The IRS has recently announced the opening of the window for employers to adopt pre-approved defined benefit plans. (Announcement 2018-05) Every pre-approved plan has a regular six-year remedial amendment cycle, and plans are generally required to amend their plan documents to conform to changes in the law. Employers using pre-approved plan documents to restate their defined benefit plans for certain plan qualification requirements must adopt a restated plan document no later than April 30, 2020.
A pre-approved plan is a standardized plan sold to employers by a document provider such as a financial institution or benefits practitioner, which includes IRS’s pre-approval that the plan document meets the qualification requirements of the Internal Revenue Code. Pre-approved plans are either Master and Prototype (M&P) or Volume Submitter (VS). Pre-approval comes in the form of an Opinion Letter for M&P plans, and an Advisory Letter for VS plans. The IRS expects to issue the opinion and advisory letters for the current six-year cycle on March 30, 2018 or shortly thereafter.
Employers who make no modifications (or minor modifications to a volume submitter documents) may rely on the opinion or advisory letter for the pre-approved plan. Examples of minor modifications include changing the effective date of a provision, adopting IRS model or sample amendments, or the adoption of required amendments. Employers who modify the terms of a pre-approved plan may request a determination letter under certain limited circumstances. Depending on the nature and extent of employer amendments made to an approved M&P or VS plan, the IRS may, in its discretion, treat the plan as individually designed. Determination letter applications will be accepted by the IRS during the two-year window starting May 1, 2018 and ending April 30, 2020.
Failure to adopt a restated plan prior to the mandated deadline could result in the plan no longer being entitled to tax-favored treatment if the plan document is found to be deficient by the IRS. The plan’s tax-favored status may thereafter be restored by adopting a restated plan document and filing for a compliance statement under the IRS’s Voluntary Correction Program (VCP). The correction process, however, can be costly, so employers should ensure the restated plan document is adopted within the required timeframe. Review of restated plan documents by legal counsel can help avoid expensive mistakes and should be considered in light of a fiduciary’s obligations toward the plan (See Those-Pesky-Plan-Documents-What-do-They-Have-to-do-With-my-Fiduciary-Duties).
The attorneys of Boutwell Fay LLP are available to help you understand the process and review your plan’s document for any potential negative consequence arising from uninformed choices or drafting errors.
© Boutwell Fay LLP 2018, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of March 30, 2018.