As a reminder, all defined contribution plans that are on a pre-approved document, including 401(k) and profit sharing plans, must be restated every 6 years. This restatement is necessary even if you have made no design changes to your plan. The current restatement cycle for defined contribution plans opened on August 1, 2020 and ends on July 31, 2022. Whenever the new cycle for restatements opens, the deadline always feels far away to me. However, each time it ends up feeling like I blinked and the deadline was already approaching. The same thing happened to me this time as I swear it was just August of 2020 when the cycle opened. If your plan has not been restated since August 2020, we recommend that you immediately reach out to your document provider to ensure that your document will be restated with enough time for you to review it and have an officer sign it before July 31st.
It is also important that you review the restatement or engage counsel to review the restatement before signing it. It is the employer as the plan sponsor that is responsible for ensuring that the new document correctly reflects the operation of the plan. If your recordkeeper or TPA is preparing your plan documents, they almost certainly have a provision in their service agreement which provides that it is you that is responsible for any errors. I know this sounds self-serving, but the benefit of having a document drafted by an attorney is that you do have reliance that it is correct and attorneys cannot hide behind provisions in service agreements absolving us of liability.
The review is important because even a small error can cost a company a lot of money to correct. For example, let’s pretend that your plan has always excluded bonuses and in the restatement the bonus exclusion gets dropped and nobody realizes it until 3 years later. The plan provides deferrals and a matching contribution of 50% of 6% of compensation and the average deferral in the plan is 6%. Over that three year period, the company paid out $300,000 in bonuses. The correction when the error is discovered is that the Plan Sponsor must go back and make a corrective contribution equal to 3% (50% of the 6% deferral rate), which is $9,000 and then the matching contribution that would have been made on the $300,000, which also would equal $9,000. Both amounts also need to include earnings since the date they should have been contributed. We had a client that this happened to only it wasn’t discovered for over 10 years resulting in a needed correction of several hundred thousand dollars to the plan. Paying your counsel to review it now will be much cheaper than what you may have to pay to fix any error. And it is quite often that we find errors in restatements.
If you would like our assistance in reviewing your restatement, please reach out to anyone on our Graydon Employee Benefits team.