Our government is constantly revising the pension laws to account for new legislation, close loop holes or simply to meet the needs of our working population.   Thankfully, they do not require you to amend your retirement plan document every time they make a change to the laws as the cost of maintaining a plan would become prohibitive.  Instead, they require that your Third Party Plan Administrator (TPA) abide by any changes to the laws while administering your plan.  About every six years they mandate that ALL pre-approved, defined contribution plans (401(k), Profit Sharing & Money Purchase) be completely rewritten to ensure that new legislation is factored into the language and that any dollar limits are updated for the newest levels.  For most plans, we are in the sixth year and your plan must be updated no later than April 30, 2016.

What if I don’t restate my plan?

Failure to restate your plan in a timely manner could jeopardize its qualified status and cost you a great deal in taxes, fees and/or penalties.  You may recall that the last required restatement was for EGTRRA in 2010.  The current required restatement is for the Pension Protection Act (PPA) of 2006 and is essentially updating the plan document to incorporate Final 415 Treasury regulations such as The Heroes Earnings Assistance and Relief Tax Act of 2008 and The Worker, Retiree and Employer Recovery Act of 2008.

What do I need to do?

Your TPA or document provider should be preparing this restatement for you, but don‘t let them just roll the plan and continue with what you have.  We believe this restatement process gives companies the perfect opportunity to review their plan to make sure the design is the right fit for their business needs and goals.  Factors change within companies and a plan that was designed five to ten years ago may no longer be a good fit for the company.  Each company should carefully review the elements of their plan and make changes that are warranted.  Some key areas to consider may be eligibility, distribution and employer contribution provisions: When should employees become eligible?  Do you want to offer Roth 401(k) deferrals in addition to the traditional pre-tax deferrals?  How quickly do you want employees to be able to get their money if they leave the company?  Are you locked into having to make company contributions each year?  How do you want any company contributions to be allocated to the employees?

There have been significant changes to pre-approved retirement plans that allow a business owner greater flexibility when designing a plan than they may have had in the past. The most popular plan design that we are seeing right now is a Safe Harbor 401(k) Profit Sharing plan that allows for discretionary matching contributions and a new comparability profit sharing allocation formula.  

In years past, most companies were limited to a basic social security integrated profit sharing formula unless they paid extra to have a firm specially design a plan for them.  This integrated design would give any employees making over a stated salary level a slightly higher contribution rate than those employees making less than the stated salary level. At the end of the day most of the employees received the same percentage of their salary as a contribution.  Changes in plan design have allowed for a different allocation method, sometimes referred to as cross-testing or new comparability.  This design allows a plan to place employees in groups and allocate different contribution rates to the different groups.  The groups can depend upon things such as job title, performance and/or age.  This design gives employers great flexibility in providing differing levels of contributions to different employees as opposed to offering everyone the same flat percentage of their salary as a company contribution.

In addition to allowing employees to save for retirement, a qualified retirement plan is a good recruitment and retainage tool and can save money on personal and business tax deductions.  It is our recommendation that you use these required restatements as an opportunity to make sure you have the right plan design for your business.  Communicate with your staff the benefits of saving for their retirement so that they will be financially secure enough to be able to retire when the time comes.  The pension team at Dermody, Burke & Brown is always available to further discuss any questions you may have.

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.