401(k) Plan Fix-It Guide - You haven't updated your plan document within the past few years to reflect recent law changes.
Find the Mistake
Fix the Mistake
Avoid the Mistake
|1) You haven't updated your plan document within the past few years to reflect recent law changes.||Review annual cumulative list to see if plan has all required law changes (see Notice 2014-77).||Adopt amendments for missed law changes. If you missed the deadline to adopt an amendment you may need to use the IRS correction program.||Use a calendar that notes when you must complete amendments. Review your plan document annually. Maintain regular contact with the company that sold you the plan.|
All 401(k) plans must be established and supported by a formal written plan document that complies with the Internal Revenue Code. You must amend your written plan when the tax laws affecting 401(k) plans change. The IRS generally establishes a firm deadline by which plan amendments reflecting tax law changes must be adopted. This requirement applies to all 401(k) plans, whether active or not, for as long as assets remain in the plan. Terminating plans must be updated for law changes through the date of termination.
How to find the mistake:
As a 401(k) plan sponsor, you need to be able to show that:
- you've timely adopted:
- a written plan document, and
- any necessary amendments to reflect tax law changes; and
- the plan document complies with the form requirements of the IRC.
You should review the following documents to determine if you timely amended your:
- Original plan document
- All subsequent plan amendments or restatements
- Any adoption agreements (The adoption agreement isn't the complete plan document and must be accompanied by a basic plan document, which provides details of how the plan must operate.)
- Any IRS opinion or advisory letter
- Any IRS determination letter
- Board of Director’s resolutions and minutes, or similar records related to the plan
Types of plan documents
You may have a written plan document that is:
The two main types of pre-approved plans are:
- Master & Prototype plans and
- Volume Submitter plans.
M&P sponsors and VS practitioners submit these respective plans to obtain an IRS opinion or advisory letter approving the form of the plan document. You may adopt a pre-approved plan from an M&P sponsor or VS practitioner. An individually designed plan document is tailored to meet the particular needs of an employer by providing the maximum amount of flexibility in plan design. The IRS hasn't pre-reviewed it.
Updating plan documents
401(k) plans must be updated from time-to-time to conform to changes in the federal tax laws made by Congress or to reflect official guidance issued by the IRS. If you didn't adopt an amendment on a timely basis, you are a late amender or a nonamender, which means your 401(k) plan doesn't comply with the law and is no longer a tax-favored qualified plan.
Plans have to be amended by the end of their remedial amendment cycles. To take advantage of its RAC, the plan sponsor must have adopted annual interim amendments by the end of the year in which the law changes became effective.
Revenue Procedure 2007-44 requires 401(k) plans to be amended and restated every five years for individually designed plans (or six years for pre-approved plans). This guidance also establishes deadlines for interim and discretionary plan amendments and provides guidance on when plan sponsors may submit determination letter applications to the IRS using a revolving cycle system. Under that system, individually designed plans are assigned a specific five-year cycle (Cycles A-E), which is generally based on the last digit of the plan sponsor’s EIN. If you use a pre-approved plan document, the institution that maintains the plan document should contact you when you need to update the plan.
Interim and good faith amendments are required to keep a written plan document current between remedial amendment cycles. Other amendments are discretionary amendments. Plan sponsors must usually adopt:
- an interim amendment by the later of the:
- due date (including extensions) for filing the income tax return for the employer’s taxable year that includes the date on which the amendment is effective, or
- last day of the plan year that includes the date on which the amendment is effective.
- a discretionary amendment by the end of the plan year in which the plan amendment is effective.
An interim amendment doesn't include any amendment adopted to:
- correct a mistake to operate the plan according to the plan terms.
- comply with legislation for which the remedial amendment period has already expired.
A plan provides for a 6-year graded vesting schedule and the plan operated on a 5-year vesting schedule. A corrective amendment providing for a 5-year vesting schedule isn't an interim amendment.
An amendment adopted to bring a plan into compliance with GUST or any other previous legislation isn't a good faith or interim amendment.
The IRS publishes a Cumulative List of Changes in Plan Qualification Requirements near the end of each year. It will help you determine which interim amendments you need to adopt and which amendments have to be finalized in your plan by the end of your current 5-year cycle. The most current Cumulative List, in, Notice 2014–77 is for Cycle E plan sponsors and electing government plans to use to draft their plans for the submission period ending January 31, 2016.
