401(k): IRS Revamps Plan Document Approval Process

As you are probably aware, effective January 1, 2017, the IRS made sweeping changes to its rulings and determination letter program for qualified plans. The most striking change was the elimination of the prior five-year cycle for submitting determination letter applications for individually designed plans. In addition, changes were made to the process for obtaining opinion letters for preapproved plans, largely to reflect the changes that had been made to the individual determination letter program. These changes are generally set forth in Rev. Proc. 2016-37.


Prior to 2017, plan sponsors typically relied upon their most recent IRS determination letter or, for preapproved plans, opinion letter as a measure of confidence that the IRS had reviewed the most recent version of the plan, along with all recent amendments, and had determined that the plan was “qualified” based on the submitted documents.

Originally, most individually designed plan sponsors had the flexibility to submit their plans whenever they wished. Later, restrictions were placed on these plans by generally fitting them into a mandatory five-year cycle, based on the plan sponsor’s EIN. Preapproved plans were submitted by vendors on the basis of a six-year cycle; however, it was generally also possible for adopters of preapproved plans to obtain their own individual determination letters. Once the five-year cycle system was set up, however — absent exceptional circumstances — most plan sponsors were limited to obtaining one determination letter per five-year cycle.

The increasing number of qualified plans (particularly 401(k) plans) maintained by U.S. employers, coupled with diminishing IRS budgetary resources in recent years, necessitated further dramatic cut-backs to (some might say the near elimination of) the pre-2017 program. This is particularly true in the case of individual determination letters. Although a detailed analysis of the replacement program is beyond the scope of this article, highlights of the key features of the revamped IRS plan document approval process (in other words, the current IRS determination letter/opinion letter submission program) are generally outlined below.

 Individually Designed Plans:

The big news affects individually designed plan sponsors seeking their own determination letters.  Under the new scheme, a plan sponsor can request a determination letter for an individually designed plan (including an individually designed 401(k) plan) only if:

  • The plan has never received a favorable determination letter (generally, this would be because it is a new plan);
  • The plan is terminating; or
  • The IRS makes a special exception. The IRS has stated that it will consider “additional special circumstances,” based on program capacity and other factors.
    • The IRS recently solicited comments as to whether to consider special circumstances during 2019.

OBSERVATION: So, where it once might have been possible for an individually designed plan sponsor to submit a major plan amendment to the IRS on an off-cycle basis, in order to obtain reliance that the amendment would not adversely affect the plan’s qualification, this option is no longer viable.

  • No More Interim Amendments. Under the pre-2017 program, individually designed plans were periodically required to adopt interim amendments in response to changes in the law and other official guidance that appeared on the annual “Cumulative List of Required Plan Changes” (“Cumulative List”). If the interim amendments were timely adopted, they extended the remedial amendment period with respect to the changes until the end of the plan’s five-year amendment cycle.

The new determination letter program replaces the Cumulative List with a “Required Amendment List” that details required changes in plan qualification requirements, and sets the deadline for adopting plan amendments to reflect the changes.

For existing plans, the amendment deadline generally is the end of the second calendar year following the year in which the Required Amendments List was issued, although the deadline may vary for particular amendments.

  • No More Expiring Determination Letters. Under the old program, determination letters received by plan sponsors had expiration dates, after which the letters could no longer be relied upon. Letters issued under the new program will not have expiration dates.  Further, expiration dates included in determination letters issued prior to January 4, 2016 will no longer apply.
Preapproved Plans:

These days, most 401(k) plans are likely to take the form of preapproved plan documents. The IRS changes to its program for issuing opinion letters for preapproved plans are less dramatic, and generally mirror the changes for individually designed plans.

