EBIA Weekly Newsletter

IRS Overhauls Opinion Letter Process for Pre-Approved Plans; Combines Prototype and Volume Submitter Programs

   July 6, 2017

Rev. Proc. 2017-41 (June 30, 2017)

Available at https://www.irs.gov/pub/irs-drop/rp-17-41.pdf

The IRS has issued Revenue Procedure 2017-41, significantly restructuring its opinion letter program for pre-approved retirement plans, including 401(k) plans. According to the IRS, the substantial changes are intended to expand the retirement plan provider market and encourage employers currently maintaining individually designed plans to convert to the pre-approved format. The revenue procedure is effective October 2, 2017, and the submission period for the third six-year remedial amendment cycle for providers of pre-approved plans is modified to begin October 2, 2017 and end October 1, 2018. Here are highlights for 401(k) plans:

  • Master and Prototype (M&P) and Volume Submitter (VS) Programs Combined. The M&P and VS programs are combined into a single opinion letter program involving two types of plans—standardized plans and nonstandardized plans. Pre-approved plans of either type may use either a basic plan document with an adoption agreement or a single plan document. Adopting employers of nonstandardized plans may adopt minor modifications, while standardized plans are more limited with respect to certain plan features, including, for example, eligibility requirements, allocation formulas, and hardship distributions.
  • Money Purchase /401(k) Plan Combination. Money purchase plans may now be combined with a 401(k) or profit-sharing plan in the same pre-approved plan document.
  • ESOP /401(k) Plan Combination. A nonstandardized plan that contains an employee stock ownership plan (ESOP) may now include a 401(k) feature. (Pre-approved plans containing ESOPs cannot be standardized plans.)
  • Hardship Distributions. Nonstandardized plans may provide for either safe harbor or non-safe harbor hardship distributions; standardized plans may allow only safe harbor hardship distributions. (See our Checkpoint article for a review of the safe harbor standards.)
  • Submission of Non-Electing Church Plans. Opinion letters may now be sought with respect to non-electing church plans. Plan document providers will need to submit for approval separate basic plan documents and adoption agreements tailored to specific types of employers (e.g., churches, governmental entities, and private employers).
  • Exempt Status of Trust or Custodial Accounts. The IRS will no longer rule on the exempt status of a pre-approved plan’s related trust or custodial account under Code § 501(a).

EBIA Comment: The overhaul of the pre-approved plan program is not surprising given the IRS’s significant reduction of the determination letter program for individually designed plans (see our Checkpoint article). The revenue procedure contains detailed information that is a must-read for providers of pre-approved plan documents as well as employers and advisors maintaining pre-approved plans or considering a switch from individually designed to pre-approved plans. The IRS indicates it will continue to update the opinion letter program and has requested comments on suggested improvements. Comments are specifically requested regarding the possibility of allowing adopting employers to continue to maintain certain “legacy” benefit formulas (such as frozen or continuing benefit formulas for certain participants due to a merger or acquisition) when adopting a pre-approved plan. For more information, see EBIA’s 401(k) Plans manual at Sections XXVII.G (“Extended Remedial Amendment Periods”), XXVII.K (“Adopting a Pre-Approved Plan”), and XXVII.L (“Advisory or Opinion Letter: Pre-Approved Plan”). You may also be interested in our recorded webinar “Common Mistakes and How to Fix Them: 401(k) Plans(recorded on 7/21/16).

Contributing Editors: EBIA Staff.