Operating Under the IRS Pre-Approved Plan Document Program...Nov 07, 2018 · • A pre-approved...

Operating Under the IRSPre-Approved Plan Document Program

Richard A. Hochman, Esq., APMDirector, Retirement Plan Consulting Services

Actuarial Systems [email protected]

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mailto:[email protected]

Agenda

• Individually designed plans

• Pre-approved plans

– Revenue Procedure 2017-41 revision of pre-approved plan program

– Defined benefit plans

– Defined contribution plans

– 403(b) plans

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INDIVIDUALLY DESIGNED PLANS

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Individually Designed Plans

• IRS Announcement 2015-19 – Revisions to the Employee Plans Determination Letter Program

– Effective January 1, 2017, the IRS eliminated the staggered five-year remedial amendment cycles for individually designed plans

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– Effective January 1, 2017, a sponsor of an individually designed plan may only submit a determination letter application:

• For a plan on initial plan qualification

• For qualification upon plan termination

• For certain other limited circumstances

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• Last restatement cycle was the third Cycle A. All individually designed plans (both DC and DB) have been restated for PPA 2006.

• Some law firms are offering private determination letter functions. Is there any real benefit?

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• How do sponsors keep plan updated?

– IRS now publishes an annual “Required Amendments List”

– Plan must adopt amendment by the close of the second plan year after publication of List

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– In the meantime, plan must operate in compliance with applicable laws and regulations. The IRS also publishes an annual “Operational Compliance List.”

– With the elimination of the five-year cycle, it is not clear that plans are staying in compliance

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PRE-APPROVED PLANS

REVENUE PROCEDURE 2017-41 REVISION OF PRE-APPROVED PLAN PROGRAM

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Revenue Procedure 2017-41

• IRS Revenue Procedure 2017-41 sets forth significant changes to pre-approved plan program

• Impacts pre-approved defined contribution plans and pre-approved defined benefit plans

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• New Rules effective for THIRD submission cycle

– Pre-approved defined benefit plans are currently under SECOND cycle rules. Documents were submitted by October 2015, with approval letters issued in Spring 2018.

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• For pre-approved defined contribution plans, third cycle submission period began October 2, 2017 and now ends on December 31, 2018.

• Revenue Procedure does NOT apply to pre-approved 403(b) plans or add 457(b) plans to the program.

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• The changes to the individually designed program were done without input from the retirement plan practitioner community

• Since pre-approved plans make up more than 85 percent of the plan document market; when the IRS first announced that they were considering changes to the pre-approved program, several practitioners requested that they obtain industry input

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• In response to the request, the IRS reached out to industry practitioners for input on changes to the pre-approved plan program

• I was asked to put together an industry Task Force to meet with IRS and Treasury staff

• A meeting was held in September 2016

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• It was very productive and cordial. The Task Force members addressed a range of issues to simplify and improve the Pre-Approved program.

• In June 2017, the IRS issued Revenue Procedure 2017-41, which included many of the industry’s recommendations

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• General impressions of new procedures:

– Significant and welcome streamlining of the pre-approved plan program

– Benefits to document providers and adopting employers

– Questions remain and clarifications needed

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• What does the new Revenue Procedure do?

– Significantly streamlines the pre-approved plan program

– Retains many of the best aspects of the prior procedures

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– Continues the encouragement of the adoption of pre-approved plans, especially in light of the changes to the determination letter program

– Reduces burdens on IRS staff

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• Reduces some, but not all, of the costs for document drafters and providers

• DOCUMENT PROVIDERS MUST READ AND KNOW THE NEW REQUIREMENTS AND RESPONSIBILITIES IMPOSED UNDER REVENUE PROCEDURE 2017-41!

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• Eliminates the terms “master and prototype” (M&P) and “volume-submitter” (VS) plans and instead uses the term “Pre-Approved Plans”

• Organizations that sponsor a Pre-Approved Plan are now referred to as “Providers”

• Pre-approved plans may utilize the basic plan document/ adoption agreement format or a text-based format

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• While the procedure continues to use the terms “standardized” and “non-standardized” plans, the meaning has changed to reflect the elimination of M&P and volume-submitter plans

– Insight – “standardized” plans are similar to current standardized M&P plans and “non-standardized” plans are similar to current volume-submitter plans with regard to design flexibility

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• Types of plan designs acceptable under the Pre-Approved Plan program are expanded

– Previous revenue procedure added cash balance plans and ESOPs as permissible pre-approved plan designs

– The new procedure now allows church plans and ESOPs with 401(k) features to utilize the pre-approved plan format

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• A pre-approved plan may combine profit-sharing, 401(k), and money purchase plan features into a single adoption agreement

• Cash balance plans may base the interest crediting rate on “actual rates of return” on plan assets, in addition to other safe-harbor interest-crediting methods

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• We requested that actual rates be made available for the current second-cycle DB submissions, and provided sample language for IRS consideration

– The IRS agreed in March of this year. This is part of what held up approval of the DB documents.

