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.||For older items, review the annual cumulative list to see if the plan has all required law changes. Starting in 2016 review the annual required amendments list.||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 (IRC). 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 the plan was timely amended:
- 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:
A pre-approved plan is submitted to the IRS to obtain an opinion or advisory letter approving the form of the plan document. You may purchase and adopt a pre-approved plan through the document provider (Master & Prototype sponsor or Volume Submitter 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.
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.
Updating plan documents - cycle system
Revenue Procedure 2007-44 set up the cycle system requiring 401(k) plans to adopt timely interim amendments and extended the remedial amendment period to the end of the remedial amendment cycle, every five years for individually designed plans (or six years for pre-approved plans). Individually designed plans were assigned a specific five-year cycle (Cycles A-E), which was 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 contacts you when you need to update the plan. This cycle system ended on December 31, 2016, for individually designed plans.
As of January 1, 2017, the cycle system applies only to pre-approved plans (See New Determination Letter Program – Rev. Proc. 2016-37).
Interim amendments are required to keep a written plan document current for law changes between remedial amendment cycles. Other amendments, such as optional provisions under the Internal Revenue Code or electing to change a provision in operation that wasn’t required because of a law change, are considered discretionary amendments.
Deadlines to adopt amendments under the cycle system:
- interim amendments - 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.
- discretionary amendments - 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 failure to operate the plan per 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 previous legislation isn't an interim amendment.
The IRS publishes a Cumulative List of Changes in Plan Qualification Requirements near the end of each year. Beginning in 2017, the Cumulative List will be published prior to the beginning of each 6-year remedial amendment cycle for pre-approved plans. Prior to January 1, 2017, the list was also used by individually designed plan sponsors to help determine which interim amendments the sponsor needed to adopt and which amendments had to be finalized in the plan by the end of each 5-year cycle.
Updating plan documents – amendment deadlines for individually designed plans starting January 1, 2017
Starting in 2017, plan amendment deadlines for individually designed plans are no longer tied to the remedial amendment cycles. For amendments required to be timely adopted and to avoid disqualification of an existing plan, the new remedial amendment period is the end of the second calendar year following the year the provision appears on the annually published Required Amendments List. For discretionary amendments, the deadline is generally the end of the plan year in which the change is put into effect. See Revenue Procedure 2016-37. Plan sponsors may also want to consult the annually published Operational Compliance List.
Beginning September 1, 2019 some individually designed 401(k) plans that have merged together will have the opportunity to make submit a determination letter application to the IRS if certain conditions are satisfied. See Revenue Procedure 2019-20 (PDF) for details and the impact it may have on some amendment deadlines.
|Tax Law/Guidance||Major Provisions||
|Revenue Ruling 2013-17 and Notice 2014-19||Guidance issued in response to Supreme Court case, United States v. Windsor, 570 U.S. 133 S. Ct. 2675 (2013) that found section 3 of the Defense of Marriage Act unconstitutional. The effect is that for Federal tax purposes (including for qualified retirement plans), the terms “spouse,” “husband and wife,” include an individual married to a person of the same sex if the individuals are lawfully married under state law.||
The later of:
(For additional details see Notice 2014-19)
|American Taxpayer Relief Act of 2012||Expanded the type of amounts eligible for an in-plan Roth rollover to include amounts that were not otherwise distributable to the employee.||
The later of:
If your plan didn’t implement this benefit in operation, then no plan amendment was necessary (see Notice 2013-74)
|Small Business Jobs Act of 2010
||Permits a plan that includes a qualified Roth contribution program to allow employees to roll over amounts from their accounts other than designated Roth accounts to their designated Roth accounts in the plan. Amounts eligible for rollover are limited to amounts that were otherwise eligible for distribution to the employee.||
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, requires diversification of plan investments and 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.
|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 (Revenue Procedure 2007-44). For plan sponsors who use pre-approved plans, the end of the applicable remedial amendment period was April 30, 2010 (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 (Revenue Procedure 2007-44). For plan sponsors who use pre-approved plans the end of the applicable remedial amendment period was April 30, 2010 (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. 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.
If ineligible for VCP, file a VCP submission with the IRS using Revenue Procedure 2019-19 (PDF).
If the only mistake in the VCP submission involves the late adoption of interim amendments then the plan sponsor can use Form 14568, Model VCP Compliance Statement (PDF), and Form 14568-A, Model VCP Compliance Statement - Schedule 1: Interim Nonamender Failures (PDF). 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.
Form 14568-A isn't available if the required amendment isn't adopted before the plan’s extended remedial amendment period expires. If the amendment is adopted after the expiration of the remedial amendment period, 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 (PDF), 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 interim amendment.
