As employers who use a pre-approved plan document know, a restatement of the plan must be adopted before the end of the two-year window following the 6-year corrective amendment period cycle. As the Cycle 3 deadline for defined contribution plans approaches – July 31, 2022 – guidance on what to do if the plan sponsor misses a restatement deadline is particularly welcome. We discuss recent IRS guidance below.
A. Defined benefit plans
For 401(a) defined benefit plans, the two-year restatement window for the most recent recurring plan amendment cycle (Cycle 2) ended July 31, 2020 (see Announcement 2018-05 and Notice 2020-35). A plan for which a restatement has not been adopted by the Cycle 2 deadline is no longer a pre-approved plan – that plan becomes an individually designed plan for the period between the restatement deadline and the date on which the restatement is effectively adopted. In addition, the employer loses its prior adopter status for failing to timely adopt a pre-approved plan for the cycle immediately preceding the opening of the current cycle.
In the event of such a conversion to an individually designed plan, the plan should be reviewed to ensure that all prior interim and discretionary changes made while the plan was a pre-approved plan meet the requirements of Section 401. (a) of the Code. Any defects in form found will need to be corrected, with the rules applicable to corrective change periods for individually designed plans governing the determination of the period of failure (see Rev. proc. 2016-37, section 5).
B. 403(b) Plans
Similarly, employers sponsoring a 403(b) plan were given a 3-year window to reformulate their 403(b) plans to become a pre-approved plan for cycle 1, the adoption window being ending June 30, 2020 (see tax procedure 2017-18 and opinion 2020-35). As this was the first cycle for pre-approved 403(b) plans, a plan that did not adopt a restatement by June 30, 2020 never became a pre-approved plan and would be an individually designed plan. for the period between the restatement deadline and the date of adoption of the restatement. As above, the plan must be reviewed for Code compliance, in this case with Section 403(b).
C. Description of fix
The IRS confirmed in a May 23 website posting that those individually designed plans that do not meet applicable Code requirements can be corrected under the Income Procedure’s Employee Plan Compliance Resolution System. 2021-30 (“EPCRS”). Specifically, self-correction is available as long as the plan meets all of the self-correction program requirements, including schedule requirements and the requirement for a favorable advance letter.
Specifically, the IRS has clarified that a defined benefit plan satisfies the requirement for a “prior letter” by virtue of the plan relying on an opinion or opinion letter of the prior adoption of a pre-approved plan, as this letter is equivalent to a determination letter (see Rev. proc. 2015-36, section 19.04). For 403(b) plans, since there was no option to request a letter of determination, and no prior option to request a letter of opinion (or advice), the prior letter requirement is met whether the employer had a written plan document in place in 2009 (or the year the plan was first adopted, whichever is later). It is important to note that a Voluntary Correction Program (“VCP”) request would only be required to correct the failure if the defect has persisted for more than three years.
This clarification from the IRS – allowing these late adoptions to be corrected without requiring a corresponding VCP filing – is very helpful. Additionally, while the IRS has not specifically addressed pre-approved defined contribution plans, for which the deadline to adopt a restatement for the current cycle is July 31, 2022, it is reasonable to conclude that these guidelines will also apply to these plans.