Pre-Approved Plans: Now Everyone Wants One

Transcription

1 Pre-Approved Plans: Now Everyone Wants One Don Kieffer, Jr., Tax Law Specialist, Internal Revenue Service, TE/GE Robert M. Richter, J.D., LL.M., APM, Vice President, FIS (Relius)

2 Why Have Pre-Approved Plans Become More Popular?

3 Pre-Approved Plans Can be very flexible - but not as flexible as individually designed plan (IPD) Less expensive to maintain IRS is encouraging use of pre-approved plans Documents have become a commodity? Perhaps the question should be: Why use an IDP? In some cases it may be your only option No more restatements every 5 or 6 years

4 PRE-APPROVED PLANS: IMPERMISSIBLE PROVISIONS

5 Impact of Impermissible Provision An Impermissible Provision is a provision that is prohibited in any pre-approved plan Plans with these provisions MUST use an IDP

6 Impermissible Provisions Collectively Bargained plans (single-employer or multiemployer) Union employees of single-employer can be covered under preapproved plan Stock bonus plans other than ESOPs ESOPs with MP provisions or that hold preferred stock Non-electing church plans Failsafe provisions for IRC 401(a)(4) or average benefits test of IRC 410(b)

7 Impermissible Provisions Cannot incorporate by reference the 415 limits and the ADP/ACP tests Cannot include blanks or fill-in provisions unless the provisions have parameters precluding their completion in a manner that could violate the qualification requirements

8 Impermissible Provisions Plans with 401(h) accounts (post-retirement medical) DB/K plans (414(x)) DB plans with 414(k) accounts (pre-egtrra provisions are grandfathered) Rollover accounts are permitted Governmental DB plans with DROP features

9 Impermissible Hybrid Provisions Hybrid plans with any of the following features are NOT permitted in a pre-approved plan: A statutory hybrid plan that is not a cash balance formula (e.g., a pension equity plan) An interest crediting rate based on a participant s choice or a rate that doesn t satisfy the regulations (1.411(b)(5)-1(d)) An interest crediting rate that is based on actual return of assets or a subset of assets or rate of return on certain RICs

10 Impermissible Hybrid Provisions Hybrid plans Conversion from a traditional DB formula unless it s an A + B conversion No wear-away approach That use 3% or fractional accrual method Must use 133 1/3% method That are fully insured (IRC 412(e)(3))

11 Impermissible Hybrid Provisions Offset provisions unless: Offset is applied on accumulate basis at annuity starting date Offset meets the safe-harbor requirements of 1.401(a)(4)-8 Minimum accrued benefit of 0.5% of comp for each year of credited service

12 Other Prohibitions De-risking provisions (Notice ) Non-safe harbor target benefit plans No NRA less than 55 Other items the IRS deems inappropriate in a pre-approved plan

13 If It s Not Impermissible Then Technically it s allowed in a pre-approved plan The adoption agreement could this large: Or it could be this small: The terms of the plan are: (with a very long parameter on what can be filled in)

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15 Reliance What Does it Mean? Reliance (having IRS approval on a plan document) means you can rely on the terms of the plan as approved IRC 7805(b) relief Bankruptcy protection? Having a current determination letter avoids need to produce old documents

16 QAB Quality Assurance Bulletin Generally, a specialist is only responsible for verifying one cycle prior to the plan s current remedial amendment cycle. If a specialist determines additional verification of prior law is required, the specialist must receive managerial approval to expand the scope of the determination.

17 EPCRS: Rev. Proc A plan must have a favorable letter to be able to use SCP to correct significant failures Favorable Letter means: For IDPs, a letter (does not need to be current) For pre-approved plans, a current letter For 403(b) plans, plan that was timely adopted and conforms, in good-faith, to final 403(b) regulations

18 Scope of Reliance No reliance on IRC 415 or 416 if maintain another plan covering some of the same participants No reliance on trust provisions (new) No reliance on ERISA Title I provisions

19 The New Determination Letter (DL) Program For IDPs Rev. Proc

20 One and Done Employers can only request a determination letter on an IDP designed plan If they have never received a determination letter on the plan On plan termination (Form 5310) Other circumstances identified by IRS Don t hold your breath

