the PPA Plan Restatement

A non-technical review of qualified retirement plan legislative and administrative issues
Ready or Not, Here it Comes…
the PPA Plan Restatement
It’s time again to participate in that never ending
ritual of qualified retirement plan restatements.
As legislation affecting retirement plans is enacted, the Internal Revenue Service (IRS) requires
all plan sponsors to restate or “rewrite” their plans
to conform to current law.
For pre-approved plans, these required restatements take place on a regular six-year cycle. The
current cycle of defined contribution plan restatements is being referred to as the “PPA restatement” after the Pension Protection Act (PPA).
If you sponsor a 401(k) or other type of defined
contribution retirement plan for your employees
and use a pre-approved type of plan, you will be
required to restate the plan within the next two
years. Failure to complete this restatement before
the deadline of April 30, 2016, could result in the
disqualification of your plan and result in possible taxation for participants and your loss of
deductions and penalties.
In addition, an interim amendment to the plan
may be required by the end of the year to comply
June 2014
with IRS guidance released in April regarding
same gender marriages.
After tax legislation is enacted, the law is analyzed
by the IRS to determine how it will affect qualified plans in actual operation. This analysis usually takes years, and practitioners may be left to
operate their plans on a “good faith” basis during
this period.
In other words, plans are required to be operated
in the best possible way based on the prevailing
understanding of the current law even though
official regulations and/or guidance has yet to be
issued. As a result, many plan sponsors have adopted “good faith” interim amendments to bring
their plans into temporary compliance with PPA,
other laws and new guidance issued by the IRS
pending this restatement period.
PPA was a sweeping piece of legislation enacted
in 2006 which made major changes in the tax
laws relating to retirement plans. It is the largest
piece of legislation included in the plan restatement. The restatement takes the language from
the prior Economic Growth and Tax Relief
Reconciliation Act (EGTRRA) restatement
document and includes any new laws added by
Congress and any guidance issued by the IRS
through the fall of 2010 including:
ƒƒ The Pension Protection Act (PPA)
ƒƒ The final Section 415 regulations
ƒƒ The Heroes Earnings Assistance and Relief Tax
ƒƒ The Worker, Retiree, and Employer Recovery
ƒƒ The Katrina Emergency Tax Relief Act of 2005
ƒƒ The GULF Opportunity Zone Act of 2005
Types of Plan Documents
All qualified plans are required to have a written plan document. The plan document can take
various forms:
ƒƒ Individually Designed Plan Document: This
type of plan document is custom designed by
an attorney exclusively for an individual employer to meet its specific needs. An individually designed plan offers the greatest degree of
flexibility possible.
ƒƒ Pre-Approved Plan Document: There
are two types of pre-approved plan documents—volume submitter plans and prototype plans. Volume submitter plans generally
offer more flexibility than prototype plans but
not as much as individually designed plans.
Pre-approved plan documents are available
for most types of plans including 401(k),
profit sharing, new comparability and defined
benefit plans.
Restatement Cycles
More than 80% of all plans use prototype or
volume submitter pre-approved documents.
Currently, we are in the second six-year cycle for
defined contribution plans. Most pre-approved
plan documents have now been rewritten and
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approved by the IRS. Beginning on May 1, 2014,
the window for restating documents opened. The
IRS provides a period of two years for all employers who use a pre-approved plan to finish the
Pre-approved defined benefit plans are on a different six-year restatement cycle than defined
contribution plans. Individually designed plans
are on a five-year cycle and must be restated every
five years.
IRS Letters
In order to receive a measure of assurance that
an individually designed plan document is in full
compliance, the plan document may be voluntarily submitted to the IRS to receive a determination
that its terms and conditions satisfy all applicable
IRS tax-qualification requirements (referred to as
a “determination letter”).
With pre-approved plans, the IRS has already
reviewed the plan language and determined that
it meets the requirements for tax qualification.
The IRS issues an “opinion letter” for prototype
plans and an “advisory letter” for volume submitter plans to the plan document provider who files
with the IRS for pre-approval of the plan. As long
as an employer does not modify the pre-approved
provisions, the employer will have reliance on
the opinion or advisory letter issued to the plan
document provider.
