By Paul Protos

Defined benefit (DB) retirement plan sponsors with restated preapproved plan documents that were part of the latest Internal Revenue Service (IRS) 6-year remedial amendment cycle can benefit from some of the lessons learned by other sponsors that have completed the defined contribution (DC) cycle.

The IRS in early March notified affected employers with restated preapproved DB documents that it would release opinion and advisory letters for them at the end of the month (see, IRS to Issue Opinion Letters, Extend Amendment Cycle for Some Restated Preapproved DB Plans).

In past years the IRS developed the 6-year remedial amendment cycle as a way for preapproved plans—both master and prototype (M&P) and volume submitter (VS)—to keep preapproved plan documents current with required legislative and regulatory changes. But in June 2016 it announced a significant cutback in determination letters for individually designed plans and changes to the routine review cycle for preapproved plans.

Each employer with an existing preapproved plan must restate its plan on or before April 30, 2020. The plan restatement is the last step in the second 6-year remedial amendment cycle.

Lessons Learned

Employers that participated in the second cycle for preapproved DC plans that ended on April 30, 2016, learned valuable lessons about the restatement process that can apply to this recent cycle for DB plans.  Taking a page from the books of their DC plan sponsor compatriots that have been through this process, all employers can:

• Understand the role of the employer in the process.
• Schedule changes in plan design.
• Manage the payment of document provider costs.
• For an employer sponsoring a cash balance (CB) plan, consider basing the interest-crediting rate on the actual plan asset rate of return.
• For an employer considering terminating a DB plan, coordinate the restatement process with the termination process.
• For an employer with an individually designed plan document, consider the pros and cons of moving to a preapproved plan document.

As the plan restatement process begins, the provider of the employer’s preapproved DB plan document should be communicating with the employer in the coming months regarding the provider’s process for preparing the restatement. In anticipation of this, an employer is encouraged to review its existing plan document and any related plan amendments, to consider any desired changes in plan design, and to evaluate administrative policies and procedures that could be improved. These steps will help outline the tasks related to, and timing of, the restatement. 

Generally, the document provider will notify an employer that the plan must be restated and will communicate its expectation of when the restatement will occur. Some providers may include a draft of the restated plan based on an assumption that the employer does not intend to make any changes to the plan. The employer may get a 30- to 60-day window to review the draft, ask questions, and request any design changes. 

If the employer has no changes or does not respond, the provider will prepare a final document package for signature by the employer that would include the formal plan document, a copy of the provider’s IRS opinion or advisory letter for the plan, possibly a separate trust agreement, an updated Summary Plan Description (SPD), an agreement formally acknowledging the employer’s and the provider’s responsibilities to the plan and to each other, and any related disclosures to participants. 

Many providers can provide for the documents to be signed electronically. The employer and any other signatories execute the documents and distribute the disclosures.

Ultimate Plan Fiduciary

A restatement process in which there are no plan design changes is deceptively simple. Each employer always must keep in mind, though, that it, as the plan sponsor, is the ultimate plan fiduciary responsible for the design and operation of the plan. Once the documents are executed, it is the employer that is responsible and accountable for the plan. The IRS expects that by executing the documents, the employer knows what is in the plan documents and the employer has reviewed and consented to all the contents of the documents. 

To do this properly, the employer should anticipate the amount of time that will be needed to complete a proper review. The plan document is on average about 100 pages. M&P and certain VS documents have an adoption agreement associated with the plan document that provides a menu of available plan provisions to choose from. The adoption agreement often has more than 40 pages of affirmative choices and applicable default provisions. The SPD can have more than 50 pages, and should accurately reflect the provisions in the formal documents. 

If the employer wishes to change elements of the plan design, often the change cannot be effective until the start of the next plan year. This is most common for changes that affect eligibility and benefit accruals. For example, an employer with a calendar-year plan year that wishes to have this type of change made effective January 1, 2019, should begin discussing this immediately with the document provider. 

An employer that fails to coordinate with the document provider regarding such changes may have to amend the plan twice—once to comply with the required restatement and once to adopt the desired plan design changes. The effort to coordinate the amendment and restatement process with the provider is far less than the effort and expense to amend twice.

Whether an expense can be paid from plan assets for services provided to a plan has long been debated. Generally, an expense required for the routine operation of the plan’s existing provisions can be paid from plan assets. However, expenses associated with an employer’s choice to make changes to the plan that are not mandatory should be paid by the employer.

Discretionary Changes

An employer making discretionary changes to the plan design as part of the restatement process should consult with the provider and other plan advisers to determine if the cost of the restatement can be paid in whole or in part from plan assets. If an employer is making discretionary changes to the plan design, then the employer should pay for the cost of those changes.

Document providers have differing pricing models for plan restatements that lead to considerably different costs. One such model to consider is the restatement as a single service unrelated to other services that the provider may perform for the plan. An employer should expect the cost of a fairly straightforward restatement under this model to be roughly in the range of $1,000 to $1,800. 

The cost of any future plan amendments required before the next restatement is billed with each amendment and can be roughly in the range of $200 to $1,000, depending on the nature and scope of the amendment. This pricing model is essentially pay-as-you-go. A plan sponsor should be able to determine if the restatement and each amendment could be paid from plan assets.

Another pricing model considers the restatement as part of a document support service for the entire cycle, including any needed future amendments before the next restatement. An employer should expect the cost of a fairly straightforward restatement under this model to be roughly in the range of $2,500 to $4,000. 

In a related move, the IRS in Revenue Procedure (Rev. Proc.) 2018-21, effective March 16, accelerated the availability of provisions in a preapproved plan for an employer with a cash balance (CB) plan to change the interest-crediting rate to be based on the actual plan asset rate of return. Previously, such provisions were not scheduled to be available until the third restatement cycle, at least 6 years from now. 

The publication of Rev. Proc. 2018-21 after the publication of Announcement 2018-5 providing guidance on opinion and advisory letters for preapproved DB plans likely will cause some providers to modify or amend their preapproved plans. An employer interested in adopting this change in the interest-crediting rate should confirm with its document provider that the plan document incorporates the provisions allowed by this new Rev. Proc.

Considering Termination

An employer that had already been contemplating terminating an M&P or VS DB plan may commit to that decision rather than go through the restatement process. At the time of termination, the plan should be fully compliant with all required interim amendments.

The preapproved DB plans in the second cycle complied with the plan qualification requirements in Notice 2012-76, 2012-52 I.R.B. 775 (referred to as the 2012 Cumulative List). A DB plan that terminates before April 30, 2020, and is not restated must be able to demonstrate that all required amendments made available after the 2012 Cumulative List were adopted at the time of termination. 

If an employer sponsors an individually designed plan, it may consider moving to a preapproved DB plan document. The IRS effectively is getting out of the business of periodic reviews of individually designed plans to determine their qualified status (see, IRS to Issue Opinion Letters, Extend Amendment Cycle for Some Restated Preapproved DB Plans).

Such a plan now can file for a determination letter on the initial qualification of the plan, upon termination of the plan, or for certain specific circumstances. An employer that would like periodically (every 6 years) to refresh its IRS review of the qualification of the plan should consider using pre-approved plan document.

With the conclusion of the second cycle for DB plans in 2020, employers can then look forward to the third cycle, which will incorporate the modifications to the restatements made with Rev. Proc. 2017-41, and the next round of changes.