richard hochman, managing director mckay hochman ...2 richard hochman, managing director mckay...
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Plan Document Update Post PPA & 403(b)
Richard Hochman, Managing Director
McKay Hochman - DST Retirement Solutions
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Richard Hochman, Managing Director McKay Hochman - DST Retirement Solutions
Rich has been involved with employee benefits for more than
three decades. He is Managing Director of McKay Hochman
Consulting (a service of DST) which is nationally recognized in
the plan document, consulting and training arenas. Rich is a
frequent speaker at industry forums including those offered by
NIPA and ASPPA, as well as the Enrolled Actuaries Meeting. He
received an Educator of the Year Award in 2012. During his
career he has authored articles on a range of industry topics and
testified at Regulatory hearings in Washington, DC. He earned a
BA degree in Political Science, a BS degree in Business
Administration, an MBA and a JD degree from the State
University of New York at Buffalo.
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Plan Documents Post PPA Restatement
• PLAN DOCUMENT STATUS
• Individually Designed Plans
• Have completed the PPA restatement cycle for
Defined Contribution and Defined Benefit Plans as of
January 31, 2016.
• For Cycle A Plans there is one more restatement
available with the ability to get a favorable
Determination Letter. As of 2017, the five-year
restatement cycle for individually designed plans is
eliminated.
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Plan Documents Post PPA Restatement
• Existing Determination Letters that were issued
on Cycles B-E will no longer have a expiration
date. The expiration dates on those letters are
voided. What is not clear is reliance on those
letters if amendments are made to the
documents.
• Individually designed plans can still obtain initial
Determination Letters as well as Determination
Letters on plan termination.
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Plan Documents Post PPA Restatement
• Individually designed defined contribution plans
were provided the opportunity to amend onto a
pre-approved plan and will have reliance, if they
adopt the pre-approved plan by April 30, 2017.
• The 2017 deadline only applies to plans that had
not adopted the pre-approved document before
January 1, 2016.
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Plan Documents Post PPA Restatement
• Two types of plans were previously not allowed on
pre-approved documents and had to be individually
designed.
• Cash Balance Defined Benefit Plans
• Employee Stock Ownership Plans (ESOPs)
• Cash balance provisions were permissible as part of
the PPA Defined Benefit restatement cycle. Those
documents were submitted last fall. The cash
balance provisions had to meet certain safe-harbor
requirements. Biggest issue being the use of actual
rates of return.
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Plan Documents Post PPA Restatement
• ESOPs will be permitted as part of the next DC
pre-approved restatement cycle. That
submission is currently scheduled for October
31, 2017 for mass submitters. The IRS has
already issued model ESOP language that can
be used for that submission.
• While not official, the use of Form 8905 will likely
be eliminated as of 2017; in conjunction with the
elimination of the five-year cycle.
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Plan Documents Post PPA Restatement
• Pre-Approved Plans
• The PPA Defined Contribution six-year
restatement cycle ended April 30, 2016
(yesterday). The April 30, 2017 deadline
addressed earlier for IDPs does not apply.
• The PPA Defined Benefit cycle has been
extended. Documents were originally required to
be filed by January 31, 2014. However, due to
the cash balance change that deadline ultimately
became October 30, 2015.
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Plan Documents Post PPA Restatement
• Those documents have been assigned to
agents. It is anticipated that the review process
will take approximately two years. Thus, Opinion
and Advisory letters would be issued in March of
2018. Restatements would begin May of 2018
and would end April of 2020.
• According to the IRS there were 65 lead plans
submitted and about half have cash balance
language.
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Plan Documents Post PPA Restatement
• 403(b) Plans
• Until 2009 there was no requirement that 403(b)
arrangements have written plan documents.
• As of 12/31/2009, sponsors of 403(b)
arrangements were required to adopt plans that
met specific requirements. However, there was
no approval process for those documents.
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Plan Documents Post PPA Restatement
• The IRS ultimately announced the intention to
create a pre-approved 403(b) plan program.