Correction programs available:
Some, plan document failures may be corrected on or after April 19, 2019 under SCP if certain conditions are met. The conditions are:
- Plan document failures must be corrected within the two-year correction period specified in Rev. Proc. 2019-19, section 9. The failure begins in the plan year that includes the end of the applicable remedial amendment period.
- Plan must have a favorable letter as defined in Rev. Proc. 2019-19, section 5.01.
- SCP is not available to correct a failure to timely adopt an initial IRC 401(a) plan document.
- Corrective amendments to resolve demographic failures that were not timely adopted are not eligible for SCP and must be resolved under VCP or Audit CAP.
- The late adoption of discretionary amendments is not considered a plan document failure.
- Refer to Rev. Proc. 2019-19, sections 4.01, 4.03, 4.04 and 4.05 for program eligibility requirements.
The Carrot Stick Company has sponsored a 401(k) plan since 1997. They use a pre-approved plan document. On May 3, 2019 the plan sponsor realized that they failed to timely amend their plan for EGTRAA by the April 30, 2010 deadline and for PPA by the April 30, 2016 deadline respectively. The EGTRRA document was adopted on June 30, 2015 and the PPA document was adopted on December 5, 2018. Can these failures be considered resolved under SCP per Rev. Proc. 2019-19?
The answer is no. The failures can’t be resolved under SCP. The correction of the failures occurred before April 19, 2019, the effective date of the revenue procedure. Prior to 4/19/19 the correction of these failures needed to be accomplished via VCP or Audit CAP. Even if the failures had been uncorrected they would still be ineligible for SCP under Rev. Proc. 2019-19 because correction would be occurring after the end of the 2 year period for correcting significant failures under SCP. That period would have ended on 12/31/12 for the EGTRRA failure and 12/31/18 for the PPA failure.
Voluntary Correction Program:
If the plan isn't under examination, you may make a VCP submission to the IRS via the Pay.gov website in accordance with the instructions in Rev. Proc. 2019-19, Section 11. Consider using IRS model documents in the Form 14568 series (i.e. Form 14568 and Form 145468-B) to describe the failures and how they were fixed. User fees for VCP submissions are generally based on the amount of plan assets.
The XYZ Company maintains a pre-approved 401(k) plan using the calendar year as its plan year. The 2016 Form 5500 indicated that the plan had had net assets of $476,000. 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. The plan document failure described in this example can’t be resolved under SCP because the conditions described in Rev. Proc. 2019-19 can’t be met. XYZ Company may use Forms 14568 and 14568-B. The VCP user fee for 2019 is $1,500 given the amount of net plan assets. If the amount of next plan assets exceeds $500,000, the user fee will be higher. VCP user fees may change in subsequent years. Note: If you use a pre-approved plan and didn't timely amend for EGTRRA, see 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 2016 Form 5500 indicated that the plan had $675,000 in net plan assets. 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. The plan document failure described in this example can’t be resolved under SCP because the conditions described in Rev. Proc. 2019-19 can’t be met. ABC must make a VCP submission. Among other forms and documents use Form 14568-B (PDF) and check the box indicating that the plan wasn't timely amended for the 2012 Cumulative List.
Assume, a VCP submission is made on April 30, 2019. For 2019, the user fee in this case is generally $3,000 given the of amount of net plan assets reported on the most recently filed Form 5500. If the amount of next plan assets exceeds $10,000,000, the user fee will be higher. VCP user fees may change in subsequent years.
The Any Company, a sole proprietorship, with one employee, maintains a pre-approved 401(k) plan using the calendar year as its plan year. As of December 31, 2017, the total amount of plan assets is $78,000. Any Company didn't timely amend its plan for changes in the law mandated by the Pension Protect Act of 2006 (“PPA”). Any Company should've adopted PPA good faith amendments by December 31, 2009. In addition, most pre-approved document providers required their clients to adopt a PPA pre-approved restated plan document by April 30, 2016, to be considered timely amended. Any Company may use Forms 14568 and 14568-B. The general VCP user fee for 2019 is $1,500 given the amount of plan assets. If the amount of next plan assets exceeds $500,000, the user fee will be higher. VCP user fees may change in subsequent years. Note: If you use a pre-approved plan and didn't timely amend for PPA, see the VCP Submission Kit for PPA. Note the plan document failure described in this example can't be resolved under SCP because the conditions described in Rev. Proc. 2019-19 can't be met.
Audit Closing Agreement Program:
If this mistake is found on audit, you may correct it under Audit CAP. The sanction under Audit CAP is based on facts and circumstances, as discussed in Section 14 of Revenue Procedure 2019-19.
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.