Each year, the IRS updates its guidance on rulings and determination letters for employee benefit plans, principally retirement plans. This year, new Revenue Procedure 2017-41 (Rev. Proc.) combines programs for master & prototype (M&P) plans and volume submitter (VS) plans into a single program for pre-approved (PA) plans and provides greater flexibility in designing PA plans.

One announced goal of this latest update is to encourage employers with individually-designed plans to convert to PA plans. The IRS eliminated most determination letters for individually-designed plans in January 2017 (click here for our prior alert on determination letters). The IRS recognizes that an individually-designed plan that maintains legacy benefit formulas may not easily convert to a PA plan and has asked for comments on this issue.

Under the new IRS program, there are two types of PA plans – Standardized and Non-Standardized – available to both defined contribution plans and defined benefit plans. Each type may use either the adoption agreement/basic plan document format or the single plan format. Under a Standardized plan, an adopting employer adopts the PA plan documents virtually word for word. Under a Non-Standardized plan, an adopting employer has some flexibility, particularly with respect to the compensation definition and safe harbor and administrative provisions.

PA plans can now include features such as a combined money purchase plan and 401(k), a combined ESOP and 401(k), a cash balance formula with interest credits based on actual rates of return, or either safe harbor or non-safe harbor hardship distributions.

The basic process continues to be that there is a 6-year remedial amendment period during which a PA plan with an Opinion Letter from the IRS is considered qualified. The current 6-year period for defined contribution plans is February 1, 2017 – January 31, 2023. During that time, the period during which providers of PA plans must submit their new form PA plan documents has been moved back to begin on October 2, 2017 and end on October 1, 2018 (an eight-month delay from earlier guidance). Defined benefit plans continue to have a 6-year remedial amendment period from February 1, 2013 – January 31, 2019, with the next 6-year period scheduled to begin on February 1, 2019 and end on January 31, 2025.

Once a PA plan provider receives an Opinion Letter on its PA plan, each adopting employer must sign and date the new form of PA plan within deadlines announced by the IRS. The Rev. Proc. outlines when an employer may rely on an Opinion Letter, considering it to be the equivalent of a determination letter. In cases where an employer has modified the form language to such an extent that it may not rely on the PA plan's Opinion Letter, the employer can file a request for a determination letter for reliance on the PA plan as adopted by the employer or as an individually-designed plan.

Employers using PA plan documents should remember to:

  • Understand which type of plan document they are using,
  • Make sure they have copies of the complete plan document (generally 2 separate documents for adoption agreement/basic document users),
  • Promptly sign and return to the provider all amendments and restatements, and
  • Consider using IRS correction programs to maintain reliance on the PA plan and its Opinion Letter. The provider must notify an employer if reliance on the Opinion Letter is not available if the employer does not correct its plan.

The Executive Compensation and Employee Benefits team is ready to assist employers to determine their complliance and to consider converting their individually-designed plans to a PA plan.