• As announced, it was originally anticipated that
an individually designed plan program would
follow.
• In Rev. Proc. 2013-22, IRS for the first time
established the pre-approved 403(b) program. It
provides for both prototypes and volume
submitter plans.
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Plan Documents Post PPA Restatement
• One of the features allowed under the 403(b)
program that is not allowed under the pre-
approved programs for either DB or DC
documents is that volume submitter plans can
have “flex provisions” that are not applicable to
all adopting employers. We had hoped to have
that applied to the DB program as well and it
wasn’t.
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Plan Documents Post PPA Restatement
• Upon announcing the pre-approved program, the
IRS also announced their intention to not have
an individually designed program and that there
will be no Determination Letters available to
403(b) arrangements. This raises a couple of
issues.
• Which is the better document for employers offering
403(b) plans?
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Plan Documents Post PPA Restatement
• Under normal operating rules, employers may not
make modifications to the approved prototype plan
document language without causing the document to
be deemed individually designed. However, volume
submitter documents may be amended by adopting
employers; unless they are too substantial/significant.
Historically, an employer wishing IRS approval of the
modifications could submit for a Determination Letter
using Form 5307.
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Plan Documents Post PPA Restatement
• If an employer can easily fit onto a prototype, that
might be the way to go, but if the employer’s existing
document has provisions that don’t fit within the
framework of the prototype, they will likely be better off
adopting a volume submitter plan and making the
necessary modifications. An open issue is whether
they will be able to submit for a Determination Letter
on Form 5307. There currently is no provision for that
to be done in the 403(b) arena.
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Plan Documents Post PPA Restatement
• If using a volume submitter document, how significant
can the changes be, before the document becomes
individually designed and theoretically has no reliance
on the underlying Advisory Letter? This is an
unknown.
• Due to the greater flexibility more employers will likely
use volume submitter documents than prototypes.
• What does an employer do, if their existing plan
does not fit on the finally approved documents?
Can they really operate a plan that has no IRS
approval?
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Plan Documents Post PPA Restatement
• Since the documents submitted last April are still
in review, it is not anticipated that Opinion and
Advisory Letters will be issued before early 2017.
All letters are typically issued simultaneously.
• It is anticipated that the window for employers to
adopt the approved 403(b) documents will open
May 1, 2017.
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Plan Documents Post PPA Restatement
• The employer adoption period for pre-approved
plans has been two years. However, industry
representatives have already advised the IRS
that since this is the first ever 403(b) amendment
and restatement cycle that the window period
should be three years, not two. We will likely not
know the answer to this request until the
program opens.
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Plan Documents Post PPA Restatement
• Thus, if it goes as anticipated, the restatement
period will open May 1, 2017 and extend until at
least April 30, 2019, but possibly April 30, 2020.
• It is important to remember that the remedial
amendment period to fix 403(b) plan document
errors dating back to 2009 will not end until the
restatement period closes.
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Plan Documents Post PPA Restatement
• Additionally, since there was no “PPA”
restatement period for 403(b) plans like there
was for DC and DB plans, the final documents
will reflect PPA, HEART and WRERA.
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Plan Documents Post PPA Restatement
• USER FEES
• IRS User Fees were increased dramatically
earlier this year. This will have an impact on
your plan document offerings for the next round
of restatements.
• When the PPA documents were submitted in
2012, prototype basic plan documents had a fee
of $12,000 including one adoption agreement.
Each additional adoption agreement was $1,000.
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Plan Documents Post PPA Restatement
• Similarly, Volume Submitter Specimen
Documents with up to one Adoption Agreement
were also $12,000 with each additional Adoption
Agreement being $1,000.
• Basic Prototype Plans support both standardized
and non-standardized adoption agreements, as
well as, profit-sharing, money purchase, target
benefit and 401(k) arrangements. Thus the
major vendors submitted multiple adoption
agreements.
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Plan Documents Post PPA Restatement
• Volume submitter plans had different specimen
documents for Money Purchase, Profit-sharing
and 401(k), though multiple adoption agreements
was not the norm.
