Important Information
Cycle 3 Restatement Deadline Is Approaching
The Cycle 3 restatement (“Cycle 3 Restatement”) deadline is July 31, 2022. You have received a survey and Frequently Asked Questions on the need to timely restate your company’s retirement plan. If you require assistance in this regard, please contact your plan administrator at 856-396-0499.
Plan documents are drafted based on laws and regulations set forth by Congress, the IRS, and the Department of Labor. As those laws and regulations change, documents must be updated to reflect those changes. The deadline for the last mandatory restatement was April 30, 2016, but it was based on documents approved by the IRS in 2014 and only considered legislative/regulatory updates through 2010. Since then, there have been a number of regulatory and legislative changes impacting retirement plans, including, but not limited to, the following:
- Expansion of the definition of “spouse” to include those of the same gender
- Availability of plan forfeitures to offset certain additional types of company contributions
- Ability to amend safe harbor 401(k) plans once the year has already started
- Creation of in-plan Roth transfers
- Qualifying longevity annuity contracts (“QLACs”)
The Cycle 3 Restatement applies to 401k plan documents that are “tax-qualified” and “pre-approved” by the Internal Revenue Service (“IRS”). The IRS requires these documents to be fully rewritten (or “restated”) every six years to reflect recent law changes. The last “6-year restatement” cycle was required to bring retirement plan documents in compliance with the Pension Protection Act of 2006 (“PPA `06”). The period for complying with the next cycle is occurring now and ends on July 31, 2022. If a retirement plan is not amended and restated to comply with the Cycle 3 Restatement, could result in your plan losing its “tax-qualified” status.
Major Consequences if a Retirement Plan Loses Its Tax-qualified Status
If a plan loses its tax-qualified status, the consequences can be draconian. The following discusses the major consequences if a plan becomes “disqualified”.
Upon plan disqualification, the participants of the plan would be immediately subject to federal income tax on all of their accrued benefits in the plan as ordinary income. Such income would be taxed for all open years with penalties and interest.
In addition to the taxation of plan participants, if a retirement plan lost its tax-qualified status, the trust of the plan would be immediately subject to federal trust tax on an amount equal to all of the accrued benefits in the plan. Such trust income would be taxed for all open years with penalties and interest.
In addition to the taxation of a plan’s trust, upon plan disqualification, the employer with respect to the plan would immediately lose its deductions for all amounts contributed to the plan for all open tax years.
Finally, assets of a “non-qualified” retirement plan cannot be rolled over to a tax-qualified plan or Individual Retirement Account/Annuity (“IRA”). Thus, if a plan loses its tax-qualified status, its assets cannot be rolled over to another tax-qualified plan or IRA. If such assets were rolled over to another tax-qualified plan or IRA, it would cause the recipient plan or IRA to lose its tax-qualified or “tax-favored” status, respectively.