As a business owner, you must operate your 401(k) plan according to the terms of a written plan document. Most plans use an IRS preapproved document for this purpose. All preapproved documents must be fully rewritten (or restated) every six years to reflect recent law changes. The last 6-year restatement cycle was called “PPA” after the Pension Protection Act. A new cycle – called “Cycle 3” – opened last year. Between August 1, 2020 and July 31, 2022, all pre-approved 401(k) plans must be restated from a PPA to a Cycle 3 plan document. That means now.

In my view, there is no better time for employers to simplify the administration of their 401(k) plan than restatement time.  The reason – you can wrap discretionary plan amendments into your restatement for no additional fees. Here are some simplifications to consider (when applicable).

Plan Eligibility

The eligibility provisions of your 401(k) plan document define the age and/or service requirements that employees must meet join your plan and the employee classes to be excluded from plan participation altogether (if any).

Some simplifications to consider include:

Plan Compensation

Your 401(k) plan document must define the compensation to be used when allocating contributions to plan participants. This definition is called plan compensation. When defining plan compensation, employers have three options for a starting point. Most choose Form W-2, Box 1 wages that have been grossed up by elective deferrals.

You can exclude forms of compensation from plan compensation, but these exclusions cannot discriminate against non-Highly-Compensated Employees (HCEs). Most employers exclude no more than the “safe harbor” exclusions under IRC Section 414(s) like pre-entry pay or fringe benefits.

Some simplifications to consider include:

Plan Contributions

Your 401(k) plan can permit employee and employer contributions. Employee contributions include pre-tax and Roth elective deferrals, while employer contributions include safe harbor, matching and profit sharing. All contributions must be allocated to participants pursuant to a formula in your plan document.

Some simplifications to consider include:

Plan Distributions and Loans

A 401(k) account withdrawal is called a distribution. In general, 401(k) plans must permit participant distributions following a separation from service or death. They may also allow participants to take in-service distributions while still employed. To give participants even greater access to their account, a plan can offer a participant loan feature.

Some simplifications to consider include:

Maximize your Restatement Fee!

401(k) providers can charge dramatically different fees for Cycle 3 restatements – from $500 to $2,000 in my experience. Using your restatement as an opportunity to simplify your plan’s annual administration can help soften the blow.

For additional questions about your 401(k) plan’s Cycle 3 restatement, contact your 401(k) provider.

This content was originally published here.

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