Clock Ticking On Required Retirement Plan Amendments Basic Requirements

All calendar-year qualified retirement plans (pension, profit sharing, 401(k), etc.) must generally be amended by December 31, 2001 to comply with changes made by tax laws which were enacted as early as 1994. Plans operating on a fiscal plan year must be updated not later than the last day of the first plan year beginning on or after January 1, 2001. Congress and the Bush Administration are considering proposed legislation further affecting retirement plans, but Internal Revenue Service (IRS) representatives have indicated that the "remedial amendment" period will not likely be extended.

In most cases, plan sponsors will likely wind up restating their entire plans. A restatement incorporates the original plan and all amendments into a single document, which promotes the convenience of reference. Additional benefits resulting from the restatement process include the opportunity to adjust plan design to be more effective, to modify plan operations and to resolve problems before they need to be disclosed as part of due diligence in a corporate transaction involving the plan sponsor.

Many businesses, particularly smaller ones, use prototype retirement plan documents provided by mutual fund companies or other service providers. Plan sponsors that have adopted prototype-style plan documents may adopt the restated form of prototype within one year after the prototype sponsor receives IRS approval for same.

Prototype plans offer certain advantages, principally that they are easy and relatively inexpensive to adopt. However, they also present a number of disadvantages, the most important being the lack of flexibility and the inability to accommodate the variable design provisions that may be most desirable to achieve a plan sponsor's objectives. Retirement plans are key components of a company's benefit package, and ideally, should be tailored to the individual circumstances of the plan sponsor.

In addition to the amendment requirements described above, plan sponsors should be aware that the IRS has issued Rev. Proc. 2001-17, which outlines the most current methods of correcting various form and operational defects within qualified retirement plans. An operational qualification defect arises when a plan is operated inconsistent with plan terms or the qualification requirements of the Internal Revenue Code.

Qualification defects can inhibit corporate mergers, acquisitions and financing transactions once identified during due diligence or may be expensive to correct if discovered by an IRS audit. Such defects can be corrected under Rev. Proc. 2001-17. In fact, this very flexible IRS program allows qualifying plan sponsors to "self-correct" most administrative errors in advance of any real harm.

Identifying and correcting errors through Rev. Proc. 2001-17 can save plan sponsors considerable cost and effort, and should be considered in connection with the required amendment and restatement process.

The Ross & Hardies Benefit Group can help with all of these important retirement plan compliance and related matters. For example, our benefits attorneys are available to:

• Evaluate effectiveness of current plan design and suggest changes to enhance effectiveness;
• Draft restated plan documents (either custom or prototype);
• Review or assist in preparing prototype restatements provided by plan service providers;
• Draft or review summary plan descriptions;
• Prepare and submit IRS determination letter applications;
• Evaluate operational compliance with qualification requirements and prepare submissions under Rev. Proc. 2001-17; and
• Coordinate and evaluate plan service providers (trustee/investment custodian, record keeper, third-party administrator, payroll service agent, etc.) and service agreements.

Clients and other interested parties should also be aware that Ross & Hardies sponsors a prototype plan document which can accommodate virtually all defined contribution plan designs. Our prototype plan combines the general advantages of a prototype with the desirable flexibility that is commonly lacking in such plans, and can be substituted for a company's existing plan.

We also advise on questions that frequently arise in the operation of welfare and tax-advantaged cafeteria plans (new COBRA, HIPAA and flex plan regulations have recently been issued) and on the design and implementation of all forms of incentive and deferred compensation arrangements.

First published in May 2001

This material is published by Ross & Hardies to provide a summary of significant developments to our clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation.