A 401(k)-plan restatement is an update to a retirement plan’s documents in order to reflect any new regulations or laws in the past six years, as required by the Internal Revenue Service (IRS).
Generally, a plan restatement is a formal rewriting process. It can be contrasted against plan amendments, which are typically smaller changes and occur during the normal course of plan administration.
As of this writing—November 2021—we are in the middle of a two-year plan restatement window. The IRS opened the restatement window on August 1, 2020. It will close on July 31, 2022. Therefore, any plan that has not yet been restated has approximately nine more months to do so.
Plan restatements are mandatory, and the penalty for not complying can be severe. This holds true even if your plan was amended in the recent past. If a plan fails to restate before the July 2022 deadline, it will be subject to IRS penalties. The most severe IRS penalty is a complete cancelation of tax-favored status. In other words, employees taking part in the plan would start paying taxes on their contributions—a complete gut-punch to the benefits of 401(k) contribution. Plan restatements are even mandatory for new retirement plans. The IRS restatement regulations do not account for a plan’s inception date.
While the six-year period might feel too frequent and repetitive, the rationale for restatement is important. Laws and regulations frequently change, especially with important positions in Federal legislation changing in 2-, 4-, and 6-year periods. It is all too easy for a plan to fall out of compliance with these changing rules. Restatement allows for a wholesale rewriting of the plan, capturing all legislative changes in one fell swoop.
Who is in charge of plan restatement? That responsibility falls onto the plan sponsor and/or the plan administrator. It is their fiduciary duty to maintain and restate the plan documentation. Once the plan has been restated, a summary—perhaps a new Summary Plan Description—should be provided to plan participants to describe the scope and scale of the changes.
Plan restatements are an important part of 401(k) maintenance. While the restating work can be tedious, it ensures that the plan is fully compliant and up to date with Federal regulations.