EBIA Weekly Newsletter

IRS Retirement Plans Newsletter Highlights Adoption Deadlines and Potentially Discriminatory Plan Design

   April 14, 2016

IRS Newsletter: Employee Plans News, Issue 2016-5 (Apr. 4, 2016)

Available at https://www.irs.gov/Retirement-Plans/Employee-Plans-News

The April 4, 2016 issue of Employee Plans News covers several topics of interest to 401(k) plan sponsors and advisors, including the following:

  • Deadlines to Adopt Pre-Approved Plan Restatements. The newsletter reminds employers using pre-approved plans that they generally must adopt an updated plan restatement on or before April 30, 2016. (This deadline for pre-approved plans was set by the IRS in 2014, under its six-year remedial amendment cycle (see our Checkpoint article).) However, a one-year extension—through April 30, 2017—applies to employers first adopting a pre-approved 401(k) plan on or after January 1, 2016. This extension, which is intended to facilitate a plan sponsor’s ability to convert an existing individually designed plan into a pre-approved plan, was previously announced in Notice 2016-03 (see our Checkpoint article). Employers wishing to request a determination letter for modifications to a volume submitter plan must submit the application by April 30, 2016—or by April 30, 2017, if they qualify for the one-year extension.
  • Failure to Adopt by Deadline. The newsletter announces a new option allowing financial institutions or service providers offering pre-approved plans to request “umbrella” closing agreements on behalf of all employers using their plans that missed the deadline to adopt the pre-approved restatement. Alternatively, employers may continue to correct this failure by completing their own submission under the IRS’s Voluntary Correction Program.
  • Discriminatory Plan Designs. The newsletter cautions against plan designs that provide significant benefits to highly compensated employees (HCEs) and a specified group of non-HCEs who work very few hours or receive very little compensation—while excluding other non-HCEs from plan participation. The design aims to provide non-HCEs the minimum allocation necessary to satisfy the mathematical portion of the nondiscrimination requirements of Code §§ 401(a)(4) and 410(b). The newsletter includes examples of problematic designs, such as a requirement of 1,000 hours to earn a year of vesting service but not for allocation purposes—meaning that low-paid or short-service participants receive an allocation but never vest in their benefit. Although these plan designs may satisfy vesting or numeric nondiscrimination tests, they don’t comply with the requirement to interpret the nondiscrimination rules in a reasonable manner consistent with the purpose of preventing discrimination in favor of HCEs.

EBIA Comment: With the two-year adoption period for pre-approved plans nearly here, the new option for umbrella corrections could prove useful for those not eligible for the extended deadline. And although the IRS notes that the discriminatory plan design described in the newsletter is not new (in fact, the IRS warned against similar designs in a 2004 memorandum—see our Checkpoint article), it is seeing more plans using the design or variations producing the same result. Because discriminatory plans may lose their tax-qualified status, limiting allocations to very short-service or very low-paid employees may end up being penny-wise and pound-foolish. For more information, see EBIA’s 401(k) Plans manual at Sections XIX (“Nondiscrimination: Minimum Coverage Rules”), XX (“Nondiscrimination: Code § 401(a)(4) and Top-Heavy Rules”), XXVII.G (“Remedial Amendment Cycles”), XXVII.K (“Adopting a Pre-Approved Plan”), and XXVII.L (“Advisory or Opinion Letter: Pre-Approved Plan”).

Contributing Editors: EBIA Staff.