Admittedly, it’s not as exciting as the cicadas’ recent reemergence cycle, but it’s a good time to remind your sponsor-clients about the 401(k)-restatement cycle if they haven’t started the process already.
Eric Droblyen, CEO of Employee Fiduciary LLC, notes that 401(k) plans must operate according to the terms of a written plan document to meet IRS qualification requirements. Most plans use an IRS preapproved document for this purpose, and these documents must be fully rewritten (or restated) every six years to reflect recent law changes. “The last six-year restatement cycle was called ‘PPA’ after the Pension Protection Act of 2006,” Droblyen explains. “A new cycle, called ‘Cycle 3,’ opened last year.”
Keeping Up to Date
The periodic restatements help keep plan documents current in response to changes. A plan’s documents must always reflect the provisions that apply to the plan at any given time, according to Adam Pozek, partner with DWC. That would normally mean that anytime there is any sort of change to the underlying rules that apply to retirement plans, we would have to update plan documents, says Pozek.
The restatement requirement lessens the ongoing plan-update workload. “Essentially, what the IRS has said is that with a few minor exceptions, every six years plans have to update their documents to reflect any changes that occurred in the preceding six-year timeframe,” says Pozek. “So rather than making us amend plans or restate plans every time there's a law change, we do it every six years. The idea is that the process brings plan documents up to date with a more or less current set of rules that apply.”
Matt Sommer, head of Janus Investors’ Defined Contribution and Wealth Advisor Services team, points out that the current cycle updates documents for new laws up to February 1, 2017, and restatement is mandatory. “Even plans that have been recently adopted will likely need to be restated,” Sommer cautions. “Failure to restate can result in penalties, including plan disqualification.”
The restatement deadline is July 31, 2022, but Sommer recommends sponsors complete the process by December 31, 2021. “The reason is because a mandatory hardship distribution is due by December 31, 2021,” he explains. “Plan sponsors might as well get both done at the same time.”
Anna Johnson, director of operations, Ascensus also recommends an early start. A plan should provide four to eight weeks' lead time for a document provider to restate a document, she advises.
“Most service providers are in the midst of restatement now, with hopes to finish initial deliveries months before the July deadline,” says Johnson. “If the employer has not yet heard from their document provider under whichever contractual relationship they may have, then employers should reach out to their document provider as soon as possible for a schedule of when this will occur.”
Plans frequently work with multiple support organizations. Brandon Grandbouche, managing partner of WealthHarbor Capital Group LLC, explains the document restatement process is primarily driven by the third-party administrator (TPA), who will ensure all voluntary amendments and updated provisions are incorporated into the restated plan document.
“The record keeper or plan provider will handle point on communications with the plan sponsor/administrator and let them know what the process is, why it must be done, and when they expect to complete the restatements,” Grandbouche explains. “They will then send the plan sponsor the updated basic plan document and adoption agreement for review and signature.”
The restatement process can go in multiple directions, Pozek explains. DWC takes a holistic approach and considers the restatement a good opportunity for an overall plan design review. “So, we'll prepare a summary and then have a conversation with our client to explain to them the pros and cons, the options, the ins and outs of their plan, so that if there are any changes they want to make, they can make it at the same time that we're having to adopt this new plan document anyway,” he says.
Other firms take the approach that if clients are happy with their current plan documents, the goal will be to make the process as quick and easy as possible, Pozek adds. With this approach, the restatement essentially transcribes existing provisions into the new form of the plan document. “Those are kind of two different ends of the spectrum in terms of how organizations might approach going through the plan document process with their clients,” he says. “Neither one is better or worse. It's just really a matter of a business model.”
Plan Advisor’s Role
Sources agreed that plan advisors can play an important role in helping plan sponsors get the restatement completed on time. Droblyen suggested that plan advisors can contribute by:
- Having a clear understanding of the TPA’s restatement process so they can help guide the sponsor through it.
- Being able to explain the need for the restatement, which probably won’t be welcome news to many sponsors.
- Suggesting discretionary changes to the sponsor that simplify plan administration and/or meet plan goals at a lower cost.