21 One and Done For purposes of one and done, reliance on preapproved plan is not the same as having received a DL Example: Employer has traditional DB on an M&P plan and has reliance Employer adds cash balance provisions Employer could submit for a DL as an initial plan qualification In many cases this won t be necessary as most cash balance provisions will be permitted in pre-approved plans

22 Amendments No ability to obtain approval of interim or discretionary amendments to IDPs Good-faith no longer the standard

23 Required Amendments List IRS will annually issue a Required Amendments List for IDPs only An item will be put on the RA list when: The law changes and the IRS determines no guidance is needed The law changes and the IRS has issued guidance on the subject The IRS issues changed guidance (e.g., regulations on forfeitures reducing SH and QNECs)

24 Required Amendments List Generally have 2 years to adopt an amendment once it is on the list No exception for IRC 411(d)(6) IRS has not changed the interim amendment rules for pre-approved plans Used in issuing determination letters to IDP Use list issued two years earlier So 2016 list applies to determination letter requests made in 2018

25 First RA List (2016) IRS Notice Part A: Changes in qualification requirements that generally would require an amendment to most plans None Part B: Other changes in qualification requirements that may require an amendment: Collectively-bargained defined benefit plans: Restrictions on accelerated distributions from underfunded single-employer plans in employer bankruptcy under 436. (Highway and Transportation Funding Act of 2014, P.L , 2003)

26 Operational Compliance List New rules could result in extend delays between effective date of change in the law and the adoption of a conforming amendment IRS will issue an annual operational checklist to help employers know what changes are effective each year Good for all plans 2017 list:

27 Retroactive Corrections & Reliance

28 The RAP The Remedial Amendment Period (RAP) is a period during which a disqualifying plan provision can be retroactively corrected Think of it as the ability to self-correct a plan document failure Without the RAP, disqualifying plan provisions can generally only be corrected using VCP

29 The Regulatory RAP The regulatory RAP generally Starts as of effective date of plan or amendment Ends on the due date of the sponsor s tax return, including any extensions, for the year in which the disqualifying provision is effective For multiple employer plans it is the 10th month after the end of the applicable PY For governmental plans it is tied to legislative sessions

30 Procedural Extension The IRS has provided procedural extensions to the end of the Remedial Amendment Period: (5-year and) 6-year restatement cycles Permits plan sponsors to retroactively correct plan document defects that have occurred during the applicable cycle

31 The RAP for IDPs Rev. Proc eliminated the 5-year cycle for individually designed plans (IDPs) after 2016 In place of the 5-year cycles, IDPs have 2 new procedural RAPs

32 Later of RAP for New IDP 15th day of 10th month after end of first plan year (Oct 15 for calendar year) Due date of employer s return as if employer requested extension Special rules for tax-exempt and governmental employers

33 RAP for IDP Amendments Discretionary amendments: Last day of plan year put into effect Amendment to deal with law change (interim amendment) Last day of second calendar year beginning after Required Amendments List published which describes the required amendment So if item on 2022 RA list, RAP ends 12/31/2024 Other amendments (e.g., to fix errors) End of second calendar year beginning after later of year amendment adopted or effective No requirement to restate IDPs Probably unwise to restate because you lose all reliance on determination letter

34 Transition Rule IRS has extended the RAP for certain IDPs to 12/31/2017 Example: Employer on Cycle C had conventional IDP defined benefit plan Timely filed for determination letter in 2013 Letter would have expired 1/31/2019 Expiration date removed; employer can rely unless employer amends Employer amended to add cash balance provisions on 8/1/2014 (design won t work on preapproved document) RAP extended to 12/31/2017 But employer cannot file for a DL

35 RAP for Pre-Approved Plans Adopters of pre-approved plans have a 6-year remedial amendment period Must timely adopt interim amendments Must restate plan every six years to retain reliance Otherwise it is a document failure

36 Eligibility for 6-Year Cycle Plan is eligible for 6-year cycle if: Employer is a prior adopter Employer adopted preapproved plan for prior cycle Employer is new adopter: Not a prior adopter

37 Goodbye 8905 Rev. Proc had a category for intended adopter: Employer has individually designed plan Employer completes Form 8905 prior to end of its 5-year cycle Employer fall under the 6-year cycle The intended adopter category is gone (presumably because there are no longer 5 year cycles) Just adopt newly approved plan in 2-year window as a new adopter

38 What is the RAP? Employer established a cash balance plan (IDP) in 2016 General RAP ended in 2017 If employer adopts a pre-approved DB plan (expecting a RAP of ) does employer now have a RAP going back to 2016?

