Why Plan Restatements Provide An Ideal Time To Think About Plan Redesign
A blog by Richard Rausser, CPC, QPA, QKA, Senior Vice President – July 22, 2014
Over the last seven years, Congress and the Internal Revenue Service (“IRS”) have been busy making changes to the regulations that govern the operation of qualified retirement plans. The major changes include the following legislation and regulatory guidance:
- Final Regulations under Code Section 415
- Pension Protection Act of 2006 (PPA)
- Heroes Earnings Assistance and Relief Act of 2008 (HEART)
- Worker, Retiree, and Employer Recover Act of 2008 (WRERA)
All qualified plans have been required to comply with these rules in operation, with differing effective dates. Sponsors of defined contribution plans were already required to formally adopt separate amendments (where applicable) over the last several years to demonstrate good faith compliance with some provisions of these rules.
Plan sponsors have different deadlines under IRS rules to completely rewrite their legal plan documents in order to consolidate these amendments into one revised document. The most substantial body of the new laws is found in PPA. Hence, the retirement services industry is referring to the revised plan document needed to comply with these laws collectively as the “PPA restatement.” We anticipate that the IRS will be issuing approval of these pre-approved plan documents on or about May 1st. All volume submitter and prototype defined contribution plans must be restated and executed no later than April 30, 2016.
The restatement of the plan is also an opportune time to consider implementing progressive plan features—automatic features—that can help drive positive participant behavior to drive more successful outcomes. Current best practices in 401(k) plan design include adding automatic features to help participants achieve long-term successful retirement outcomes and attain retirement readiness. This includes adding features such as automatic enrollment, automatic escalation of salary deferrals and utilization of qualified default investment funds. It is important to consider adopting these features to benefit new employees as well as current staff members. Automatic features can help plan participants set a reasonable level of salary savings, increase their contributions over time, achieve proper investment diversification and make better use of the plan’s investment alternatives.
Suggested plan design considerations:
1. Auto-enrollment at 6% of pay (not the more widely used 3% deferral rate)
2. Auto-escalation – at least 1% per year, but 2% would be better. Only cap at 10% if using QACA – no cap if not QACA
3. Use QDIA for new participants who do not make an affirmative investment election
4. Limit loans to no more than one loan outstanding at any time (or at most two loans)
Incorporating these plan design changes now will eliminate the need to further amend the plan after the PPA restatement is completed.
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