• User Fees for document vendors have increased
significantly, likely limiting their offerings for the
next cycle. This may impact what TPA’s and
others will offer to their adopting employers.
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Plan Documents Post PPA Restatement
• Under the new fee schedule, the prototype basic
plan document will remain at $16,000, however,
each additional adoption agreement will now cost
$11,000.
• For volume submitters, the fee has doubled from
$14,000 to $28,000 and each additional adoption
agreement is also $28,0000.
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Plan Documents Post PPA Restatement
• For example, a provider with a base document
and 12 Adoption Agreements paid a user fee of
$23,000 in 2012. To provide the same package
of documents in 2017, (the next scheduled
submission) the user fee will be $137,000. That
is an increase of nearly 6 times.
• Among the likely changes is elimination of
money purchase adoption agreements.
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Plan Documents Post PPA Restatement
• It is also likely that stand along profit-sharing
plans will be on a 401(k) adoption agreement,
without using the elective deferral and matching
provisions.
• Industry practitioners have talked about the need
to revamp the pre-approved program so that it
works better for both the IRS and the retirement
industry.
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Plan Documents Post PPA Restatement
• PRE-APPROVED DC PLANS THAT MISSED
THE PPA DEADLINE
• Due to the timing of the issuance of PPA Opinion
and Advisory Letters in 2014, the major
document providers had requested that the PPA
restatement cycle not begin on May 1, 2014. The
IRS rejected that request, but said that they
might consider extending the deadline. That did
not happen.
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Plan Documents Post PPA Restatement
• All pre-approved DC plans that were adopted
using EGTRRA documents, had to be restated
onto the PPA approved documents by April 30,
2016.
• The consequences of failing to adopt the pre-
approved plan by the deadline is that the plan is
no longer entitled to tax-favored treatment. This
reduces the employer’s deduction for
contributions made to the plan and the
participants’ ability to rollover distributions.
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Plan Documents Post PPA Restatement
• Individual employers that missed the deadline
can make VCP submissions, to get their plans
requalified. Those submitting before April 30,
2017, will be eligible for a 50% reduction in fees.
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Plan Documents Post PPA Restatement
Example
• An employer with 25 plan participants would
normally have a VCP filing fee of $750. However,
if they make a VCP submission by April 30, 2017
the filing fee is only $375 — a fifty percent
reduction. Potential filing fees after the April 30,
2017 deadline can range from $500 to $15,000.
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Plan Documents Post PPA Restatement
• On its website, the IRS offers information about
how to “Correct the Failure to Adopt the Pre-
Approved Plan by the Applicable Deadline.” The
URL is:
https://www.irs.gov/Retirement-Plans/Correct-the-
Failure-to-Adopt-the-Preapproved-Plan-by-the-
Applicable-Deadline
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Plan Documents Post PPA Restatement
• On its website the IRS not only addresses the
individual employer approach, but also
addresses a newly announced program,
whereby a financial institution or service provider
can request an “umbrella closing agreement” that
covers individual employers affected by the
failure to update their plans.
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Plan Documents Post PPA Restatement
• The “umbrella” approach is similar to the group
submission under VCP, but eliminates the need
for the financial institution or service provider to
have made a systematic error.
• While plan sponsors may continue to make VCP
submissions, the IRS invites financial institutions
or other service providers to submit proposals for
umbrella closing agreements to correct the
failure on a larger scale by addressing employers
affected by the failure as a group.
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Plan Documents Post PPA Restatement
• The website provides a sample submission kit to
assist with the individual employer
submission. It still addresses the prior April 30,
2010 deadline, but has been updated to reflect
the new forms.
• he VCP submission should include
• Form 8950 Application for VCP.
• An explanation for item 7(b) that a Form 5300 was not
submitted.
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Plan Documents Post PPA Restatement
• Form 8951 Compliance Fee – reflecting the 50%
discount.
