For the many employers that use a pre-approved 401(k) plan (or another type of defined contribution plan), the deadline to execute a restatement of the plan was July 31, 2022.  An employer that missed the deadline will need to (i) review whether a correction will be required to maintain the plan’s favorable tax status and (ii) implement any required correction.  Depending on the circumstances, some failures may require obtaining formal approval from the IRS through its Voluntary Correction Program, while others may be eligible for self‑correction.

Pre-approved Plans

The terms of all traditional retirement plans (such as 401(k) plans) must meet the requirements of Internal Revenue Code Section 401(a) and related regulations.  Retirement plans with language already pre-approved by the IRS to satisfy these requirements may be purchased from a third-party such as a service provider or financial institution.  The most common format of a pre-approved plan consists of an adoption agreement and a basic plan document.  The adoption agreement includes many design options for the employer to select from (such as eligibility, types of contributions, and vesting).  The basic plan document contains all the non-elective provisions of the plan and generally includes more technical language regarding the plan’s operation.

Generally, to keep up with changes in the tax law, the pre-approved plan providers must update their plan documents and obtain approval letters from the IRS every six years.  The adopting employers then have a set period of time (generally two years) to adopt the updated plan document.  The adoption deadline for the latest plan remedial amendment cycle (Cycle 3) was July 31, 2022.

Impact of Missed Deadline for Restatement of Pre-approved Plans

On May 23, 2022, the IRS issued an edition of Employee Plans News addressing the impact of missing the deadline to restate a pre-approved defined benefit or 403(b) plan.  This same IRS guidance may be used in analyzing the failure to restate a pre-approved defined contribution plan timely.  Based on this IRS guidance:

• Loss of Pre-Approved Plan Status: Failure to timely restate a pre-approved plan results in the plan’s loss of status as a pre-approved plan.  This means the employer could no longer rely on the pre-approved plan’s opinion letter from the IRS approving the plan document’s compliance with the tax code.  However, it does NOT mean that the plan is automatically out of compliance with the tax code.  Being a pre-approved plan is only one method of meeting the requirement to have an updated written plan document.
• Individually Designed Plan Status: If it’s not a pre-approved plan, the plan is an individually designed plan.  An individually designed plan can still satisfy the tax qualification requirements for a retirement plan.  However, without the favorable IRS opinion letter from the pre-approved plan to rely on, the plan must be reviewed to determine whether there are form defects, especially with any prior interim or discretionary amendments.  In determining whether the interim and discretionary amendments were timely and proper, the rules for individually designed plans would apply.

Correction for Missed Deadline

If failing to timely restate a pre-approved plan results in any interim or discretionary amendments being defective, the plan may be corrected through the IRS Employee Plans Compliance Resolution System (EPCRS).  EPCRS includes two correction programs: (i) the Voluntary Correction Program (VCP), which permits a plan sponsor to pay a fee and receive the IRS’s approval for correction, or (ii) the Self-Correction Program (SCP), which allows plan sponsors to voluntarily correct failures without formal IRS approval and without payment of fees or sanctions to the IRS.  SCP is available only to correct defects that have existed for less than the past three years (see IRS Rev. Proc.  2021-30, Part IV).  Form defects older than three years may be corrected only under VCP.

Conclusion

Failing to qualify as a pre-approved plan is not a qualification issue by itself.  If an employer did not timely adopt the restatement of its pre-approved plan, it could still meet the written document requirements as an individually designed plan.  Individually designed plans that fail to meet these requirements can be self-corrected under certain circumstances detailed in Rev. Proc. 2021-30, Part IV (mainly that the defective amendment or plan language lasted for less than three years).