Every six years, the IRS requires that qualified retirement plans that rely on pre-approved plan documents be completely amended and restated. The restatement must comply with law changes that have occurred since the previous restatement. It also incorporates amendments since the last restatement.
The required current restatement and amendment cycle, for all Solo 401k plans (referred to as “Cycle 3 DC,”) opened August 1, 2020, and ends on July 31, 2022.
For valued Solo 401k accountholders, among the many services that we provide are mandatory plan restatements, updates, and amendments. This includes the 2020 required IRS plan update.
There should not be any significant surprises for you because of the scheduled restatement. We work with the IRS and Department of Labor on a consistent basis to ensure our documents are up-to-date and afford the greatest freedoms to Solo 401k account holders. We also maintain the strictest compliance standards. The annual maintenance fee allows you to continue using the documents, as well as gives you access to all plan updates, amendments, and restatements.
“Generally, unless you write your own plan, the financial institution that provided your plan will take the continuing responsibility for meeting qualification rules that are later changed.”
In other words, as your document provider, we shoulder the responsibility for keeping everything up to date and qualified. A good example is that enacted legislation can require retirement plan sponsors to update or amend their plan documents.
There has been some very notable legislation that will be part of this restatement. In particular, the Setting Every Community Up for Retirement Enhancement (SECURE) Act became law on December 20, 2019. Shortly after that, the Coronavirus Aid, Relief and Economic Security (CARES) Act became law on March 27, 2020. The pandemic also prompted other legislative requirements for retirement plans. But even during less momentous years, multiple regulatory changes affect Solo 401k and many other retirement plan documents. For a comprehensive list of changes that will be in the rewrite, see IRS Cumulative List of Changes in Retirement Plan Qualification Requirements.
What is a Plan Restatement?
Along with mandatory amendments to reflect legislative and regulatory changes, a restatement includes voluntary amendments that have been adopted since the last time the document was rewritten. A restatement is a complete rewriting of the plan document.
The restatement is mandatory although your plan has been amended frequently for a variety of reasons. Your role as a Solo 401k account holder will be minimal, but you will need to review the restatement and your signature will be needed. If the July 31, 2022 deadline is not met, the IRS may impose penalties up to and including revocation of tax-favored status. Revocation will almost certainly result in future contributions no longer being deductible and most unfortunately, the immediate distribution of the account as taxable income.
It is time for a restatement. The last restatement was completed in April of 2016. However, the IRS had a two-year lag time so that it only reflected legislative and regulatory updates through 2010. Since then, changes have happened through plan amendments. But amendments tend to complicate the ease of reading the documents and can confuse. A rewrite will compile changes into more easily read and understood documents.
Additionally, because the amendments have now been time-tested, a more thorough understanding now exists of how these work in the real world and how the IRS has historically interpreted them. In some cases, this allows more detail and clarity to be included in the rewrite than was in the original amendment.
To some people’s irritation, the IRS dictates the restatement cycle. This means that all plans must be restated regardless of the inception date or how recently amendments may have been made. The rewritten document should be implemented promptly to remain compliant and qualified.
Next Steps For Your Plan Restatement
For most Solo 401k account holders, the restatement process is clear-cut, unambiguous, and uncomplicated. As your document provider and plan sponsor, we are responsible for ensuring it is an updated document. This is a particularly good reason to have your document provider and plan sponsor be the same company.
You will review the updated document and confirm the data is accurate. You will then need to officially adopt the restated document by signing it. If you have been considering any standalone amendment(s), this could be the right time to make them. In addition to an updated basic plan document and adoption agreement, you can also expect to receive a copy of the IRS opinion letter and an updated Summary Plan Description (SPD), as well as any forms or notices that may be required.
If you will be terminating your Solo 401k before July 31, 2022, it should be restated before the effective date of termination using an approved Cycle 3 document.
If you decide to make future discretionary changes, those can be added at the appropriate time, reviewed, and signed. However, the time of restatement can be perfect to include changes to avoid future amendments.
Although the July 31 deadline might seem to be in the distant future, we have begun the process. This ensures ample time to prepare a signature-ready document that accurately integrates the plan’s design, accommodates the plan’s governance structure, and incorporates best practices that are designed to mitigate liabilities and risks. Likewise, you may want to begin planning for any standalone changes and reserve time to review the rewritten documents several weeks ahead of the deadline.
A Few Q&A
It’s an IRS requirement that a retirement plan document is up to date to continue qualifying for favorable tax treatment. IRS pre-approved plans must be rewritten, reviewed, and approved every six years. Here are a few Q&A that might be on your mind.
Q1. What will happen if I don’t restate my Solo 401k by the July 31, 2021 deadline?
A1. This was already covered but to reiterate, missing the deadline can trigger the IRS to disqualify the Solo 401k. The effect is almost a certainty that your contributions will no longer be deductible (for a Roth 401k, future earnings will not be tax-free). Additionally, the funds already in the Solo 401k can be distributed and taxed as income all in the same tax year. However, it might be possible to use the “late adopter” procedure if the deadline is missed. But the late adopter procedure will incur significant IRS user fees. Restating your Solo 401k before the deadline should be a high priority.
Q2. What is a layman’s explanation of “IRS approved?”
A2. It means that the restated document can be relied on to meet the current requirements of laws and regulations. For this to remain in effect, two things must happen. You must operate your Solo 401k in compliance with the documents and you must only make changes to the documents that are allowed elections.
Q3. Are other retirement plans required to be restated?
A3. Yes. Restatements are required for 401(k) plans, profit-sharing plans, and money purchase plans. Also, some ESOP and church 401(k) plans may begin using a pre-approved plan for the first time with this restatement. Plans that currently use an individually designed plan may also choose to adopt a pre-approved plan during this cycle.
Q4. Will the plan’s “Summary Plan Description” change?
A4. Yes. The Summary Plan Description (SPD) will be updated as a result of the restatement. The SPD update will include current information about the plan’s features and rules.
Q5. Will there be changes in the way my Solo 401k is administered?
A5. No. There should be no substantial changes in the way your plan is administered from our side. The restatement will be designed to preserve all existing discretionary plan provisions. However, you do have complete checkbook control, which means you must administer the plan in accordance with the plan documents. It’s your money. Invest it whatever you want!
Excellent customer support and help walking you through the documents will empower you so you can use your Solo 401k to continue building your retirement nest egg