Plan restatement

A plan restatement is a legally required, comprehensive update, of a 401(k) plan document that incorporates all amendments and regulation changes made since the last restatement. Mandatory restatements apply to pre-approved plans but do not apply to individually designed plans. Most sponsors use a pre-approved plan. 

What is a pre-approved plan

A 401(k) plan document can be custom-designed and written for a plan sponsor, typically by an attorney. This is called an “individually designed plan.”  Due to the complexity and expense of adopting an individually designed plan, most plan sponsors use a pre-approved 401(k) plan document. 

A pre-approved 401(k) plan document is prepared by  a document provider such as a financial institution or plan service provider (the “pre-approved plan provider.”) The pre-approved plan provider  prepares a draft plan document, making sure that all legally required provisions and language is included. They then submit the draft document to the Internal Revenue Service (“ IRS”)  for  approval as meeting the requirements of Internal Revenue Code Section 401. Once approved by the IRS, the IRS issues an Opinion Letter for the pre-approved plan that states the plan document complies with the law. The pre-approved plan provider then makes the pre-approved plan available to employers or other third party service providers. 

The pre-approved document has two components: 1) the Basic Plan Document (“BPD”), and 2) the Adoption Agreement. The BPD includes all of the standard language that applies to the plan. The BPD cannot be modified by the adopting plan sponsor. The Adoption Agreement has a checklist of information where the plan sponsor chooses the provisions that will apply to its plan. With the help of a service provider in most cases, the sponsor makes their elections and signs the Adoption Agreement, making the plan effective for that employer. 

How often do 401(k) plans need to be restated

Every six years, the IRS opens a window of time for pre-approved plan providers to submit updates to their BPD and Adoption Agreement. This is the time when pre-approved plan documents are updated to  ensure they include all new legal requirements added to the law since the last restatement. Once approved, the IRS will issue a new Opinion Letter for the pre-approved plans. Pre-approved plan providers then release the new pre-approved plan document for use.  The IRS also establishes a deadline for plan sponsors to adopt the new pre-approved document. rThis six-year period is known as the "restatement cycle."

The last restatement cycle was called the “Cycle 3 restatement.” Cycle 3 restatements were required for existing plans by July 31, 2022. All 401(k) plans that use a pre-approved document should be on a Cycle 3 restatement document today. 

The fourth restatement submission cycle (“Cycle 4”)for pre-approved 401(k) plans ends on January 31, 2025.  Once the  IRS finishes reviewing submissions, it will issue opinion letters for those documents that have been approved. Employers may then adopt the plans within a window (usually about two years) announced by IRS. Plan sponsors using a pre-approved plan for its plan document should expect their provider to initiate a Cycle 4 restatement process in 2025 or 2026.

TIt's crucial for plan sponsors to work with their plan providers and legal counsel (if applicable) to ensure timely completion of the restatement process. Failing to restate a plan by the deadline can result in the plan losing its tax-qualified status, leading to potential tax consequences for both the employer and plan participants.

What is the purpose of a plan restatement

The purpose of a 401(k) plan restatement is to ensure that the plan remains compliant with current laws and regulations, maintaining its tax-qualified status. During the restatement process, the plan document is updated to incorporate any changes in pension law and regulations that have occurred since the last restatement. 

Failing to restate the plan could result in the loss of the plan's tax-qualified status, leading to severe tax consequences for both the employer and the participants. Additionally, the IRS may require corrective actions, which could include fees to reinstate the plan’s qualified status through programs like the IRS’s Voluntary Correction Program (VCP). 

In addition to maintaining compliance, the restatement process provides an opportunity for employers to review and update plan provisions. This allows them to make any necessary changes to align the plan with their current business goals and objectives, as well as to take advantage of any new features or benefits that may have become available since the last restatement.

The bottom line

By regularly restating their 401(k) plans in accordance with IRS requirements, employers demonstrate their commitment to providing a compliant and well-maintained retirement plan for their employees. This not only helps to protect the interests of the plan participants but also ensures that the employer can continue to offer this valuable benefit without the risk of legal or financial repercussions.