Last year, in Revenue Procedure 2017-41, the IRS announced a new regulatory regime for defined contribution plans. The regime was issued, according to the agency, “to expand the [plan] Provider market and encourage employers that currently maintain individually designed plans to convert to the pre-approved format.”

The deadline for prospective submitters of “preapproved” defined contribution plan documents is October 1, 2018. Here’s what affected employers should know going forward.

(Non)standardized plans

The principal effect of the revenue procedure was to consolidate preapproved “master,” “prototype” and “volume submitter” plan document types into a simplified categorization system. Now they’re either “standardized” or “nonstandardized” preapproved plans. The IRS hopes that, the more employers that use preapproved plan formats, the less time it will have to spend reviewing customized plan documents.

Standardized preapproved plans basically come under the safe harbor heading, meaning the employer has fewer plan design choices. Safe harbor plan design requirements, while limiting sponsors’ exposure to regulatory problems, tend to err on the side of generosity to plan participants. An employer using a standardized preapproved plan can rely on the opinion letter issued to the preapproved plan “as if it were its own determination letter.”

Nonstandardized preapproved plans, in contrast, don’t need to satisfy safe harbor standards, and sponsors can make minor modifications to the plan. However, if the IRS were ultimately to decide that modifications were more than minor — it’s not always clear-cut — there could be trouble. When in doubt, instead of relying on the authority of the IRS’s affirmative opinion letter issued to the plan document’s creator, a plan sponsor can file its own determination letter using IRS Form 5307.

2 plan formats

Employers can submit preapproved plans in one of two formats:

  1. An adoption agreement plan. This consists of the plan document itself and the adoption agreement. The sponsor cannot tinker with the approved plan document, but it does have some wiggle room with the adoption agreement.
  2. A single-document plan. An adoption agreement isn’t included here; the document contains all available optional and alternative paragraphs.

More terminology

The following categories of qualified plans previously ineligible for preapproved plan treatment now have that opportunity:

  • Employee stock ownership plans with 401(k) features,
  • Combined profit sharing, 401(k) and money purchase plans that are all rolled into a single plan document,
  • Cash balance plans that base the interest crediting rate on actual rates of return, and
  • Church plans.

Finally, though Rev. Proc. 2017-41 removed the term “volume submitter,” it added the similar-sounding “mass submitter.” These are businesses that submit “opinion letter applications on behalf of at least 30 unaffiliated providers that have ‘word-for-word identical’ plans to the mass submitter’s pre-approved plan.” Because they streamline the IRS review process, mass submitters are given expedited treatment.

What’s the impact?

Rev. Proc. 2017-41 made many language changes, some of which may affect your plan.

For a no-obligation discussion on the possible impact and steps you should take now, contact Meresa Morgan, our Audit Shareholder with significant experience in this area.

© 2018