39 Modifications to an Approved Plan

40 Modification of IDP New (?) rule for IDPs: If a plan is amended, reliance is only lost on provisions affected by that modification Some law firms are now offering a private determination letter Risky to restate an IDP once it has received a DL

41 Modifications to Pre-Approved Plans Impact on 6-year cycle Impact on Reliance Different rules for each

42 Impact of Modifications 6-year Cycle General rule still entitled to the 6-year RAP Anti-abuse provision IRS has discretion to determine that 6-year RAP does not apply If modification is to add impermissible provision (e.g., interest credit based on subset of assets), then lose ability to use 6-year RAP in following cycle if amend after 1 year If amend within 1 year of adopting pre-approved plan, then not entitled to use 6-year RAP at all

43 Impact of Modifications - Reliance Loss of Reliance (subject to exceptions) Still able to adopt amendments on behalf of adopting employers (unless impermissible or abusive modifications) Prototype (standardized under new rules) becomes individually designed unless modification is for 415/416 coordination Volume submitter (nonstandardized plan under new rules) still considered pre-approved if changes are not extensive In most cases, if DL desired, submit Form 5307

44 Identical Adopter An Adopting Employer may rely on an Opinion Letter only if.the employer s plan is identical to a pre-approved plan with a currently valid Opinion Letter

45 Permissible Amendments Reliance not lost if modification is for: Trust or custodial provisions Special effective dates if restatement could accomplish same result Adoption of interim amendments Amendments to the administrative provisions of the plan (such as provisions relating to investments, claims procedures and employer contact information)

46 Permissible Amendments Reliance not lost if modification is for: COLA adjustments Changes to a provider s name

47 Describe or Other Lines Completion of describe or other line is NOT a modification as long as parameter is followed OK to be creative Can the blank refer to outside documents that contain differing provisions (such as legacy provisions or union contracts)? How do you ensure you haven t crossed the line? Submit a 5307 which means you are considering it to be a modification These options do not always work well with automated systems for generation of SPDs or other forms

48 Issues on Modifications Can modifications be made to ERISA Title I provisions since there was no reliance? If a modification is made, does it destroy ALL reliance? For individually designed plans reliance is only lost with respect to the modification Modifications to a pre-approved MEP still requires Form 5300 submission This technically means one and done

49 Interim Amendments If a modification causes a pre-approved plan to be treated as an IDP, then for purposes of reliance the provider no longer has the authority to adopt interim amendments on behalf of the employer Impermissible amendments, abusive amendments, or amendment to standardized plan Plans could still include a general delegation of amendment authority outside

50 Scope of Review Submission of pre-approved plans for a DL Can only submit a pre-approved plan (volume submitter or nonstandardized) for a DL if a modification was made to the pre-approved plan Only permitted during the 2-year restatement period (i.e., no off-cycle submissions) Review is based on Cumulative List that was used for the pre-approved plan

51 QAB Quality Assurance Bulletin If an IRS specialist or agent believes there is an error in a pre-approved plan, it should be referred to the pre-approved plans coordinator

52 Change of Providers Employer is using Sponsor A s Prototype Employer switches to your firm for future services Is reliance lost (i.e., is a restatement of the plan onto another pre-approved plan required)? Technically no Interim amendments must be adopted at employer level

53 Sponsor Changes Your firm sponsors a pre-approved plan Your firm is acquired or merged with another firm resulting in new EIN Opinion/advisory letters are not transferable to another entity Entity is based on EIN, not name change Can obtain letters for name change Obtain new approval letters to step into the shoes of old sponsor

54 403(b) Plans Rev. Proc

55 General Overview Rev. Proc sets forth the pre-approved plan program The IRS will not issue determination letters on 403(b) plans An employer has reliance if a modification is substantially similar to a pre-approved plan We do not have any rules regarding the timing of discretionary or interim amendments

