newsletter will summarize some of these issues and describe the consequences of not timely amending plan documents. It will also summarize the new IRS determination letter process.
Written Plan Document Requirement
Tax-qualified retirement plans are governed by the Employee Retirement Income Security Act of 1974 (“ERISA”). All ERISA-governed plans must be documented in a written plan document.
The IRS has the primary responsibility for the review of the terms and conditions of a tax-qualified plan. The IRS reviews the plan document when a determination letter is requested or during a plan audit.
Plan documents can take various forms including individually designed, volume submitter and prototype plans which are described below.
Individually Designed Plans
This type of plan document is custom designed to meet the employer’s specific needs. The employer has the greatest variety of available options with this type of plan.
Volume Submitter Plans
Volume submitter plans generally look like individually designed plans, but the IRS has pre-approved much of the document language since it is expected they will see a large volume of these plans utilizing the document options.
Prototype Plans
Prototype plans are pre-approved by the IRS and come with two types of adoption agreements: standardized and non-standardized. Standardized adoption agreements have very limited choices which prevent the plan sponsor from designing a plan that will not satisfy discrimination tests.
Non-standardized plans offer additional flexibility to exclude certain forms of compensation for allocation purposes or exclude certain employees from the plan or contribution eligibility.
Plan provisions usually take the form of a fill-in-the-blank adoption agreement. The selection of available options varies by sponsor of the prototype document. These documents are generally sponsored by companies such as retirement consulting firms, brokerage firms, banks, insurance companies and mutual funds.
Determination Letter Applications
A first way that the IRS may wind up reviewing a plan document is when a determination letter application is submitted. A plan is voluntarily submitted to the IRS for a determination that its terms and conditions satisfy all applicable IRS tax-qualification requirements.
Plan sponsors are not required to submit pension, 401(k), money purchase or other tax-qualified plans for IRS approval. If, however, a plan sponsor does not submit a plan and the IRS later determines that the plan does not satisfy a legal requirement, the plan may be “disqualified” with negative tax consequences for the plan’s participants.
When a determination letter request is submitted, the IRS reviews the submitted plan against a checklist of legally-required provisions derived from the Internal Revenue Code and related regulations. If the IRS concludes that the plan satisfies these requirements, the plan will be issued a favorable determination letter.
If the IRS concludes that the plan does not satisfy these requirements or has questions about plan terms and when they were adopted, it will contact the person submitting the determination letter request for more information.
The Internal Revenue Code and related IRS guidance allows a plan sponsor to adopt retroactive plan amendments in certain limited circumstances. If a retroactive amendment is not permitted, the IRS may refer a determination letter application to its employee plans correction program which will trigger additional IRS fees.
Recent IRS Update of Determination Letter Process
The IRS recently issued guidance (Revenue Procedure 2005-66) updating the rules governing the determination letter process.
Although a plan sponsor may submit a determination letter application at any time, the IRS has historically been faced with periodic waves of determination letter applications. These waves have generally occurred at the end of an applicable “remedial amendment period.” A remedial amendment period is a period of time during which a plan sponsor may amend a plan retroactively to comply with changes in applicable law.
The result of these waves was that the IRS often found itself needing to adjust its staff (including using audit staff) to review determination letter applications. The new determination letter application process attempts to smooth these waves.
Impact on Volume Submitter and Prototype Plans
The IRS has historically required that pre-approved plan documents, such as volume submitter and prototype plans, be amended from time-to-time to comply with applicable legal changes. If a pre-approved plan satisfies applicable IRS requirements, an opinion letter is issued to the sponsor of a pre-approved plan. Many individual plan sponsors rely on this opinion letter rather than submitting a request for their own determination letter.
Under the new determination letter process, pre-approved plans must be submitted once every six years for a new opinion letter. The timing of this six-year cycle depends on the type of plan involved–the cycle will differ for defined contribution and defined benefit plans.
When the review of a cycle of pre-approved plans (which is anticipated to last two years) has neared completion, the IRS will publish an announcement stating a uniform date by which all employers using a pre-approved plan must adopt the newly approved plans. It is expected that this date will give virtually all plan sponsors adopting a pre-approved plan a two-year window in which to adopt the updated plan and, if necessary, submit the plan for its own determination letter.
Impact on Individually Designed Plans
Under the new determination letter process, individually designed plans have a five-year remedial amendment period that, in most cases, is based on the last digit of a plan sponsor’s federal employer identification number.
A plan sponsor may apply for an updated determination letter during the last twelve months of its five-year filing cycle. In general, a plan sponsor may submit either a restatement or a working copy that incorporates all amendments. The sponsor’s favorable determination letter will include an expiration date, so the sponsor will need to refile if it wants to preserve reliance.
Interim Amendments
Changes to a plan document, either due to Internal Revenue Code tax-qualification requirements or because of a discretionary plan design change, must be reflected in a timely adopted good-faith “interim” amendment. An interim amendment addressing a disqualifying plan provision will be treated as timely adopted if the plan amendment is adopted by the due date (including extensions) of the employer’s tax return for the year in which the change is first effective. However, any discretionary change must be adopted by the end of the plan year in which the plan amendment is effective (unless earlier adoption is necessary to prevent a cutback under applicable IRS guidance).