• Form 14568 Part I Model VCP Submission
Compliance Statement. This form is a model
compliance statement. Use attachments to this form to
explain what the failure was, how it will be corrected,
and what steps will be taken to make certain the error
will not occur again.
• Form 14568-B, Part II , Schedule 2, Nonamender
Failures
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Plan Documents Post PPA Restatement
• Letter 5265,Acknowledgement Letter. Include a
completed copy of this letter if you would like the IRS
to confirm that we received your application.
• A signed and dated Form 2848 if you want an
attorney or other qualified individual to represent your
organization with regard to this VCP submission.
Include a signed and dated Form 8821 if you want
the IRS to mail copies of any correspondence
regarding this VCP submission to anyone besides
you.
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Plan Documents Post PPA Restatement
• A check made payable to the United States Treasury
for the appropriate fee, plus a photocopy of the check.
Attach both to the Form 8951.
• A signed copy of the EGTRRA plan document (or
adoption agreement, if applicable) and a copy of the
IRS opinion/advisory letter for the plan that you have
adopted.
• A signed copy of your pre-EGTRRA plan document (or
adoption agreement, if applicable) in effect prior to the
EGTRRA restatement and a copy of the IRS
opinion/advisory letter for this older plan document.
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Plan Documents Post PPA Restatement
• Completing Form 8950
• Follow the official Instructions as well as the items
below.
• Item 2: If you are completing and signing the form, but
want us to contact a different employee of the plan
sponsor directly for additional information, enter the
appropriate individual’s contact information and
include a completed Form 8821. If a Form 2848 is
included, check the appropriate box and do not enter
any other information for Item 2.
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Plan Documents Post PPA Restatement
• Signature block: The signer must be an owner of the
plan sponsor or an employee authorized to sign
documents on behalf of the plan sponsor. See
Instructions for Form 8950 for more information on
“Who Must Sign”.
• Item 3: Check the box for “VCP regular submission.”
• Item 4: Enter the name of the plan, the three-digit
plan number, the month the plan year ends, and
amount of plan assets
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Plan Documents Post PPA Restatement
• Item 5: Check the box associated with the type of
retirement plan.
• Item 6: Check the box for “Yes” and the box for
“Schedule 2.”
• Item 7a: Check the box for “Yes.”
• Item 7b: Check the box for “No.”
• Item 7c: Enter the following in the text box: “Six Year
Cycle for adopters of pre-approved defined
contribution plans.”
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Plan Documents Post PPA Restatement
• Explanation for Item 7B on Form 8950 - Create a
document that includes the sponsor’s name, the plan
number and the sponsor’s EIN at the top of the page.
Title the document “Explanation for item 7b on Form
8950.” In the body of the document state: “No
determination letter application is included in this
submission because the plan sponsor is correcting the
reported failure by adopting a pre-approved plan
document with an opinion or advisory letter on which
the plan sponsor has reliance.”
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Plan Documents Post PPA Restatement
• Completing Form 2848 or 8821
• Form 2848 - Include a completed and signed Form
2848 with your submission if you want an attorney or
other eligible person to represent you in
communications with the IRS about this VCP
submission. If your submission does not include a
Form 2848, the IRS will contact the individual who
signed Form 8950 or the employee named in Item 2 of
Form 8950 provided you included a completed Form
8821.
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Plan Documents Post PPA Restatement
• In the Matters section of Form 2848 (or the Tax
Matters section of Form 8821), enter “Voluntary
Correction Program (Rev. Proc. 2013-12)” under
“Description of Matter.” Enter “8950 and 8951” under
“Tax Form Number,” and enter “N/A” under “Years or
Periods.”
• Remember that only certain individuals are
authorized to represent an employer. The IRS
announced earlier this year a freeze of the ERPA
program.
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Plan Documents Post PPA Restatement
• Instructions are also provided for completing Forms
14568 and 14568-B
• Mailing your VCP submission
• First class mail:
Internal Revenue Service
P.O. Box 12192
Covington, KY 41012-0192
• Express mail or private delivery service:
Internal Revenue Service
201 West Rivercenter Blvd.
Attn: Extracting Stop 312
Covington, KY 41011
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Plan Documents Post PPA Restatement
• What happens next?
