By Jane Meacham, Contributing Editor

The Internal Revenue Service (IRS) has issued several changes to its preapproved qualified retirement plan program, in line with its phaseout at the beginning of 2017 of much of the determination letter program for individually designed plans.

The changes are seen as encouragement for plan sponsors to switch to more-standard, streamlined preapproved plans, and will soon affect the cycle of defined contribution (DC) plans filing their plans with the agency on October 2.

Sponsors of master and prototype (M&P) and volume submitter (VS) plans should review Revenue Procedure (Rev. Proc.) 2017-41, which on June 30 outlined procedures for issuing opinion letters on the qualification of preapproved plans under Code Sections 401, 403(a), and 4975(e)(7). The Rev. Proc. also modified the IRS preapproved letter program by blending the M&P and VS programs into a single, new opinion letter program.

The Rev. Proc.’s changes become effective October 2, but apply only to opinion letter applications about a plan’s third 6-year remedial cycle, along with subsequent cycles. It was published July 17 in Internal Revenue Bulletin 2017-29 .

“Many of these changes appear to be designed to make preapproved plans more attractive and usable in place of individually designed plans, but time will tell how effective they will be,” said a July 27 Groom Law client bulletin.

What the Changes Achieve

The IRS said in the Rev. Proc. that the program is:

• Simplified by eliminating the distinction between M&P and VS plans;
• Liberalized by increasing the types of plans eligible for preapproved status; and
• Revised to give more flexibility in preapproved plan design.

Rev. Proc. 2017-41 is likely to be updated. The IRS said it expects to continue revising it “in whole or in part, from time to time,” including changes based on public comments it receives.

Plan sponsors also should get ready for some updated Listings of Required Modifications (LRMs), which are expected to be released soon by the IRS. The Rev. Proc. said one LRM containing sample plan language is already available for downloading and use by plans switching to a more universal format.

Although the sample language in the LRM is designed for use in plans that have an adoption agreement format, “in order to expedite processing, Providers are encouraged to refer to the sample language as a guide in drafting plans that do not use an adoption agreement format” as well, according to Rev. Proc. 2017-41.

The IRS on June 30 also issued Notice 2017-37, which set forth the Cumulative List of Changes in Plan Qualification Requirements for Pre-Approved Defined Contribution Plans for 2017 (known as the “2017 Cumulative List”). It spells out changes in the qualification requirement of the federal tax Code that must be acknowledged in a plan document submitted to the IRS under the preapproved plan program in order to receive an opinion letter from the agency. The notice was also published July 17 in Internal Revenue Bulletin 2017-29.

The changes contained in Rev. Proc. 2017-41 related to the issuance of opinion letters on the qualification of preapproved plans were stated in Rev. Proc. 2015-36, which was later modified by Rev. Proc. 2016-37.

Among several significant changes brought about by Rev. Proc. 2017-41 are:

• Allowance for an adopting employer of any nonstandardized plan to adopt minor modifications without losing “reliance” on the IRS opinion letter. This includes amendments to the administrative provisions in the plan (such as provisions relating to investments, plan claims procedures, and employer contact information), provided the amended provisions are not in conflict with any other provision of the plan and do not cause the plan to fail to qualify under Code Section 401;
• Elimination of the longstanding prohibition against combining a money purchase plan with a 401(k) or profit-sharing plan in the same preapproved plan document;
• An end to the prohibition against submitting an application for an opinion letter for a nonelecting preapproved church plan; and
• An end to the IRS practice of ruling on the exempt status of a preapproved plan’s related trust or custodial account under Code section 501(a). Trust language may no longer be contained in the plan document, either. As such, employers are on their own—or will need to rely on plan trustee documents—as far as trust language is concerned.

Conclusion

While the latest Rev. Proc. guidance gives more flexibility than prior versions, major restrictions remain in many areas.

“Accordingly, plan sponsors and their advisors will want to weigh their options carefully before jumping on the ‘preapproved plan’ bandwagon. A sponsor who migrates its individually designed plan onto a preapproved form will obtain assurance that its plan document complies with the form requirements of the Code. But the price will include a loss of substantial flexibility over a key part of its overall benefit package,” the Groom Law bulletin counseled.