Plans must always be operated in compliance with a new or changed tax-qualification requirement as of its effective date regardless of when an amendment is adopted.
Plan Audits
A second way that the IRS may wind up reviewing a plan document is when the IRS conducts an audit of a plan. The IRS, as part of its enforcement activities, may request the plan document and other information about the plan.
Although these activities have been relatively infrequent in recent years, the IRS has recently begun renewed enforcement activities. As part of its renewed efforts, the IRS is working to streamline the audit process to avoid “open ended” audits that consume significant amounts of time. Instead, many IRS auditors are likely to initially focus on a few core areas of concern when conducting an audit.
Of course certain audits, such as the IRS’s new Employee Plans Team Audit program for large employers, may be far more comprehensive.
Timely plan amendments are key to avoiding problems when a plan is audited. Although the IRS may also focus on operational activities, a clear plan document helps to streamline the audit process. Plan sponsors who fail to timely adopt plan amendments to comply with law changes may utilize the IRS’s Voluntary Correction Program (“VCP”), as long as the plan is not under examination by the IRS. Reduced filing fees apply if the VCP filing is within one year of the missed deadline.
If the IRS finds that a plan has not been timely amended during an audit, a plan and plan sponsor may be subject to significant IRS closing agreement fees and, in the worst case, a plan may lose its tax-qualified status.
Summary Plan Description and Summary of Material Modification
A summary plan description (“SPD”) generally describes the material terms of a plan, including all contribution rules, distribution rules, fees and other participant rights under the plan in a manner designed to be understood by an average plan participant.
An updated summary plan description must be provided once every ten years if there have been no plan amendments and every five years if plan amendments have been adopted. A plan administrator must provide a summary plan description to a participant or beneficiary within 90 days of becoming a participant or becoming eligible to receive benefits from a plan. Also, unless a new SPD is provided each time an amendment is adopted, a plan administrator must provide a summary of the amendment in a summary of material modifications to participants and beneficiaries within 210 days after the close of a plan year in which an amendment is adopted.
Conclusion
There are a number of ongoing plan document maintenance activities that are easily overlooked by plan sponsors and fiduciaries. Pre-approved and individually designed plan sponsors should keep in mind the need to timely amend their plan for discretionary and Internal Revenue Code-mandated changes and be aware of the new remedial amendment periods.
Complying with IRS requirements involve a commitment of time and effort. However, taking steps to comply with these requirements now can help to prevent the need for more time consuming and costly efforts to achieve after-the-fact compliance at a later date.
This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.
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Spring will arrive soon, promising new growth and a fresh beginning. It could also be the perfect time to do some spring cleaning for your plan. Let’s look at some areas that you might consider reviewing to ensure your retirement plan is operating efficiently.
Document your processes and procedures to make certain that plan tasks can be handled in case of any absences during an enrollment or pay period. Having a backup in place can prevent errors and delays that could lead to penalties.
Make sure to have a process in place to notify all new enrollments of their eligibility, regardless of whether the plan has automatic enrollment. Depending on the timing for plan entry, including the plan enrollment paperwork with the new hire paperwork could make entry easier for you. Please reach out with any questions regarding when an employee enters the plan.
Deposits of employee deferrals and loan repayments must be submitted to the plan as soon as possible to avoid penalties and corrections. For plans with less than 100 participants, a safe harbor rule allows deposits to be made within seven business days. For larger plans, the expectation is that the money will be deposited more quickly. Depositing these funds on the pay date will avoid the possibility of being late.
Monitoring deferral contribution limits during the calendar year will avoid refunds after year end. Make sure that your payroll is set up to stop deferrals once the limit is reached, including any catch-up contributions for those who have reached age 50.
To keep the plan in compliance, employer contributions must be deposited timely. Due dates are impacted by the type of contributions, required status and tax deductibility. If you have questions on when to deposit your employer contribution or even whether to make an employer contribution, please contact us.
Most plans must be covered by a fidelity bond. The minimum coverage is 10% of plan assets (rounded up to the next $1,000) and the maximum coverage is $500,000. Additional requirements apply to plans with employer securities or non-publicly traded assets. If your fidelity bond is insufficient, now is the time to raise the coverage. Inflation clauses that increase the bond amount as the plan assets increase can ensure that your bond coverage is always adequate. Contact us or your insurance provider if you don’t have a fidelity bond.
Another area to review is communication with participants. Helping your employees understand and trust the plan can increase their contributions. Be sure that your procedures include distributing any plan-related communications—including required participant notices.
Distributions also involve communication, including some of the aforementioned notices. Discussing distribution options with terminated participants, possibly as part of an exit interview, can help to reduce risk of lost participants. We’ll provide instruction on distributions for force-out distributions for small balances, testing corrections and required minimum distributions.