• The VCP submission will be reviewed for
completeness. If anything is missing, and your
submission is substantially incomplete the IRS may
return it to you.
• The VCP submission will be assigned to a specialist
for review. If the specialist has any questions
regarding your submission, he or she will contact you
or your authorized representative by mail or phone.
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Plan Documents Post PPA Restatement
• Once your submission is approved, the Model
Compliance Statement you submitted (Form 14568
and incorporated attachments) will be signed on
behalf of the IRS and mailed to you. This document is
your VCP compliance statement.
• You can expect to receive your compliance statement
four to six months after you mail your submission to
the IRS. If you haven’t received your compliance
statement after six months, you may call 626-927-
2011 (not a toll-free number) to check on the status of
your submission.
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Plan Documents Post PPA Restatement
• Keep your compliance statement and signed plan
document in a safe place. If the IRS later audits your
plan, the compliance statement will show that the
failure you identified was corrected through the
Voluntary Correction Program. A financial institution
holding plan assets may also ask to see a copy of the
compliance statement before it will make requested
distributions.
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Plan Documents Post PPA Restatement
• Umbrella Closing Agreement parameters for
Multiple Plan submission:
• Minimum of 20 plans covered by closing agreement.
• $5,000 fee for the first 20 plans plus $250 for each
additional plan. Maximum amount: $50,000 (similar to
the Group Submission fee arrangement under VCP)
Note: When we first announced this program on April
1, 2016, the base fee was $10,000. We reduced that
fee to $5,000 to offer a 50% reduction for the first year
after the April 30, 2016 deadline.
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Plan Documents Post PPA Restatement
• The closing agreement should include plans
maintained by eligible participating employers for
whom the service provider can certify that they
have a record of their:
• Consent to participate - affirmative agreement to
participate in the closing agreement program
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Plan Documents Post PPA Restatement
• Prior document compliance - adoption of pre-approved
defined contribution plans for the Economic Growth
Tax Relief Reconciliation Act of 2001 (EGTRRA) by
the required deadline stated in Notice 2004-84; or if
late, IRS compliance statements to correct for the late
adoption of EGTRRA documents.
• Correction of the document issue - execution of the
PPA restatement using the service provider’s pre-
approved document
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Plan Documents Post PPA Restatement
• Financial institutions or other service providers
that apply and are approved will have until the
later of 120 days from the closing agreement
execution date or May 1, 2017, to:
• provide a final list of employers covered by the closing
agreement
• pay additional fees (if applicable).
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Plan Documents Post PPA Restatement
• You can send a letter outlining your proposal to:
Internal Revenue Service
TE/GE:EP:VC Group 7554
Request for Voluntary Closing Agreement
9350 Flair Drive, 3rd Floor
El Monte, CA 91731
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Plan Documents Post PPA Restatement
• MID-YEAR AMENDMENTS OF 401(k) PLANS
• On January 29th, the IRS issued long awaited
guidance on Mid-year amendments to “safe-
harbor” 401(k) plans (Notice 2016-16).
• The notice significantly increases the number of
instances in which a Safe Harbor (SH) plan may
be amended during the plan year and provides
clarification on what mid-year changes and
amendments remain prohibited.
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Plan Documents Post PPA Restatement
• The notice also clarifies when an updated SH
notice is required and the timing for distribution
of that notice.
• Comments are also being sought by the IRS
about how the rules should apply to plans when
the employer has engaged in acquisitions or the
plan has been merged.
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Plan Documents Post PPA Restatement
• Mid-year changes to an SH plan are defined as a
change that is effective on a day other than the
first day of the plan year or a change that may be
effective as of the first day of the plan year, but
adopted later in the year.
• The Notice basically allows any amendment
unless it is one the list of prohibited
amendments.