– IRS issued required language that greatly reflected what the industry had provided

– If don’t use this exact language, the plan will be deemed individually designed

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• The IRS will accept (during the two-year restatement period) determination letters applications (using Form 5307) for Pre-Approved Plans that are modified

– In light of the pull-back on Determination Letters on individually designed plans, practitioners had feared that the IRS would restrict the ability to obtain a Determination Letter for a modified pre-approved plan. They are still only available during this two-year window.

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• The procedures clarify that the IRS only considers tax-qualification requirements and does not review Title I of ERISA requirements in issuing its opinion letters

• The IRS will no longer review the trust/custodial provisions of a Pre-Approved Plan and trust/custodial provisions MUST be in a document separate from the other plan provisions

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– This is a significant change in IRS-review procedures. Putting trust/custodial provisions in a separate document, detached from the other plan provisions, raises compliance and other concerns.

– Mass submitters have requested the ability to include boilerplate Trust language in their documents, thus far it does not look like IRS will allow this

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– The IRS has not provided sample trust/custodial language and leaves acceptability of trust provisions in the hands of providers and adopting employers

– Will law firms now become involved in the drafting of plan trusts?

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• Providers must use separate basic plan documents for governmental and church-plan provisions

– The requirement of separate basic plan documents for governmental and church-plan provisions will impact the cost for providers to offer these types of plans. The minimum user fee for each separate plan is $16,000.

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• Interim amendments are still necessary and a pre-approved plan must include language designating the “mass submitter” as agent for the provider for purposes of making plan amendments

– Interim amendments will continue to be a significant concern for mass submitters and providers, especially the applicable deadline. Had requested the two-year rule applicable to IDPs, but IRS did not provide it in the Revenue Procedure.

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• The IRS has clarified that electronic signatures are acceptable under the pre-approved plan program

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• Cumulative lists, which the IRS previously issued on an annual basis, will now be issued only in the year before the submission of pre-approved defined contribution and defined benefit plans

– Impact: Document drafters, especially of individually designed plans, will no longer be able to look to the annual cumulative lists for help in indicating the qualification provisions that the IRS believes need to be included in plans

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• Provider must provide adopting employer with a copy of the plan, amendments, and IRS Opinion Letter

• Provider must ensure adopting employer makes required interim amendments and amends or restates plan when required

– Some amendments might be employer-specific and done on an employer-by-employer basis. New hardship-withdrawal rules are a likely example.

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• Provider must inform the adopting employer if Provider believes the plan is no longer qualified

• Provider must maintain records of adopting employer names, business addresses, and EINs and provide to the IRS upon request

• Failure to meet responsibilities may result in the loss of eligibility to be a Provider and the revocation of opinion letters issued to the Provider.

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DEFINED BENEFIT PLANS

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Defined Benefit Plans

• The second six-year cycle for DB plans is currently open; timely submission period to the IRS ended on October 30, 2015. The original submission deadline was January 31, 2014, but that was extended several times.

• Documents were reviewed based on the 2012 Cumulative List. Fortunately, there have not been a lot of statutory and regulatory changes since that time, resulting in immediate required amendments.

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• Opinion and Advisory Letters were issued in late March 2018.

• New for this cycle is the addition of cash balance plans. Approximately 55 percent of the 67 lead plans submitted included cash balance formulas.

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• At the behest of industry practitioners, in Announcement 2014-4, the IRS announced that they intended to expand the pre-approved program to permit plans with certain cash balance features to be submitted as part of their pre-approved defined benefit submissions

• The submission deadline was extended to allow time for the IRS to develop the necessary language and tools to implement this expansion

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• In June 2014, the IRS issued additional guidance about what would be acceptable in cash balance pre-approved plans

– The guidance made clear that only safe-harbor cash balance designs would be acceptable

– One problem is that many plans use actual rates of returnfor interest-crediting purposes. While permissible, this design is not safe-harbored, and therefore was not originally included in the pre-approved program.

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– As addressed above, with the release of Revenue Procedure 2017-41 allowing the use of “actual rates of return” for the third restatement cycle, industry representatives requested the use of actual rates of return in the current second cycle

– The IRS ultimately agreed

– If the IRS had not agreed, “actual rates of return” would not have been available in pre-approved plans until approximately 2023 at the earliest

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• Understanding the resource issues at the IRS, the industry offered to provide the IRS with model language that could be used for this purpose

• The industry language was submitted to the IRS last July. The IRS responded with their concerns and adjustments were made to the suggested language.

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• In December, we were advised that in order to allow the use of “actual rate of return” for interest-crediting purposes, the IRS would have to issue a new Revenue Procedure

• Revenue Procedure 2018-21 was released March 16, 2018 and was published in the Internal Revenue Bulletin on April 2, 2018

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• We were also advised that the IRS would issue language that had to be adopted on a word-for-word verbatim basis. Those wanting to use alternative language would not be able to use the pre-approved program and would continue to use the individually designed program.

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• The IRS issued Announcement 2018-05 on March 9, 2018 advising that they intend to issue Opinion and Advisory Letters for pre-approved Prototype and Volume Submitter Plans on March 30 or slightly later

• In reality due to the timing of things, plans were still being revised to include the additional cash balance language, even after the letters were issued. This clearly delayed the release of vendor document-generation programs.