Your plan document is the legal source on how the plan should be administered; operating within its parameters is critical. It’s always worth taking time to review the plan document to ensure that you fully understand and are following its provisions. We’ll cover more details about the plan document later in this newsletter. We’re here to support you in keeping your plan in compliance. Please feel free to reach out with any questions.
Addressing the Challenge of Uncashed Distribution Checks
Uncashed distribution checks present a persistent and often overlooked challenge for retirement plan sponsors. Despite the best efforts of plan administrators, some participants fail to cash their distribution checks, leading to administrative burdens, fiduciary concerns and potential compliance issues. A recent publication by Retirement Management Services (RMS) sheds light on this issue and offers practical guidance for employers seeking to manage and mitigate the risks associated with uncashed checks.
Uncashed checks can arise for various reasons. Participants may have moved without updating their contact information, may not recognize the check as legitimate or may simply forget to deposit it. Regardless of the cause, the responsibility for addressing these uncashed funds ultimately falls on the plan sponsor. This creates a fiduciary obligation to act in the best interest of the participant while ensuring compliance with IRS and Department of Labor (DOL) regulations.
Sponsors are encouraged to maintain up-to-date contact information for all plan participants and to follow up promptly when checks remain uncashed. This may involve sending reminder letters, making phone calls or using certified mail to confirm receipt. In some cases, plan sponsors may also consider using electronic payment methods to reduce the likelihood of checks going uncashed in the first place.
The IRS and DOL have issued guidance on how to handle these situations, including the use of forfeiture accounts and escheatment to state unclaimed property programs. However, these options come with their own set of rules and potential pitfalls. For example, using a forfeiture account may require the plan document to explicitly allow for such treatment. Escheatment laws, which allow the government to assume control of unclaimed property, vary by state. As such, plan sponsors must carefully evaluate their options and consult with legal or compliance experts as needed.
Another important consideration is the documentation of all the efforts made to contact participants and resolve uncashed checks. Maintaining a clear audit trail can help demonstrate fiduciary prudence and protect the plan sponsor in the event of an audit or legal challenge. It is extremely important to have a written policy in place that outlines the steps to be taken when a check remains uncashed beyond a certain period.
By taking a proactive, well-documented and compliant approach, employers can fulfill their fiduciary duties, reduce administrative burdens and ensure that participants receive the benefits they are entitled to.
Source: Retirement Management Services – “Uncashed Distribution Checks” https://www.consultrms.com/Resources/59/Plan-Sponsor-Tips-and-Help/212/Uncashed-Distribution-Checks
Divorce and the Retirement Plan
When a participant in a qualified retirement plan undergoes a divorce, the participant’s account balance may be an asset that is split with the former spouse. As the plan exists for the exclusive benefit of its participants, a court order is required to transfer the participant’s benefits to the ex-spouse. Once approved by the plan administrator, this court order is called a Qualified Domestic Relations Order (QDRO).
The QDRO is a judgment, decree or order that must be issued by a state authority (usually a court). It can be part of the divorce settlement or it may be a separate document. Because of the serious nature of separating the participant’s account balance, the QDRO is more than just an agreement made by both parties — it must also be signed by a judge.
A QDRO will describe how to divide the participant’s account balance between the participant and the ex-spouse, referred to as the alternate payee. In some cases, a set dollar amount will be allocated; in others, a percentage of the account may be designated. In the latter case, the amount assigned to the alternate payee represents the given percentage of the participant’s total vested account balance as of a specified valuation date. This percentage will apply to all sources — such as deferrals, matching or profit sharing — unless specified by the QDRO. Any interest and investment gains/losses that accrue between this valuation date and the date the funds are separated into an account for the alternate payee are often factored into this final calculation. If the participant has outstanding loans, the QDRO will usually indicate how the loans are handled.
Contributions such as deferrals and employer matching made after the valuation date are credited to the participant’s account. Earnings and losses are applied to the account balances. Once the division is complete, the alternate payee’s portion (either dollars or shares) is transferred to an account in the alternate payee’s name.
If the plan allows, the alternate payee may be paid out in a cash or rollover distribution. Not all plan documents allow the alternate payee to receive a distribution before reaching normal retirement age, so it’s important to follow the terms of the plan. In addition, the QDRO cannot violate the provisions of the plan document by requiring a plan to provide an alternate payee or participant with any type or form of benefit not otherwise provided under the plan.
Although the most common situation for a QDRO is a divorce, it can be issued in other situations, such as to a dependent in the case of child support. If the alternate payee is a minor child or legally incompetent, the order can also require payment to the individual with legal responsibility for the alternate payee. If a participant or their attorney provides you with a copy of a divorce decree that references the plan or a QDRO, please contact us immediately, and we will work with you to ensure it meets the requirements of the plan.
Important note for defined benefit plans: For 2025 plan years, PBGC premiums are due one month earlier than usual, specifically on the 15th day of the ninth month after the beginning of the plan year. For calendar year plans, this means the premium is due on September 15, 2025, instead of the usual October 15. This accelerated deadline is due to a provision in the Bipartisan Budget Act of 2015.
Upcoming Compliance Deadlines for Calendar-Year Plans
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