The following table summarizes some of the major tax laws and IRS guidance enacted or issued after 2001 that apply to 401(k) plans and where the plan amendment deadline has expired. For a more detailed list of changes, refer to the applicable Cumulative List for your plan. It may be important to review the initial Cumulative List that applied to your plan, since the cumulative lists for the second cycle series don't include amendment items from the initial cycle.
|Tax Law/Guidance||Major Provisions||
|Small Business Jobs Act of 2010
||Participants in a 401(k) plan were allowed to convert their vested 401(k) accounts to Roth accounts without taking a distribution from the plan.||
The later of:
If your plan didn't implement this benefit in operation then no plan amendment was necessary (See Notice 2010-84).
|Worker, Retiree, and Employer Recovery Act of 2008 (WRERA)||
Amendment deadline for PPA technical corrections was by the end of the 2009 plan year. For calendar year plans, the deadline was December 31, 2009.
|Heroes Earnings Assistance and Relief Tax Act Of 2008 (HEART Act)||Requires all 401(k) plans to be amended for special benefits for plan participants who are or who may perform qualified military service.||The last day of the first plan year that began on or after January 1, 2010. For calendar year plans, the deadline was December 31, 2010.
|Pension Protection Act of 2006 (PPA)
||Requires faster vesting of employer contributions, simplifies 401(k) administration, diversification of plan investments, increased portability for distributions. Permits additional new automatic contribution arrangements and other optional benefits. Temporary provisions of a 2001 tax law change were made permanent.||The last day of the first plan year that began on or after January 1, 2009. For calendar year plans, the deadline was December 31, 2009. Specific PPA amendments on the diversification of investments didn't have to be adopted until the end of the first plan year that began on or after January 1, 2010 (See Notice 2009-97). For calendar year plans the deadline for this specific item was December 31, 2010.|
|Final IRC Section 415 regulations
||Numerous changes to plan language associated with IRC Section 415(c) effective for limitation years beginning on or after July 1, 2007||
The later of:
For many plans, the amendment deadline was the filing deadline for the plan sponsor’s 2008 tax return. The deadline may be earlier if your plan has a non-calendar plan year, limitation year or both. The deadline was January 31, 2009 for plan sponsors:
|Final IRC Sections 401(k) and 401(m) regulations
||Made changes to 401(k) administration and was mandatorily effective for plan years beginning on or after January 1, 2006.||For many plans, the filing deadline for the plan sponsor’s 2006 tax return. However, some plan sponsors who use an individually designed plan and fall under Cycle A or B had an earlier deadline. If the regulations were optionally applied in 2005, the amendment needed to be adopted by December 31, 2005.|
|Automatic rollover provision associated with IRC Section 401(a)(31)(B) and Notice 2005-5||Changes to the rules related to mandatory distributions of benefits. Applies to all plans on or after March 25, 2005.||
The later of:
|Final IRC Section 401(a)(9) regulations
||Various changes to the rules regarding required minimum distributions. Applies to all plans starting in 2003.||Good faith amendment generally needed to be adopted by the last day of the first plan year that began on or after January 1, 2003. If good faith amendments were timely adopted, a restated plan document that fixed any defects or minor omissions needed to be adopted by the end of the plan sponsor’s cycle that included EGTRRA as set forth in Revenue Procedure 2007-44. For plan sponsors who use pre-approved plans, the end of the applicable remedial amendment period was April 30, 2010 (see Announcement 2008-23).|
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
|Provided for higher benefits and simplification of plan administration. Generally effective in 2002.||Good faith amendments generally needed to be adopted by the last day of the first plan year that began on or after January 1, 2002. If you used a pre-approved plan document, the deadline was September 30, 2003. Assuming the good faith amendments were timely adopted, a restated plan document that complied with all EGTRRA requirements and that fixed any defects or minor omissions needed to be adopted by the end of the plan sponsor’s cycle that included EGTRRA as set forth in Revenue Procedure 2007-44. For plan sponsors who use pre-approved plans the end of the applicable remedial amendment period was April 30, 2010 (see Announcement 2008-23).|
* Special grandfathered 401(k) plans sponsored by a governmental entity as defined in IRC Section 414(d) may have had later deadlines, in some cases, than the ones specified in the table for some of the listed amendments.
How to fix the mistake:
If you find you haven’t amended your plan timely for law changes, you should take the following steps:
- Adopt amendments for the tax law changes you've missed. You may be able to use IRS model or sample amendments that apply to your 401(k) plan. You'll need to confirm that the operation of the plan is consistent with the plan terms, including the amendment. For individually designed plans, the IRS has published some suggested sample language as part of a package of Listing of Required Modifications.
- Model amendments issued by the IRS may be useful. The following IRS guidance contains model or sample plan amendments:
- Sample amendment to provide for designated Roth contributions in 401(k) plans (see Notice 2006-44).
- Sample amendments to add the automatic enrollment feature (see Notice 2009-65).
- Use Sample Amendment 1 to add an automatic contribution arrangement to a 401(k) plan.
- Use Sample Amendment 2 to add an eligible automatic contribution arrangement described in IRC Section 414(w) (permitting 90-day withdrawals) to a 401(k) plan.
- You may have to adopt a pre-approved plan from an M&P sponsor or VS practitioner.
- Generally, the effective date of the amendment should be retroactive to conform the plan’s terms to the requirements of the legislation.
- File a VCP submission with the IRS using Revenue Procedure 2013-12.
If the only mistake in the VCP submission involves the late adoption of interim amendments or amendments required to implement an optional law change, then the plan sponsor can use Form 14568, Model VCP Compliance Statement, and Form 14568-A, Model VCP Compliance Statement - Schedule 1: Interim Nonamender Failures, including Forms 8950 and 8951. The resolution of certain interim or optional law change amendment failures using Form 14568-A results in the IRS treating the corrective amendment as if the plan sponsor had adopted it timely to determine the availability of the extended remedial amendment period. The fee for the submission is $375.
