Action required: Solo 401(k) owners (and others) and EGTRRA

August 23, 9:27 PMSF Personal Finance ExaminerBarbara Bryn Klare

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I don't often willingly wander into tax territory, but since many of us have accumulated a "grab bag" of assorted IRAs and 401(k)s, I thought I would briefly cover the latest misunderstood tax topic: qualified retirement plan restatement.

What is "Restatement"?

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 is already in effect, but the IRS is requiring that all plan sponsors formally update their retirement plan documents for EGTRRA and other legislative provisions since 2001. If you sponsor your own Individual or Solo 401(k), or if you have employees, you will need to update or "restate" all plan documents. You must go through this restatement process for all qualified retirement plans for which you are a sponsor.

If someone else handled your plan documents - third-party administrator, attorney or financial advisor - you should ask them ASAP: "How are you handling my plan for the EGTRRA restatement?”

What Are the Key Changes?

The key changes include: higher contribution and deduction limits, catch-up contributions, higher elective deferral limits for 401(k) plans, faster vesting schedules for employer contributions, and improved asset portability.

The Big Plan Rewrite - Get Your Pen Ready

You will need the following EGTRRA pre-approved plan documents from your custodian to fullfill the restatement process.

Adoption Agreement

 Basic Plan Document - Note that you will want proof that your custodian's Basic Plan Document has been approved by the IRS.

Summary Plan Description (if you have employees)

In the past, restatement periods have been less predictable, but the IRS is now implementing a system of six-year restatements. The window for this one began May 1, 2008 and runs until April 30, 2010, but it is generally best to restate as soon as possible, rather than wait. If so, keep in mind that if you don't restate your qualified retirement plan, you run the risk of your plan losing its tax-qualified status. You might also be dropped by your plan custodian and have to find another one; which would be a much bigger paperwork and accounting headache than simply restating your current plan. Note that if you are planning to terminate your plan, you still must restate it prior to termination.

If you are not sure how to operate your plan or have tax questions regarding restatement, be sure consult with your tax advisor. 

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 © 2009 Barbara Bryn Klare. All Rights Reserved.