Several years ago, the Internal Revenue Service (IRS) established a special schedule, known as the six-year “remedial amendment” cycle, for so-called “pre-approved” qualified retirement plans to adopt revisions reflecting changes in applicable law. These plans include generic master and prototype (M&P) and volume-submitter (VS) plans that have received favorable opinion or advisory letters from the IRS concerning their standard terms.
The IRS requires that employers using pre-approved defined contribution plans adopt restated plan terms by April 30, 2010. The restated terms must comply with various requirements enacted under the Economic Growth and Tax Relief Reconciliation Act of 2001 and other plan qualification requirements found in the IRS’s 2004 Cumulative List of Changes in Plan Qualification Requirements (the 2004 Cumulative List), published in Notice 2004-84. Vendors sponsoring such pre-approved plans (Plan Sponsors) generally should have sent the required restatement documents to all adopting employers by this time.
Employer Reliance on IRS Opinion or Advisory Letters for Pre-Approved Plans
An employer using a pre-approved plan may be able to rely on the IRS opinion or advisory letter for the plan as evidence that the form of the plan is tax-compliant, and thereby avoid having to request a favorable determination letter for the plan from the IRS. In order to have this reliance, the employer generally must have selected only those design options that are specifically permitted under the plan document.
However, even if the employer does not deviate from the permitted options, there may be circumstances when the employer cannot rely on the opinion or advisory letter, and must instead apply to the IRS for a determination letter if it wants assurance that the form of the plan is tax-qualified. Examples of situations in which this is case are as follows:
- The plan uses a definition of “compensation” for allocation purposes that does not satisfy a nondiscrimination safe harbor in the regulations under Sec. 414(s) of the Internal Revenue Code of 1986 (Code).
- The plan uses an allocation formula that does not meet one of the design-based safe harbors under the nondiscrimination requirements of Code Sec. 401(a)(4).
- The employer maintains another qualified plan covering some of the same participants as the pre-approved plan and wants to be certain that the pre-approved plan has properly addressed such issues as the “annual additions” limit in Code Sec. 415 and the top-heavy plan requirements in Code Sec. 416.
Even if an employer using a pre-approved plan may rely on the opinion or advisory letter for the plan, it may otherwise wish to obtain a determination letter for certain reasons, including (i) making it easier for terminated participants to roll over their benefits to other qualified plans that may seek assurance that the employer’s pre-approved plan is tax-qualified; (ii) decreasing the likelihood that the IRS will re-examine the terms of the plan in an audit; and (iii) providing added justification for shielding a plan participant’s benefits from creditors in the event he or she files a bankruptcy petition.
Filing Determination Letter Applications for Pre-Approved Plans
April 30 is also the deadline for submitting a determination letter application for a pre-approved plan. In order to comply with procedural requirements for these applications, the plan administrator must provide advance notice to “interested parties” (for ongoing plans, mainly current employees) of the filing at least 10 days before the filing date. Therefore, notice must be provided no later than April 20 in connection with an April 30 filing.
In general, an employer that has adopted an M&P plan and limits design choices to those permitted in the plan document can request a determination letter by filing Form 5307. An employer that adopts a VS plan and makes changes to the pre-approved plan document may file an application for a determination letter by using either Form 5307 or Form 5300, depending on the extent of the changes. The IRS will require a Form 5300 when the VS adopter makes changes to the plan that are too extensive or complex, or otherwise incompatible with the VS program.
Special Issues for Employers Making Changes to Pre-Approved Plans
Some employers adopt pre-approved plan documents but modify them to make design changes beyond those permitted by the plan documents. Such changes can cause the plan to lose its pre-approved status and instead be treated as an individually-designed plan. For such a plan, the employer must request an IRS determination letter in order to have reliance that the modified plan document meets applicable tax-qualification requirements.
These plans will be reviewed for compliance with the items shown on the Cumulative List in effect for the year in which the determination letter application is submitted (which for this year is the 2009 Cumulative List, published in Notice 2009-98). Under Rev. Proc. 2005-16, such a plan will nevertheless generally be allowed to remain within the six-year remedial amendment cycle. The IRS announced in 2008 that an employer maintaining such a plan must file a determination letter application on Form 5300 by April 30, 2010 in order to obtain reliance.
In recent years, the IRS has required that various “interim amendments” be made to qualified plans to comply with tax law changes. Plan Sponsors of M&P plans typically timely adopt the required interim amendments on behalf of all employers using such plans. As a result, such an employer generally does not have to adopt any interim amendment itself unless the amendment has various permitted design alternatives, and the employer does not choose the default option.
However, if an employer adopts an M&P plan and modifies it such that a determination letter is required as a condition of obtaining reliance, the employer must thereafter timely adopt all interim amendments itself – adoption only by the Plan Sponsor is not sufficient. If the employer submits a determination letter application for the plan, it must include copies of timely-adopted interim amendments. The failure of an employer to timely-adopt any interim amendment may be correctable under the IRS’s Employee Plans Compliance Resolution System.
Please contact one of the authors or any other member of our Employee Benefits team if you have any questions concerning the matters discussed in this article or need any assistance in connection with your plan.