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Plan Documents Post PPA Restatement
• Participants must receive appropriate updated
notice of any such amendments. As applicable,
participants must be given a window to modify
their elective deferrals once the notice is
provided.
• Any amendment that changes information
provided in the initial SH notice, requires an
updated notice to be provided.
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Plan Documents Post PPA Restatement
• The timing for the updated notice replicates the
timing for the initial notice.
• At least 30 (but not more than 90) days in
advance of the effective date of the amendment.
If notice cannot be given in that timeframe
(because, for instance, the amendment has a
retroactive effective date) the notice must be
provided within 30 days of the date the
amendment is adopted.
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Plan Documents Post PPA Restatement
• If the change is not an item detailed in the SH
notice, the supplemental notice is not required.
• Specifically prohibited amendments include:
• A mid year change to the “type” of safe harbor plan
(example references change from “traditional to
QACA”). Question: Is a Match SH to a Non-Elective
SH a different type? Why does it matter?
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Plan Documents Post PPA Restatement
• Increasing the number of years required to become
vested for QACA SH contributions;
• Any change reducing the number of employees
currently eligible to receive SH contributions. (It is
permissible to amend the plan to make the eligibility
requirements stricter, but only with regards to
employees who are not yet eligible for the plan.)
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Plan Documents Post PPA Restatement
• A mid-year change (i) to modify (or add) a formula
used to determine matching contributions (or the
definition of compensation used to determine
matching contributions) if the change increases the
amount of matching contributions, or (ii) to permit
discretionary matching contributions.
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Plan Documents Post PPA Restatement
• However, this prohibition does not apply if, at least 3
months prior to the end of the plan year, the change is
adopted and the updated safe harbor notice and
election opportunity are provided, and if the change is
made retroactively effective for the entire plan year
(which may require a plan that provides for periodic
matching contributions as described in §§ 1.401(k)–
3(c)(4) and (5)(ii) and/or 1.401(m)–3(d)(4) to be
amended to provide for matching contributions based
on the entire plan year)
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Plan Documents Post PPA Restatement
• Thus, a plan may only be amended to increase
the employer match or add a discretionary or
fixed matching feature if that amendment is
retroactive to the first day of the plan year and
provides for a matching true-up.
• Remember that ordinarily plans prohibit a true-up
of matching contributions unless the matching
computation period is annual.
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GETTING READY FOR 403(b) RESTATEMENTS
• GETTING READY FOR 403(b)
RESTATEMENTS
• As expressed earlier, it is currently anticipated
that the restatement cycle for 403(b) plans will
likely start May 1, 2017.
• If it is like the other pre-approved programs, the
restatement window will be at lest two years, but
it could possibly be three.
• The documents that employers adopted may not
fully reflect the final regulations.
64
GETTING READY FOR 403(b) RESTATEMENTS
• Determine when the employer adopted their
current document. If the document was adopted
on or before 12/31/09, any document defect can
be fixed when the new approved document is
adopted.
• However, if an existing plan was not timely
adopted by the end of 2009, the employer should
submit for relief under the EPCRS program if
they have not already done so.
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GETTING READY FOR 403(b) RESTATEMENTS
• Do not wait for the documents to be approved
before submitting to EPCRS.
• There was no requirement that the plan be
amended for PPA and subsequent legislation.
The new approved documents will contain all
that language. Make sure that the plan operated
in compliance with the laws and the documents
when adopted reflect the actual plan operation.
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GETTING READY FOR 403(b) RESTATEMENTS
• Make sure that the employer has copies of all
their documents so that the provisions can be
mapped over to the final approved plan
document. Understand that the final approved
plan may not provide for all the existing
language. If you have questions contact your
document vendor to address your concerns. It is
possible that your language could be added into
the approved documents.
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GETTING READY FOR 403(b) RESTATEMENTS
• Some plan provisions may have to be
memorialized as prior provisions and will not be
effective once the new plans are adopted. Thus,
you may want to prioritize which employers are
being amended early on in the cycle and which
you are holding back for later in the adoption
window.
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Questions