Consequences of Failing to Timely Adopt a PPA Restatement
Posted on May 10, 2016 by Legacy Retirement Solutions
Over the course of the last two years, we at Legacy Retirement Solutions, LLC (“Legacy”) have diligently worked to help our clients satisfy the most recent Internal Revenue Service (“IRS”) mandated restatement of pre-approved defined contribution retirement plans. This requirement was commonly referred to as the “Pension Protection Act” (“PPA”) restatement requirement in honor of the piece of retirement plan related legislation that most significantly influenced the content of the restated plan documents.
As you, hopefully, already realize due to you and/or your clients’ satisfaction of this requirement; the general deadline to adopt a pre-approved defined contribution PPA restatement was April 30, 2016. An important part of our PPA restatement efforts here at Legacy included what many plan sponsors may have perceived as “annoying” and “duplicative” follow-ups. However, the follow-up was necessary in order to best ensure that the requisite plan documents were not only received by each of Legacy’s plan sponsor clients that required them but also that they were understood and, possibly most importantly, timely executed. These efforts beg the question of: what would happen if a plan sponsor didn’t timely adopt a PPA restatement? The remainder of this article is intended to discuss the implication of such failure as well as what could be done to resolve it.
If a plan sponsor did not sign a PPA restated defined contribution plan document as required on or before the April 30, 2016 deadline; the associated retirement plan is no longer entitled to tax-favored treatment. The loss of tax-favored treatment may: 1) eliminate prior years’ deductions for contributions paid to the plan; 2) make the trust of the plan subject to taxation for current and certain prior years; and 3) force taxable distributions of all of the plan’s assets to its participants. Obviously, these consequences are both significant and severe. Fortunately, there is a voluntary correction methodology established by the IRS available to rectify this situation and which allows a plan sponsor to avoid the severe tax consequences described above.
More specifically, a plan sponsor that does not timely adopt a restated PPA pre-approved defined contribution retirement plan document can restore the tax-favored status of such plan by retroactively adopting such plan under the auspices of the Voluntary Correction Program with Service Approval Program (“VCP”) as sponsored by the IRS. Successful completion of the program results in a “compliance statement” from the IRS which is a formal memorialization of the appropriate correction of the failure. In that event, the plan at issue is able to return to its tax-favored status thereby protecting the sponsor’s deductions, the trust’s tax-exempt status and the participant’s tax deferment goals.
Although there is no requirement that a plan sponsor employ a retirement plan professional (such as an attorney) to prepare and submit a matter to VCP for correction, we strongly recommend consulting with a retirement plan professional experienced in such matters before attempting to embark down this path. This is because, while the VCP process can prove to be extremely beneficial, it also can be challenging as it requires careful preparation, attention to detail and, generally, direct negotiation with the IRS regarding the content of such submission.
As much as we hope this article helped you to better understand this topic, it is not to be construed as financial, tax or legal advice. Therefore, if you believe that the issues discussed herein may apply to your (or your client’s) company, be sure to further discuss it with a qualified retirement plan professional. For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.