Text Box: When Must My Company Retirement Plan Be Updated?   Background and Overview Qualified retirement plans such as 401(k) plans and profit sharing plans are categorized as defined contribution plans, as compared to “pension plans” which are categorized as defined benefit plans. This article primarily focuses on the mandatory updating of defined contribution plans. In order for qualified retirement plans to continue receiving the benefits of being “qualified” under the applicable rules and Internal Revenue Code provisions, they must periodically be updated with language that applies new legislation and regulations. This is typically done through occasional amendments provided to an employer by the professional(s) responsible for the retirement plan document maintenance.  Historically, at a time selected by the IRS, the original retirement plan document and all of its subsequent mandatory and optional amendments must be consolidated into a new retirement plan document. This process is referred to as “amending and restating” the plan. The period during which this must occur is called the “remedial amendment period”.   The remedial amendment period for a plan can depend upon the type or format upon which the plan was drafted. If the plan was drafted on a “pre-approved” or “prototype” format, the retirement plan professional will typically apply for a Favorable Opinion Letter on a specimen or template document submitted to the IRS for review in advance of the plan format being used. When the letter is received, the plan is converted on to the newly approved plan. In contrast, if the plan is drafted as an “individually designed plan” (not a pre-approved plan) the professional will usually (though not mandatory) submit the individual employer’s plan (rather than a specimen or template) to the IRS and apply for a Favorable Determination Letter on that plan alone.   Historically, the time when a remedial amendment period began or ended was unpredictable and somewhat random. This caused employers, professionals, and the IRS great difficulty in planning. The system needed change.   As a result, in 2005, the IRS implemented a system of cyclical remedial amendment periods.     The overall structure consists of: 1) a 6-year cycle for pre-approved plans, and 2) a 5-year cycle for individually designed plans.   Pre-Approved Plans The 6-year cycle applies to eligible pre-approved plans.  Entitlement to use the 6-year cycle is dependent upon whether the plan fits one of three narrowly defined categories.  During the cycle, years 1 and 2 constitute the time frame for submission of the plans to the IRS for review. Years 3 and 4 are for the actual IRS review of the plans and issuance of Favorable Opinion Letters. During years 5 and 6, professionals will convert plans to the newly approved plan language. Upon the end of the first complete 6-year cycle for eligible pre-approved defined contribution plans, likely in 2010, a new 6-year cycle will begin. There is a separate cycle for pre-approved defined benefit plans.   The current six-year cycle for eligible pre-approved defined contribution plans is referred to as the “EGTRRA Remedial Amendment Period” because the primary legislation warranting the mandatory language update was the Economic Growth and Tax Relief Reconciliation Act of 2001 or “EGTRRA”. The first 2 year phase of the cycle ended on January 31, 2006.  It is anticipated that the IRS will complete the second phase of the cycle in April 2008 and release the approved plan specimens for implementation. The third phase will begin at that time and likely end in the spring of 2010.  Therefore, most pre-approved plans will be updated during the period from April 2008 through April 2010 to avoid potential loss of their tax qualification. Employers should begin receiving update information and scheduling from their document provider professional in the near future for implementation of the new EGTRRA-compliant plan documents.   Individually Designed Plans Plans which are not eligible for the 6-year cycle will be treated as “individually designed plans”. The initial cycle within which the employer must amend and restate a plan for the EGTRRA Remedial Amendment Period for these plans is based on the employer’s Employer Identification Number (“EIN”) and other factors and characteristics of the plan.  At the end of the applicable cycle year for these plans, a new 5-year cycle begins. The five cycles are listed below:                                                      Cycle                       Last day of current cycle                                                    A                               Jan. 31, 2007                                                    B                               Jan. 31, 2008                                                    C                               Jan. 31, 2009                                                    D                               Jan. 31, 2010                                                    E                               Jan. 31, 2011   ***************************   The determination as to whether an employer’s qualified retirement plan may be eligible for the 6-year cycle or is instead subject to the 5-year cycle is crucial and must be made now. Immediate action may be required by the employer to comply with the applicable rules. Failure to timely update a plan under the appropriate cycle may cause the plan to lose tax qualification with significant ramifications to the employer and participants. You should confirm this status with your document provider professional without delay.     Sources: IRS Issues Guidance on Staggered Remedial Amendment Period; SunGard Corbel: Monthly Current Developments: September 2005: Volume Ten, Issue 9, at 2.   Staggered Remedial Amendment Periods – It’s a RAP; SunGard Corbel: News: Pension Technical Updates; (September 1, 2005).

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Text Box: The following article contains general plan facts and is intended for informational purposes only.  To ensure that your plan contains specific provisions outlined in this and future articles, please contact your third party administrator or plan ERISA attorney.