One of the benefits to establishing a qualified retirement plan is that they are subject to favorable tax treatment. Did you know that failing to timely amend your plan document for changes in Federal tax laws can affect your plan’s status as a tax-qualified plan? Companies often engage third party service providers to ensure that these amendments are made in a timely fashion, but this is not always the case. The information below is intended to provide helpful tips on how to stay current with the applicable tax codes that might affect your plan, but also what to do if you find you have failed to amend your plan in a timely manner.
How Often Do I need to Update My Plan Document?
Our nation’s tax code is constantly changing, and the laws Congress passes can often times impact our 401(k) plans. The Internal Revenue Service (IRS) establishes deadlines that govern when a written plan document must be amended to reflect tax law changes, and this applies to all 401(k) plans with participant balances. Generally 401(k) plans are to be amended and restated every five years for individually designed plans (or six years if a pre-approved plan document is used). The following suggestions should help your Company’s plan maintain its tax qualified status:
- Set up a reminder to review your plan document at least annually
- Maintain contact with your third party service provider or the entity that sold you your plan
- At least annually, review the IRS website for enacted tax code changes that might impact your plan.
- Maintain the following documents in a central location
o Original plan document
o All subsequent amendments and restatements
o IRS determination and opinion letters
o The plan’s adoption agreement
What Should I Do If I Know I Haven’t Amended Timely?
If it comes to your attention that you either haven’t amended your plan for recent tax legislation changes or haven’t amended your plan within the required time period, there are certain corrective actions that can be taken to preserve your plan’s favorable tax status. The first thing that should be done is to ensure that the necessary amendments are made, and the documentation is maintained. Typically these adjustments are to be made retroactively to conform to the provisions of the legislation. Once the amendments and corrections have been made, you must make a Voluntary Corrective Program submission with the IRS (if the plan is not currently under audit or examination). There is a fee associated with this submission, which can range from a few hundred dollars to a few thousand dollars, depending on the nature of the correction. The IRS will review the submission, and the process is finished when the IRS approves the correction. Although the fees associated with the correction seem large, the costs associated with losing favorable tax status or potential fines and penalties if discovered during an audit or examination are much greater.
Hopefully this information sheds light on the importance of keeping abreast of current tax code changes that could impact your company’s 401(k) plan as well as the importance of amending and restating your plan document in a timely manner. Doing so can save your company a lot of time, money, and headaches in the long run.
Evan Powell, CPA