Michael Best Partner Jorge M. Leon was quoted in the Society for Human Resource Management (SHRM) article "Deadline for Updating Preapproved Retirement Plans Draws Near" on April 13, 2016.
Employers with 401(k) and other defined contribution retirement plans that were preapproved by the IRS and adopted before Jan. 1 of this year don’t have much time left—only until April 30, 2016—to sign updated plan documents incorporating new amendments into their plans, according to the IRS.
Preapproved plans are sold to employers by a financial institution, advisor or similar “document provider,” the IRS notes. They allow limited customization but give the employer the reassurance that the IRS approved the plan’s wording.
By contrast, the IRS is granting an extra year—until April 30, 2017—for plans that switch after Jan. 1, 2016, from individually designed to preapproved designs. This extension is intended to encourage plan sponsors to convert an existing individually designed plan into a preapproved plan.
Not everyone is happy about being pushed to make such a switch, though, which some believe helps explain the IRS decision to drop individual determination letters for individually designed plans at the end of this year—so the push will then become more like a shove.
Review Restatement Documents Carefully
The document provider requests that the IRS approve a retirement plan as meeting the requirements of the Internal Revenue Code. The preapproved plan sponsor then makes the IRS-approved plan available to adopting employers.
For those plans that already are preapproved, plan sponsors have the opportunity to incorporate amendments into their plans during the remedial amendment period, Jorge Leon, an attorney with Michael Best & Friedrich in Chicago, said.
Typically, plans make amendments on an ongoing basis. Every six years—the remedial amendment cycle—plan sponsors should repackage the amendments within plans rather than letting plans sprawl with innumerable loose amendments, he said. If a plan sponsor is negligent and fails to make updates on time, the plan may not qualify for protected tax status, he cautioned. Also, “the more a plan strays from what was preapproved, the bigger the risk a plan is not preapproved anymore,” Leon said.
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