56 Timeframes Deadline to restate (if using a pre-approved plan) is March 30, 2020 We do not know what the RAP is for individually designed 403(b) plans

57 Impermissible Pre-Approved 403(b) Provisions Governmental and non-electing churches can only use 15-year cliff vesting or 5-20 year graded vesting (some refer to as pre-erisa vesting) QCCOs cannot adopt a pre-approved 403(b)(9) (retirement income account) plan IRS interpretation of law is that non-qccos cannot adopt a 403(b)(9) plan (pre-approved or individually designed)

58 Multiple Employer Plans (MEPs) Law is not clear if a 403(b) MEP is permitted under the law IRS permitted MEP language to be in plan but there is no reliance on the language

59 Sponsoring Organization Requirements

60 Sponsor Duties Must amend their pre-approved plans to comply with the law Must make reasonable and diligent efforts to ensure adopting employers have actually received and are aware of all plan amendments and that new documents are adopted when necessary If a provider reasonably concludes the employer has a qualification problem, then it is incumbent on the provider to either correct under EPCRS or notify employer of availability of EPCRS

61 Sponsor Duties Maintain record of the names, addresses, and taxpayer identification numbers of adopting employers Must include employers who have ceased to maintain the plan within the previous three years IRS may request these records at any time Notify IRS and employers if plan will not be maintained

62 What If Sponsor Does Not Comply? IRS can revoke opinion/advisory letters Is there liability to the employer (e.g., if an interim amendment is not provided)?

63 Kicking an Employer Off Your Plan No IRS guidance Notify (certified mail) employer that plan will be treated as an IDP and you no longer provide interim amendments Employer has reliance until next required update to pre-approved plan

64 Rev. Proc

65 Effective Date of New Rules The new rules apply with the next 6-year cycle DC plan submission period begins 10/2/17 and ends 10/1/18 IRS approval expected in 2020 Restatement period around Does not change the 403(b) rules

66 New Terminology New consolidated program is referred to as Opinion Letter Program No distinction between M&Ps and Volume Submitter plans Sponsor of pre-approved plan is the Provider

67 Pre-Approved Plan Formats Adoption Agreement Plan AA and Basic Plan Document Single Plan Document Contract style

68 Standardized Plans Two Types of Plans Same as existing rules Must satisfy coverage and nondiscrimination Employer modifications destroy reliance Nonstandardized plans (next slide)

69 Two Types of Plans Nonstandardized plans Same as rules that currently apply to volume submitter plans If employer makes modifications then Form 5307 may be used (unless modifications are major) Not required to use safe harbor hardship standards Permitted to have irrevocable elections not to participate

70 Expansion of Permissible Provisions Nonstandardized ESOP may include a 401(k) feature Nonstandardized cash balance plan may have interest credit based on the actual return of plan assets Cannot be based on participant elected rate, subset of assets, or RIC A money purchase plan may be combined with a 401(k) or profit sharing plan Employer maintaining both would still need to adopt 2 plans Non-electing church plans are permitted

71 No Reliance IRS will not rule on trust provisions Must be a separate document No reliance on Title I ERISA provisions (clarification technically not a change in reliance rules)

72 IRS User Fees Adoption Agreement Plan - $16,000 Each additional AA - $11,000 Single Plan Document - $28,000 Providers pay lower user fees if using mass submitter documents ($300 per plan as wordfor-word adopter)

73 Impact of User Fees Consolidation of plans (MP, PS, 401(k))? Standardized plans Target benefit plans

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75 Future of the DL Program Form 5307 submissions are still available There will likely be some limited exceptions for IDP submissions What about rulings? Draft Form 5300 does not have option to request a ruling on ASG or leased employee status or partial termination

76 Future Enhancements? IRS wants comments on ways to improve the pre-approved plan program One specific area the IRS is interested in are ways to preserve legacy benefit formulas Legacy benefit formulas often arise in the context of mergers and acquisitions

77 Pre-Approved Plans: Now Everyone Wants One Don Kieffer, Jr., Tax Law Specialist, Internal Revenue Service, TE/GE Robert M. Richter, J.D., LL.M., APM, Vice President, FIS (Relius)