3838 / What requirements must be met for a plan to be qualified?
A retirement plan is tax qualified when the plan document complies with the requirements under IRC Section 401(a). The document must be updated periodically to meet this section’s changing requirements, and the plan must be operated in compliance with the IRC and the document. A plan that fails to meet these requirements, either in its document or operation, has a document failure or an operational failure, respectively. A plan that does not correct either failure could be disqualified by the IRS. An IRS disqualification strips the plan of its tax benefits. Most document or operational failures can be corrected through one of the IRS’ voluntary correction programs under the Employee Plans Compliance Resolution System (“EPCRS”).1
To meet the basic qualification requirements of IRC Section 401(a), a plan must:
(1) Be established in the United States by an employer for the exclusive benefit of employees or their beneficiaries ( Q 3839).
(2) Prohibit the use of plan assets for purposes other than the exclusive benefit of the employees or their beneficiaries until such time as all liabilities to employees and their beneficiaries have been satisfied ( Q 3839).
(3) Meet minimum age and service standards ( Q 3841), and minimum coverage requirements ( Q 3842).
(4) Provide for contributions or benefits that are not discriminatory ( Q 3848 to
Q 3863 in general, and Q 3802 to Q 3804 with respect to 401(k) plans).
(5) Provide for contributions or benefits that do not exceed the IRC Section 415 limitations ( Q 3868, Q 3719, and Q 3728).
(6) Meet minimum vesting standards ( Q 3869 to Q 3876).
(7) Provide for distributions that satisfy both the commencement rules and the minimum distribution requirements ( Q 3891 to Q 3910).
(8) Provide for automatic survivor benefits under certain circumstances ( Q 3881 to Q 3890).
(9) Contain provisions that meet the requirements for “top-heavy” plans and provide that these provisions will become effective should the plan become top-heavy
( Q 3916 to Q 3922).
(10) Prohibit the assignment or alienation of benefits ( Q 3912 to Q 3915).
(11) Meet the miscellaneous requirements described in Q 3927.
(12) Meet the plan-specific requirements that are based on the type of plan (e.g., profit sharing) ( Q 3714 to Q 3827).
(13) Provide that if the distributee of an eligible rollover distribution elects to have the distribution as permitted under IRC Section 401(a)(31)(A) paid as a direct rollover, the distribution will be made in the form of a direct rollover.
(14) Provide that if the plan uses the forced distribution provision of IRC Section 401(a)(31)(B) for distributions of vested benefits that do not exceed $7,000 ($5,000 prior to 2024), the plan also must notify the distributee in writing of the rollover ( Q 4001).2
(15) Provide to each recipient of a plan distribution a written explanation of his or her right to elect a direct rollover and the withholding consequences of not making the election prior to making the distribution ( Q 3998).3
(16) Be established through a written plan document that is communicated to employees prior to the first day of the plan year for which it is to be effective. This document must satisfy the requirements of 401(b). In most cases, plan sponsors rely on either a determination letter or other IRS approval to confirm that the form of the document is in compliance. Prototype and volume submitter documents have a form or preapproval by the IRS.4
(17) If the plan holds assets in a custodial account, that account must be with a bank or other entity that demonstrates to the satisfaction of the IRS that assets will be properly held.
(18) If the plan covers employees who are covered under a collectively bargained plan, the requirements of IRC Section 413 must be met.
(19) If the plan covers self-employed individuals, it must meet the requirements discussed under Q 3826, Q 3827, and Q 3932.
Although a document must fully satisfy the provisions of 401(a) on the date of adoption, changing legislation and Treasury regulations may require amendments prior to the close of a specific plan year. Almost every plan needs some required plan amendments every year. The IRS regularly releases a list of required amendments for qualified retirement plans.5
Failure to timely amend a plan to meet newly enacted or modified qualification requirements can result in revocation of a plan’s qualified status,6 even if the plan has been terminated.7 Nonetheless, a terminated plan must meet the IRC’s qualification rules until such time as all the assets are distributed in satisfaction of its liabilities.
Planning Point: On June 3, 2022, the IRS released details about a new pilot pre-examination compliance program for qualified plan audits. Under the program, the IRS will send the plan sponsor a letter advising that it has been selected for an examination. The sponsor is then given 90 days to review the plan for compliance issues. If the sponsor uncovers any issues, it can correct the problem within the 90-day review period if the issue is one that can be corrected under self-correction procedures or can request that the IRS enter a favorable closing agreement. If the sponsor receives a letter, the sponsor should show that either (1) the plan is compliant with any issues raised in the letter, or (2) the plan was non-compliant but has (or will) correct the problem. The sponsor must also show whether any additional issues have been detected during the compliance review (and steps that are being taken to correct those issues). The IRS will then review that information and, if it agrees, issue a closing letter without additional contact. If the IRS disagrees, it will contact the sponsor and determine whether further audit/action is necessary.
1. For details, see Rev. Proc. 2013-12, 2013-4 IRB 313, as modified by Rev. Proc. 2015-27, 2015-16 IRB 914, Rev. Proc. 2015-28, 2015-16 IRB 920 and Rev. Proc. 2016-51, 2016-42 IRB 465.
2. IRC § 401(a)(31)(B).
3. IRC § 402(f).
4. Engineered Timber Sales, Inc. v. Comm., 74 TC 808 (1980), appeal dismissed (5th Cir. 1981); G&W Leach Co. v. Comm., TC Memo 1981-91.
5. See Notice 2021-64 for the 2022 list.
6. Christy & Swan Profit Sharing Plan v. Comm., TC Memo 2011-62.
7. Basch Eng’g, Inc. v. Comm., TC Memo 1990-212; Fazi v. Comm., 102 TC 695 (1994).