Form 144568-A isn't available if the required or optional law change amendment isn't adopted before the plan’s extended RAP expires. If the amendment is adopted after the expiration of the RAP, then the plan sponsor should use Form 14568-B, Model VCP Compliance Statement - Schedule 2: Other Nonamender Failures and Failure to Adopt a 403(b) Plan Timely, to describe the plan document failure. In that case, check the box indicating that the plan wasn't timely amended for the Cumulative List that included the late good faith/interim amendment.
Correction programs available:
This mistake cannot be corrected under SCP.
Voluntary Correction Program:
If the plan isn't under examination, you may make a VCP submission to the IRS. There is a fee for this mistake.
The XYZ Company maintains a pre-approved 401(k) plan using the calendar year as its plan year. The 2010 Form 5500 indicated that the plan had 40 participants. In 2011, the plan administrator determined that the XYZ Company didn't adopt interim amendments associated with PPA by December 31, 2009 as required by their pre-approved plan’s provider. Since the special remedial amendment period for pre-approved plans that includes the PPA changes is still considered open in 2011 when the VCP submission is filed with the IRS, this problem is considered a late interim amendment failure. The fee for this size plan would normally be $1,000; however, if the failure to adopt timely interim amendments is the only mistake in the submission, there is a reduced fee of $375 regardless of the number of participants in the plan. XYZ Company should use Form 14568 and Form 14568-A - Schedule 1 when preparing its VCP submission. Note: XYZ must list all specific late PPA amendments on Form 14568-A and include Forms 8950 and 8951.
Same facts as Example 1, except XYZ Company didn't timely amend its plan for changes in the law mandated by EGTRRA. XYZ Company should've adopted EGTRRA good faith amendments by September 30, 2003. In addition, most pre-approved document providers required their clients to adopt an EGTRRA pre-approved restated plan document by April 30, 2010 to be considered timely amended. XYZ Company may use Forms 14568 and 14568-B. The VCP fee is $1,000. Note: If you use a pre-approved plan and didn't timely amend for EGTRRA, consult the VCP Submission Kit.
ABC Corporation sponsors a 401(k) plan and uses an individually designed plan document. ABC’s EIN ends in three and, therefore, falls under Cycle C, which is associated with the 2012 Cumulative List. The remedial amendment period for this cycle ended on January 31, 2014, assuming ABC adopted all good faith/interim amendments timely. The 2013 Form 5500 indicated that the plan had 450 participants. After January 31, 2014, ABC’s plan consultants determined that ABC didn't adopt interim amendments for PPA by January 31, 2014. In addition, these provisions weren't adopted in any form by January 31, 2014. The consultants also found additional defective plan language. Because the remedial amendment cycle that includes PPA closed before ABC adopted the amendments, this failure isn’t eligible for the reduced $375 fee. ABC must use Form 14568-B and check the box indicating that the plan wasn't timely amended for the 2012 Cumulative List.
The fee in this case is generally $5,000; however, if the only mistake was being a late amender for Cycle C (due date/end of remedial amendment cycle was January 31, 2014) and ABC filed a VCP submission within one year of the end of Cycle C (by January 31, 2015), then the VCP fee would be 50% of the normal fee in the chart, or $2,500 ($5,000 x 50%).
Audit Closing Agreement Program:
If this mistake is found on audit, you may correct it under Audit CAP. The sanction under Audit CAP is a percentage of the maximum payment amount.
If an IRS agent finds this mistake during the determination letter process, it’s subject to a higher fee than if you bring the mistake to the agent’s attention in the application. If you’ve filed for a determination letter and discover you may be a nonamender, bring this to the agent’s attention to avoid the higher fee.
How to avoid the mistake:
- Do an annual review of your plan document.
- Identify a person responsible for determining when time-sensitive plan amendments must be adopted, and informing all relevant parties when regulatory changes will impact the plan and require amendments. Use a calendar (tickler file) that notes when you must complete amendments.
- Make sure your plan document and Summary Plan Description or Summary of Material Modifications, as relevant, match. If you amend your plan document, check the language against the old plan document, noting any differences. Have a centralized person or department responsible for maintaining all plan documents.
- Ensure that amendments are readily available for all plans including those transferred, merged, spun-off, or transferred in a trust-to-trust transfer to the plans —back to the later of the last determination letter issued directly to the employer or to inception.
- Maintain contact (at least annually) with the outside professionals, who have drafted the plan documents, or the service provider that sponsors or sold your company the prototype or volume submitter plan documents. If the service provider, bank or law firm sends a set of amendments to formally adopt, make certain that it is timely executed per the sender’s instructions. Keep signed, dated copies of all plan documents and any amendments for your records. Knowing you've properly updated your plan may not be a simple process. Certain plans must be individually amended for each change, while others may have a prototype document that is amended by the external service provider.