The IRS recently issued Rev. Proc. 2017-41, which modifies and streamlines the agency’s preapproved retirement plan program and allows for preapproved plan documents to include a wider variety of features.
The modifications are designed to further the IRS’s stated intention to encourage sponsors of individually designed plans to transition to a preapproved plan format. However, the changes are relatively modest and most large plan sponsors will likely find other ways to mitigate their higher compliance risk since the curtailment of the individually designed determination letter program. The IRS plans to continue enhancing and expanding the preapproved plan program “in whole or in part, from time to time,” with some of the changes based on comments from program users.
The IRS also issued the 2017 Cumulative List, which outlines the qualification provisions that need to be addressed in preapproved defined contribution (DC) plans that are submitted for an opinion letter.
Rev. Proc. 2017-41 begins with applications for opinion letters for preapproved DC plan documents submitted during the third staggered remedial amendment period. That period, which was delayed by the Rev. Proc., opens on October 2, 2017, and ends on October 1, 2018.
The long-established IRS program allows providers of preapproved plans to obtain advance approval from the IRS that their plan documents meet the requirements of section 401(a) of the Internal Revenue Code and related regulations. Preapproved plans — i.e., Master and Prototype (M&P) and Volume Submitter (VS) plans — already have IRS approval, so plan sponsors adopting such plans need not request their own determination letter.
The IRS restricts the provisions and features that may be included in a preapproved plan, so the plans are most suitable for sponsors with relatively straightforward and simple designs. Since curtailing the individually designed determination letter program, however, the IRS has tried to relax some of the preapproved program’s constraints so that more plan sponsors can transition to a preapproved plan format and maintain documents that will continue to receive IRS approval.
Primary changes in Rev. Proc. 2017-41
- The IRS has replaced the M&P and VS programs with a single Opinion Letter program that will accommodate two types of plans: standardized and non-standardized. Preapproved plans may be either a basic plan document with an adoption agreement or a single plan document.
- Employers that adopt non-standardized plans may make minor modifications.
- A money purchase plan combined with a 401(k) or profit-sharing plan in the same document may now be eligible to apply for the preapproved program.
- Non-standardized plans with an employee stock ownership plan (ESOP) feature may also include a 401(k) feature.
- Non-standardized plans that include a cash balance formula may base the rate for determining an interest credit on the actual return on all plan assets (but not on returns for a subset of assets).
- The IRS has lifted the prohibition against applying for an opinion letter for a non-electing church plan.
- Plan sponsors that adopt a preapproved plan with modified language for tax code sections 415 and 416 will be permitted to submit Form 5307, Application for Determination for Adopters of Modified Volume Submitter Plans, to obtain reliance on those provisions.
While the streamlined approach and expansion should enable more plan sponsors to adopt a preapproved document, the program still may not be feasible for large plan sponsors with complicated benefit programs. For example, the program cannot accommodate single-employer collectively bargained plans, plans that incorporate the section 415 contribution limits or nondiscrimination tests by reference, or plans that include fail-safe provisions for the average benefits test.
The usefulness of the preapproved program largely depends on the range of plan documents that receive opinion letters from the IRS. Although providers of preapproved documents are not required to use the IRS model language in the Listing of Required Modifications (LRMs), past IRS reviewers have been reluctant to approve plan documents that stray too far from the LRMs.
Rev. Proc. 2017-41 invites suggestions for further improvements to the program. The IRS said that earlier comments have proposed allowing adopting employers to continue certain legacy benefit formulas when transitioning from an individually designed plan (Willis Towers Watson suggested this improvement in 2015). The Rev. Proc. requests further comments, “specifically with respect to the effect that appending legacy benefit formulas to the plan document would have on reliance on a plan’s Opinion Letter.” So, modifications that would enable plan sponsors to maintain certain legacy benefit formulas might soon be in the pipeline.
Most sponsors of individually designed retirement plans are trying to lower the compliance risk they face since the IRS scaled back the determination letter program. While using a preapproved plan document is one way to manage risk, the preapproved plan program — even with the recent expansions — is still not flexible enough for most large plan sponsors. Those that do not transition to a preapproved design need a solid governance process to ensure their retirement plans remain compliant with qualification requirements.
As noted above, the IRS has signaled its intention to further adjust the preapproved plan program, so plan sponsors will want to reassess their compliance approach as those updates occur.