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IRS Addresses Impact of Missing a Pre-Approved Plan Restatement Deadline

The IRS in a May 23 edition of Employee Plan News provides a comprehensive discussion of the impact of missing a deadline for restating a pre-approved 401(a) or 403(b) plan and how such a situation can be handled. 

To maintain a plan’s status as a pre-approved plan and retain uninterrupted reliance on its opinion letter, an employer must adopt each applicable cycle’s restatement by the due date for that cycle, the IRS reminds.

The IRS reviews pre-approved plan submissions, and issues opinion letters and advisory letters for previous cycles, for each recurring plan amendment cycle. Each cycle, says the IRS, provides a window for affected employers to adopt the restated plan. 

Missed Deadline for 401(a) DB Plans

The IRS announces the period during which employers must adopt plan restatements for 401(a) plans for each plan cycle. 
In Announcement 2018-05, the IRS opened the 2-year restatement window for defined benefit plans approved for Cycle 2, ending on April 30, 2020; Notice 2020-35 extended that window to July 31, 2020.

If a restatement is not adopted by the Cycle 2 deadline, an employer’s retirement plan is no longer a pre-approved plan. Furthermore, the employer is no longer considered a prior adopter because the employer hasn’t timely adopted a pre-approved plan for the cycle immediately preceding the opening of the current cycle. The plan therefore is an individually designed plan, and as a result, the plan must be reviewed to determine if there are form defects in the following areas:

  • Any prior interim and discretionary amendments made while the plan was a pre-approved plan will need to be reviewed and corrected if they do not meet the requirements of Code Section 401(a).
  • The rules for individually designed plans under Section 5 of Revenue Procedure (Rev. Proc.) 2016-37 https://www.irs.gov/pub/irs-drop/rp-16-37.pdf would govern the remedial amendment period applicable for those, and all other required changes, to determine how far back the form error occurred if one exists.

If, after reviewing the plan and any interim or discretionary amendments, one determines that one or more provisions did not meet the requirements of Code Section 401(a), the qualified status can be corrected. 

As an individually designed plan, the plan would meet the Self Correction Program (SCP) requirement of a prior letter under Section 5.01(4) of Rev. Proc. 2021-30. Reliance on the opinion or advisory letter from when the employer first adopted a pre-approved plan is equivalent to a determination letter (Rev. Proc. 2015-36, section 19.04).

SCP/VCP. If one finds a defect that has existed for less than the past three years, it can be corrected through the SCP. For older form defects, one would have to file a Voluntary Correction Program (VCP) application to make a correction.

Missed Deadline for 403(b) Pre-Approved Plans

Rev. Proc. 2017-18 provided a three-year window for an employer to restate their plan if they intended it to become a 403(b) pre-approved plan for Cycle 1. That window ended on March 31, 2020; Notice 2020-35 extended it to June 30, 2020.

A 403(b) plan had no pre-approved program before Cycle 1. A 403(b) plan that intended to be a pre-approved plan for Cycle 1, but failed to adopt a restatement by June 30, 2020, never became a pre-approved plan. Consequently, it would be reviewed as an individually designed plan, based on the requirements of Sections 6-9 of Rev. Proc. 2019-39

Since a 403(b) plan could not apply for a determination letter, the prior letter requirement has a more lenient condition to meet, says the IRS. A 403(b) plan meets the favorable letter condition in Section 4.03(1) of Rev. Proc. 2021-30 https://www.irs.gov/pub/irs-drop/rp-21-30.pdf, if the employer had a written plan document in place in 2009, or if later, in the year the plan was first adopted.

SCP/VCP. As with 401(a) defined benefit plans, if one finds a defect that has existed for less than the past three years, it can be corrected through the SCP. For older form defects, one would have to file a VCP application to make a correction.
 

The Bottom Line

The failure to qualify as a pre-approved plan is not a qualification issue. 

Being a pre-approved plan is one method of meeting the requirement to have an updated written plan document. If the employer that sponsors a plan does not timely adopt a current pre-approved plan, it can still meet the written document requirements as an individually designed plan. And individually designed plans that don’t meet those requirements can be self-corrected under the circumstances as discussed in Rev. Proc. 2021-30, Part IV.