SunGard Relius

As the end of 2006 approaches, employers should make sure their plan documents are in compliance. This article is both an update and a reminder of plan amendments and restatements that employers may need to adopt by the end of 2006 or early in 2007 in order to keep their plans qualified. The applicable actions, if any, that an employer must take vary based on the type of qualified plan (i.e., defined benefit, 401(k), etc.) as well as the type of plan document being used (i.e., individually designed, prototype or volume submitter). Also, the time frames set forth below apply only to ongoing plans. Plans that are terminating must be updated at the time of termination to reflect ALL applicable qualification requirements then in effect.

EGTRRA Restatements (primarily ESOPs and cash balance Defined Benefit Plans)
Cycle A, the first cycle under the 5-year staggered remedial amendment period for individually designed plans (i.e., plans that cannot fit onto a prototype or volume submitter plan pursuant to Rev. Proc. 2005-16), ends on January 31, 2007. This applies to plans such as ESOPs, stock bonus plans and cash balance defined benefit plans. It also applies to any other plan that is not drafted using a pre-approved plan document. The January 31, 2007 deadline applies to those plans maintained by an employer that has a taxpayer identification number ending in a 1 or 6.

Thus, if an employer sponsors an individually designed plan such as an ESOP or cash balance plan and the employer’s TIN ends in a 1 or 6, then the plan must be restated, and submitted for a determination letter if one is desired, no later than January 31, 2007.

One confusing aspect of the 5-year cycle is the determination of which plans are considered individually designed plans subject to the 5-year staggered remedial amendment period. In almost all cases, a plan that is “based” on a pre-approved plan (i.e., a prototype or volume submitter plan) is treated as a pre-approved plan for purposes of the 6-year remedial amendment period cycle that applies to such plans (see Staggered Remedial Amendments – It's a RAP). This is true even if the employer had modified the pre-approved plan and would have needed to submit the plan for a determination letter as an individually designed plan (using IRS Form 5300) in order to have reliance on the terms of the plan. The result is that, in most cases, the only plans that will be treated as individually designed plans for purposes of the 5-year cycle will be those that were not created using a pre-approved plan OR those that include provisions that are not permissible in a pre-approved plan, such as ESOPs, stock bonus plans and cash balance defined benefit plans (for a complete list of impermissible provisions, see Rev. Proc. 2005-16 Sections 6.03 and 16.02).

We have updated our individually designed plan (IDP) ESOP, stock bonus, and cash balance DB plans for all the changes necessary for Cycle A restatements. We will NOT update our pre-approved plans (401(k), money purchase, profit sharing, target benefit, and "regular" defined benefit plans) until the IRS approves them.

Checklists for our individually designed plans can be found here. (The cash balance defined benefit plan is part of the regular Defined Benefit Checklist.) Please note that if you will be using our Premium Fax/Mail Service to have us prepare your plans, you must send those plans to us well in advance of the January 31, 2007 deadline to ensure that we can prepare your plans on a timely basis. This is particularly true if you want us to draft any language modifications.

You may wish to use our On-Demand Pay Per Plan Service, in which you complete your checklist online and the resulting documents are e-mailed to you as either Microsoft Word or PDF documents for printing and modification in your own office. Information on using this service is available here.

PFEA and Section 415 Amendments (Defined Benefit Plans only)
There has been an extension of the deadline for employers to adopt an amendment to their defined benefit plans to conform to the Pension Funding Equity Act of 2004 (PFEA). Section 301(c) of the Pension Protection Act of 2006 (PPA) extends the amendment deadline from the last day of the 2006 plan year to the last day of the 2008 plan year. Note that this is earlier than the 2009 amendment deadline that applies to other changes made by the PPA (see below).

As stated earlier, employers must update terminating plans, prior to termination, for all outstanding legal requirements in effect as of the termination date. Thus, in addition to adopting a conforming amendment for PFEA, an employer must update a terminating DB plan for the changes made to Code Section 415 by PPA. We will be drafting an amendment for this purpose. However, we likely will wait for the IRS to issue transitional guidance relating to distributions made in 2006 prior to the enactment of PPA (because the distribution changes made by PPA are retroactively effective).