  • Background — Preapproved Plans Receive Prior IRS “Blessing.” Preapproved plans are plans that have been prepared by various vendors and are sold to employers wishing to adopt retirement vehicles (most often 401(k) plans) for their employees.  Before being offered on the marketplace, the IRS reviews the standardized or non-standardized preapproved plan document (see “New Plan Terms,” below), including each of the options available under the preapproved plan. The IRS then issues an “opinion letter,” which generally states that the plan, as embodied in the document(s) submitted to it, meets the requirements of a qualified plan under Section 401(a) of the Internal Revenue Code. Preapproved plans must be submitted to the IRS by the drafting vendors on the basis of a six-year cycle, depending on the type of plan.
  • Six-Year Cycles Retained. The new program retains the basic six-cycle arrangement, in that vendors still must submit their documents to the IRS for approval every six years, although certain changes to deadlines and corresponding details have been made.
  • Individual Determination Letters for Adopters of Preapproved Plans. Although there are limited circumstances under which adopters of preapproved plans may still file for an individual determination letter, in general, employers are expected to rely on the opinion letter issued to the vendor (however, see “Effect of Other Amendments,” below).
  • New Plan Terms. As part of the new program, the old terms “master and prototype” and “volume submitter” plans are being replaced with the new terms “standardized preapproved plan” and “non-standardized preapproved plan.” As before, both types of preapproved plans can take one of the following two forms:
    • (i) A basic plan document, which sets forth each of the available basic plan provisions; along with (ii) a separate adoption agreement, which permits the adopting employer to choose, from among the available plan provisions, those features that it wishes to include in its own plan (usually by checking a series of boxes); or
    • A single plan document that closely resembles an individually designed plan, except that any unchosen options are simply removed from the text of the plan document that is customized and adopted by an individual employer.

Generally, it is more common for master and prototype plans to take the form of a basic plan document with a separate adoption agreement.

Briefly, the differences between the two main types of preapproved plans, and the ability of an adopting employer to rely on their opinion letters, are as follows:

  • Standardized Preapproved Plan. Employers who adopt a standardized preapproved plan either make plan design decisions by checking boxes and filling in blank lines on the adoption agreement, or by otherwise selecting among the optional plan features, depending on the form the plan document takes. In a standardized preapproved plan, the employer may choose only among those options made available in either the adoption agreement or plan document.
  • Non-Standardized Preapproved Plan. Employers who adopt a non-standardized preapproved plan document also either make plan design decisions by checking boxes and filling in blank lines on the adoption agreement, or by otherwise selecting among the optional plan features, depending on the form the plan document takes. However, the scope of the permitted changes is generally wider and more flexible under a non-standardized preapproved plan.
  • Effect of Other Amendments. As long as an adopting employer chooses only those options, or makes those changes, that are permitted under a standardized or non-standardized preapproved plan, then it may rely on the IRS opinion letter issued for the preapproved plan.

However, should an employer adopt an amendment that goes beyond the permissible options or changes, then it generally loses its reliance on the IRS opinion letter and has, in effect, adopted an individually designed plan, which may necessitate filing for an individual determination letter. Employers should always seek legal counsel when determining whether a plan amendment would be permissible under any preapproved plan.

  • (For more information on the changes to the procedure for preapproved plans, see “New Pre-Approved Retirement Plan Opinion Letter Program” as set forth in Revenue Procedure 2017-41, and also generally described in this IRS information.)
So, How To Fill the Void?

The news of the shrinking of the IRS’s determination letter program came as a shock to many employers and employee benefits practitioners. Having an up-to-date, favorable determination letter has been a long-established tradition, bestowing many benefits. For example, up until recently, it has been a prerequisite for certain types of corrective action taken under the IRS EPCRS program (this requirement has since been modified to fit with the new document approval process). Just as important, many employers have viewed the determination letter as an “insurance policy,” evidence that the IRS has taken a look at their particular plan and has determined that it is qualified, as written.

In its absence, several major law firms have introduced document review programs, in which they review plan documents, amendments, and related documents in much the same way as the IRS would previously have done. If the firm determines that the documents meet the qualification requirements of the Internal Revenue Code, then the firm issues an opinion letter to that effect. At this time, it is too early to tell whether this program will prove to be as successful or as satisfactory to plan sponsors as was the previous version of the IRS determination letter program.

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