IRS Extends Retirement Plan Amendment Deadline

For many Atlanta plan sponsors maintaining compliance with ERISA regulations is an important priority that is second only to serving participants. One component of compliance is an annual review of plan operations, including amendments that must be made to accommodate legal, and other changes. Throughout 2020, many were challenged by the fast pace of regulatory changes made that often required the adoption of new plan amendments. It was especially difficult because the needed guidance to implement the changes were often issued after the fact.

Recognizing that time would be needed to review, update, and make changes, the IRS originally required compliance by December 31, 2022. However, due to concern about the ability to meet this deadline, the IRS recently issued Notice 2022-45 which provides an additional three-year extension. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Looking Back: Changes to Retirement Plans in 2020

The CARES Act, which was enacted at the end of March 2020, allowed individuals to take pandemic-related distributions from 401(k) or IRA retirement plans penalty-free. Eligible distributions had to be made between January 1 and December 31, 2020. To qualify, individuals must have been either:

• Diagnosed with COVID-19 (extends to the spouse),
• Furloughed, laid off, or had their hours reduced due to COVID-19, or
• Unable to work if they couldn’t find childcare.

Taxpayers could withdraw up to $100,000 without facing the ten percent early withdrawal tax.

There were other advantages to the COVID-related early distributions. This includes the option to spread the distribution out over a three-year period versus the same tax year. Spreading out the taxable income helped individuals to manage the tax impact and use the money toward emergency funding, like if they lost their job due to COVID or had COVID-related medical bills.

Plus, if the amount was repaid within three years, individuals would not have to pay any tax on it.

Additionally, the CARES Act temporarily suspended retirement plan loan payments and required minimum distributions (RMDs) for individuals over age 72. Typically, if a taxpayer fails to take his or her RMD, a 50 percent penalty is assessed.

Millions took advantage of the temporary relaxed provision for early withdrawals. Fidelity reported that about 1.6 million people took an average distribution of around $9,400. Vanguard accounts’ average distribution was $15,700 and spanned 5.7 percent of participants (they did not specify a total number). And nearly 120,000 federal government employees took an average distribution of $24,000 for a total of $2.9 billion.

The SECURE Act, which was signed into law on December 17, 2019, also made several changes to retirement plan rules. It increased the age for RMDs from 70 ½ to 72, required plans to extend benefits to part-time employees (beginning in 2024), and relaxed early withdrawal rules for new parents, among other changes. When COVID hit, complying with those changes plus the upheaval of the pandemic necessitated a longer-than-usual deadline for plan amendments.

Plan Amendments

For plan sponsors, changes to early withdrawals, loan payments, RMDs, and generally just routine tax law changes usually require plan amendments within a certain timeframe. Failure to update the plan document within the prescribed timeframe can result in penalties, fees, and even losing the plan’s tax-advantaged status.

To make necessary amendments, plan sponsors can use pre-approved plan documents through the IRS. This is a template for defined contribution or defined benefit plans that do not need to be reviewed. Most plans, however, require individually drafted plan documents to account for the specifics and complexities of that plan. The IRS needs to review and approve these documents before the plan can be restated and updated.

In addition to its provisions for individuals, the CARES Act also permitted exceptions to certain rules. Mainly, if the plan implemented the temporary COVID-related provisions, it could be retroactively amended and still meet ERISA compliance requirements.

The original guidance gave plan sponsors until December 31, 2022 (or December 31, 2023 for governmental plans) to make retroactive amendments.

Extended Deadlines for Plan Amendments

In Notice 2022-45, issued in September 2022, the IRS has extended the deadline for required amendments to December 31, 2025, for 401(k)s, 403(b) plans (except those maintained by a public school), and IRAs. December 31, 2025, is also the deadline for amendments related to the SECURE Act.

The new amendment deadline for governmental plans is 90 days after the legislative body with authority to amend the plan closes the third regular legislative session that begins after December 31, 2023. This due date also applies to 403(b) plans maintained by public schools.

457(b) plans have a deadline that is either the same as governmental or the first day of the first plan year that starts more than 180 days after the plan was notified of non-compliance, whichever is later.

There is also extended relief for anti-cutback rules. Anti-cutback rules protect participants’ accrued benefits from decreasing due to plan amendments. The CARES Act granted relief for plan sponsors, and this relief has been extended.

Difficulty-of-care payments changed under the SECURE Act and were initially supposed to be reflected in amended plan documents by December 31, 2022. This deadline has been extended to December 31, 2025, as well.

Which Deadlines Aren’t Included?

Notice 2022-45 does not mention whether pre-approved plans are included in the extended deadlines.

Other deadlines that remain on December 31, 2022, include:

• Cooperative and small employer charity (CSEC) plans must still remove Section 436 benefit restrictions by December 31, 2022.
• Certain periodic updates in the IRS’s Required Amendments List (RAL), include annual cost-of-living adjustments, applicable interest rates, and mortality tables.
• Discretionary amendments. 

Contact Us

Plans must still operate in compliance with IRS and ERISA rules, even if required amendments haven’t been made yet. There could a higher likelihood for errors the longer one waits to make the required amendments. So, it is important to make necessary changes as soon as prudently possible. If you have questions about the information outlined above or need assistance with your next plan audit, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.