If you offer a defined contribution plan to your workers, your plan document must be restated with the IRS sometime within the next year. This is a result of the Economic Growth and Tax Relief Tax Reconciliation Act of 2001.
The IRS is now requiring a complete plan restatement that includes updated EGTRRA provisions in order to maintain compliance.
Some EGTRRA provisions that will now be in your restated plan include the addition of catch-up contributions, the increase in 415 maximum contribution limits, an increase in elective deferral limits, faster vesting and increases in the maximum compensation considered for contributions.
These provisions must already be included in all defined contribution plans; however, they are currently included as good-faith plan amendments.
They must now be incorporated as part of the employer's restated plan document.
Big and small fixes
Since each plan must now have a full restatement, this is an opportune time to make any plan changes, both large and small. Plan administrators generally charge approximately $1,000 to $1,500 for a plan restatement. Incorporating plan changes now will avoid additional fees for plan changes in the future.
Changing provisions for loans, hardship withdrawals and in-service distributions may not have justified a plan overhaul in the past. However, now that the plan is being restated, this is likely the right time to adjust these provisions to the plan sponsor's specifications. Now may also be the right time to consider adding auto-enrollment now permitted by the Pension Protection Act of 2006.
It may also make sense to adjust the plan's contribution rules. If the plan has been contemplating a move to a safe harbor or a new comparability structure, completing these now with the EGTRRA restatement is a good idea. If your plan is having trouble passing testing, and highly compensated employees are having trouble putting money into the plan, adding a safe harbor, new comparability and Social Security integration can help to mitigate these problems.
You should review the recently approved Roth 401(k) deposit option. This can be a valuable tool for employees who will be in a high tax bracket during retirement or have low tax rates now.
In addition to minor changes that can be made during this mandatory restatement, consider making major changes that you have put off for various reasons.
If you are currently in a balance-forward plan model, there are many advantages to upgrading to a daily valuation platform. They include daily accessibility (which is popular with participants), more timely and accurate allocation of investment gains and/or losses, online account information and a more advantageous delivery of trades and statements.
When evaluating your plan, there is also reason to determine what type of plan document is in place. In the past, law-firm-drafted plan documents were preferred in order to ensure that all of the specific plan provisions would be compliant with IRS regulations. However, they can be quite expensive when compared to volume-submitter plan documents. A volume-submitter plan offers employers a wide variety of plan provisions allowed by law, using language which has been reviewed and preapproved by the IRS.
A master prototype plan costs about the same as a volume-submitter plan. However, this type of plan offers limited options with respect to plan provisions, while a volume-submitter plan normally offers hundreds of variations.
Now is the perfect time to discuss these changes with your retirement planning specialist. All of these provisions make your plan more flexible and competitive in the marketplace, thus helping you to attract and retain the best employees in your industry.
Philip J. Fogli is a financial adviser at PACS Consulting in Philadelphia. He can be reached at 215-568-5230 or pfogli@pacsconsulting.com.