During the last restatement cycle, any employer
could ask the IRS for a determination letter on
a pre-approved plan. Effective last year, the IRS
will no longer issue an opinion or advisory letter
to employers who adopt prototype or volume
submitter documents with no changes. These
plan sponsors are entitled to rely on the opinion
or advisory letter as if they had a determination
letter of their own.
If an employer adopts a volume submitter plan
document which has minor modifications, a
determination letter may be requested with a simplified filing. If the modifications are not minor,
the IRS will consider the plan to be individually
designed and will require a more complex determination letter application. If a prototype plan
document is modified, it is considered an individually designed plan. If the pre-approved plan has
been modified for unique circumstances, a determination may be desirable but never required.
Protected Benefits
Special care must be taken to ensure one plan
document does not blindly replace another plan
document. For example, if a prototype plan is
used to restate an individually designed plan,
there are special issues to consider such as ensuring certain benefits, called “protected benefits,”
are not accidentally eliminated or reduced.
Protected benefits include forms of distributions
(such as lump sum and annuities) and timing
of distributions (such as early retirement provisions).
Restatement Process
The restated plan document will incorporate all
of the changes that were made in your document
between the last restatement and this restatement. An inventory of all amendments and their
effective dates will need to be compiled so these
changes can be accurately reflected in the new
document. In addition, now is an ideal time to
make any plan design changes that you may have
been contemplating which can be incorporated
into the restated document.
After the document is completed, it should be
thoroughly reviewed. The IRS is very strict when
it comes to following the plan document. If your
plan document does not reflect the operation of
your plan, you may have a serious issue that could
affect the qualification of your plan. Any issues
discovered during the restatement process should
be addressed as soon as possible.
In addition to the plan document, you may need
to have a new summary plan description (SPD)
drafted which describes the terms of the plan in a
manner designed to be understood by an average
plan participant. The SPD will need to be distributed to all participants in the plan.
Most corporate attorneys consider the adoption
of a plan or the restatement of a plan to be an
important action which should be ratified by the
board of directors or managing partners in the
case of a partnership. As such, you should document the restatement with the board of director’s
minutes, consent resolution or similar written
In most cases, the resolution instructs the president or other officer to execute any documents
necessary to accomplish the restatement. Finally,
an authorized officer of the plan sponsor should
sign the restatement. If a new trust agreement
is also included with the document, the trustees
should sign as well.
Because a large number of plans need to be restated within the two-year period, not all restatements will be started right away.
Same Gender Marriage Interim
On June 26, 2013, in United States v. Windsor,
the Supreme Court invalidated Section 3 of the
Defense of Marriage Act (DOMA) which limited
marriage to opposite sex couples for purposes of
federal law (including retirement plan administration).
On September 16, 2013, the IRS issued a ruling
holding that same-sex marriages legally entered
into in any state recognizing such marriages
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(referred to as the “state of celebration”) would be
recognized for federal tax purposes. The ruling also
held that the state of celebration would control for
federal tax purposes, even if the couple lives in a
state that does not recognize the marriage.
The IRS recently issued a notice that provides
information on interim plan amendments that
may be required to comply with the Supreme
Court decision. In general, if the language in the
plan document does not comply with the Windsor
decision, the plan must be amended by December
31, 2014. In any case, the plan must comply in
operation with the new rules beginning on June
26, 2013, the date of the Supreme Court decision.
The need to amend the plan will depend on the
definition of marriage in the document. Some
documents may define marriage as marriage between a man and a woman, some plans may refer
to the DOMA definition and some may define
marriage as marriage under “applicable law.” The
first two definitions will need an amendment, the
last may not.
Millions of employees rely on their employers to
provide retirement benefits. Part of the responsibility for providing those benefits is maintaining the plan in accordance with current tax laws.
A plan must be operated in accordance with all
laws and regulations and the plan documentation
must reflect the laws currently in effect.
The IRS may disqualify a plan that does not
comply with the plan restatement requirements,
which could result in taxation for the participants and loss of deductions and penalties for the
We are committed to providing the support,
attention and professional expertise needed
throughout this restatement period to make it a
positive experience for all.
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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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