401(k)/401(m) Amendments (All 401(k) plans and certain other plans)
All 401(k) plans must be amended to conform to the final 401(k)/(m) regulations that were released in December 2004. In addition, all other plans subject to Code Section 401(m) (i.e., plans with after-tax employee contributions and/or employer matching contributions) must be amended to conform to the regulations. In general, a good-faith amendment must be adopted by the end of the 2006 plan year (see IRS Notice 2005-95 and our tech update, Final 401(k)/401(m) Regulation Amendments Now Available, for additional details).

You can obtain the final 401(k) amendment here.

Note that all plans prepared using SunGard Relius software after July 27, 2006 already include the required amendment.

Safe Harbor 401(k) Plan Notices
The final 401(k) regulations modified the information that is required to be in 401(k) plan safe harbor notices. Prior to the issuance of the final regulations, a safe harbor notice could refer to provisions of the summary plan description containing the contribution, distribution and vesting provisions of the plan. The final regulations now require that the safe harbor notice include the distribution and vesting provisions of the plan (i.e., incorporation by reference is not permitted). In addition, the notice must now include "contact information" where a participant can obtain more information.

While the final 401(k) regulations are effective for plan years beginning in 2006, IRS Notice 2005-95 provided relief from the changes in the safe harbor 401(k) plan notice requirements for the 2006 plan year. Notices being provided for 2007 plan years (e.g., notices that should be provided no later than December 2, 2006 for calendar year 2007 plan years) must conform to the new content requirements.

There was some hope that the IRS would provide additional relief from the new notice content requirements. However, it appears that such relief is unlikely, and even if issued, probably would not provide enough time to react to any such relief. Accordingly, the Relius document system will be updated in late October. You will receive a separate notice when the update takes place.

In addition to the Relius Documents update, we have a free, sample customizable safe harbor notice here. Subscribers to The Pension Library or Forms on Disk have additional sample notices.

When preparing safe harbor notices for 2007 plan years, one should take into account the PPA change to the vesting requirement for profit sharing contributions. Effective for 2007 plan years, profit sharing contributions must vest under a schedule that satisfies either a 3-year cliff schedule or a 6-year graded schedule. Safe harbor notices must include the vesting provisions of the plan. Therefore, the vesting schedule that will apply in 2007 must be reflected in the 401(k) plan safe harbor notice for the 2007 plan year. Similarly, the notice must include a plan’s deferral procedures. Therefore, it's likely that the IRS will require that the 401(k) plan safe harbor notice contain any automatic enrollment features that may be implemented in 2007.

ROTH Amendments
If a plan permitted Roth deferral contributions during 2006, then the employer must adopt a conforming amendment prior to the end of the 2006 plan year. We have a good-faith Roth amendment package to update 401(k) and 403(b) plans to permit Roth deferral contributions.

You can download the Roth amendment package here.

Katrina Amendments
IRS Announcement 2005-70 permits a plan that currently does not include a hardship or loan provision to make a loan or hardship distribution to those affected by Hurricane Katrina. However, an employer that makes a hardship distribution or a loan without the enabling language in the plan must amend its plan no later than the end of the first plan year beginning after December 31, 2005.

Laws enacted after the issuance of IRS Announcement 2005-70 (such as KETRA) modified the loan and hardship rules for those affected by hurricanes Katrina, Rita, or Wilma. The IRS Announcement only requires an amendment to permit hardships or loans. It does not require an amendment to modify the hardship or loan provisions in accordance with the legislative changes. An amendment to make those changes will not be required prior to 2007. We expect further guidance on this and will keep you up-to-date.

The Corbel short amendment checklists for the Corbel volume submitter and Corbel prototype can be used to add hardship distributions or loans to a plan. The checklist is available for download here.

Pension Protection Act of 2006 (PPA)
Section 1107 of the PPA provides relief from the anti-cutback provisions of Code Section 411(d)(6) and that amendments to comply with PPA changes made by the Act will generally not be required prior to 2009. However, if and when a plan follows the new law, a summary of material modifications may be required, depending on whether the provision being implemented affects the provisions of the summary plan description previously provided to participants (e.g., a change to the vesting schedule applicable to profit sharing contributions). Also, an employer will need to update a terminating plan to reflect any provisions of PPA then in effect. We will send out further e-mails as we develop PPA-related materials.

For more information on year-end requirements, you should participate in our November 7 Web seminar, To Do List - Amendments and Testing and 8905s: Oh My!.