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According to the IRS website, All 401(k) plans must be established and supported by a formal written plan document that complies with the Internal Revenue Code (IRC). You must amend your written plan when the tax laws affecting 401(k) plans change. The IRS generally establishes a firm deadline by which plan amendments reflecting tax law changes must be adopted. This requirement applies to all 401(k) plans, whether active or not, for as long as assets remain in the plan. Terminating plans must be updated for law changes through the date of termination.
How to find the problem:
As a 401(k) sponsor, you need to be able to show that:
You should review the following documents to determine if the plan was timely amended:
Each type of plan (pre-approved or individually designed plan) is placed in a cycle by which the plan must be updated. The specific information can be found within the IRS guides at these links:
Revenue Procedure 2007-44 and New Determination Letter Program –Rev Proc. 2016-37
Interim amendments are required to keep plan documents current for law changes between remedial amendment cycles.
The IRS publishes a Cumulative List of Changes in Plan Qualification Requirements near the end of each year. This list will assist you in determining if you need to make any changes or adopt amendments for your plan.
How to fix the problem:
If you find that you haven’t amended your plan in a timely manner for the law changes, you should seek advice and then adopt amendments for the tax law changes you’ve missed. You may be able to use an IRS model or sample amendments that apply to your 401(k) plan. Sample amendments are available on the IRS’ website.
Some plan document failures may be corrected if certain conditions are met. And if the plan isn’t under examination, you may be able to use the voluntary Correction Program set us by the IRS. This is a pay program by the IRS and the cost are generally reflected by the amount of assets in the plan.
If the IRS agent finds the mistake during an audit, it may be able to be correct through the Audit Closing Agreement Program and the fees will be determined by the facts and circumstances of the audit. If discovered during the determination letter process, it’s generally subject to higher fees than if you bring the mistake to the agent’s attention.
Of course, it is generally prudent to get the assistance of your tax professional(s) or another professional who is certified and familiar with the issues with which you are seeking assistance.
How to avoid the mistakes ahead of time.
Fix It #2: You didn't base the plan operations on the terms of the plan document.
Fix It #3: You didn't use the plan definition of compensation correctly for all deferrals and allocations.
Fix It # 4: Employer matching contributions weren't made to all appropriate Employees.
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