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• With Announcement 2018-05 issued, and knowing that Revenue Procedure 2018-21 was on its way, the only issue was that we still did not have the actual IRS-approved language for “actual rates of return” for interest-crediting purposes

• On March 13, the IRS sent its approved language to the lead document sponsors asking that we incorporate it into their documents and return the revised documents to them within ten days. Again, we were advised that no amendments to the language would be allowed.

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• After the release of the language an issue arose that had never been raised throughout the discussion process. Some of the actuaries upon seeing the IRS language raised the issue of needing a “cap” in the event of excessive market conditions, such as was the case in 2017.

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• The issue was immediately raised with IRS and we received the following response:

– “A question was raised as to whether a cap could be placed against the actual rate of return interest-crediting rate language previously sent to you”

– Resolution: “If your plan provides for the language contained in LRM 26CB.I.B.4.l, you will have the ability to provide for the lesser of the actual rate of return or another rate (thus a cap is possible)”

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• The LRM also addresses the possibility of providing for a floor

• Thus, to assure that various testing requirements are satisfied, the plan design can accommodate an interest-crediting rate cap and/or floor. This makes the use of actual rates of return more efficient.

• Warning: Though the use of “actual rates of return” is intended to better align assets and liabilities, based on the approved language, there is a possibility that will not always occur

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• The IRS also issued the following warning:

– Drafting Note: This plan language is designed for use with a pre-approved plan that uses an adoption-agreement format. A practitioner whose volume-submitter plan does not use an adoption-agreement format should modify the language to incorporate the adoption-agreement options into the terms of the single document plan.

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• Virtually every major submission has been in adoption-agreement format

• Employers on individually designed plans in cycles C, D, and E could have executed a Form 8905 and state that they intended to switch to a pre-approved plan. In that case, they did not have to amend and restate onto a PPA-based individually designed plan; rather they could continue to rely on their first cycle EGTRRA documents, but had to operate in accordance with the law.

• Special rules applied to Cycle-C employers due to late January release date of Announcement 2014-4

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• Employers on volume-submitter documents with modifications to the language approved in the underlying Advisory Letter, may submit for a Favorable Determination Letter on Form 5307 from May 1, 2018 until April 30, 2020

• Even for new adopters, Form 5307 cannot be submitted outside of these dates

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• In Announcement 2018-05, the IRS also advised that it will announce in future guidance a delayed beginning date for the third six-year remedial amendment cycle for pre-approved defined benefit plans. The scheduled date under existing guidance would have been as early as October 31, 2019. It will now likely be no earlier than January 2021, meaning that employers will likely not adopt those documents before May 2023.

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• All cash balance plans that remained individually designed have been amended for PPA and subsequent legislation and have reliance on their documents

• With the elimination of the five-year restatement cycle for individually designed plans, they can no longer receive Determination Letters on plan amendments. They can only receive a Determination Letter on plan termination.

• New plans that have never had a Determination Letter can also apply and obtain a DL

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DEFINED CONTRIBUTION PLANS

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Defined Contribution Plans

• The second submission cycle for DC Plans ended on April 30, 2016. The third cycle has opened. Though delayed several times, the submission window for lead plans opened October 2, 2017, and the deadline has now been extended until December 31, 2018. We do not expect any further extensions.

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• As already addressed, what is new for this cycle are the addition of ESOPs, KSOPs, and church plans

• These have to be separate documents from the profit-sharing, money-purchase, and 401(k) plans that already exist

• The user fees for each separate document start at $16,000 for a basic plan and adoption agreement format and $28,000 for a text format

• Each additional adoption agreement has an $11,000 user fee

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• What documents vendors offer and how they offer them are in part going to be driven by demand and user fees. If they don’t have enough clients offering church plans, they will likely not submit nor make them available.

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• As addressed earlier, different document types can now be combined on a single adoption agreement

• Vendors can offer an adoption agreement with both profit-sharing and money purchase-pension plans

• An employer wishing to adopt both plans will need to complete the adoption agreement twice (once for each plan). Employers cannot combine multiple adoptions on a single adoption agreement.

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• Employers will continue to rely on their second cycle (PPA) documents until the new documents are approved and the third cycle opens for adoptions

• The two-year window for adoptions is now anticipated to open May 1, 2021 and close April 30, 2023, based on the two-year period the IRS has historically taken to review and approve pre-approved documents. This timing is subject to change.

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• When the documents are submitted they will reflect the 2017 Cumulative List in Notice 2017-37. A number of significant changes have been made since then, including provisions of the Tax Cut and Jobs Act of 2017 and the Bipartisan Budget Act of 2018. They will not be reflected in the new document.

• The new documents will have to have interim amendments attached from the get-go

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• The DOL changed the Disability Claim Regulations effective April 1, 2018. That amendment may have already been included in a 2017 Interim Amendment, depending on the vendor.

• The bigger issue is the changes that impact the hardship rules and loan-default rules. As of now, guidance still has not been issued for how these changes will operate.

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• The hardship changes are effective for 2019 and we have not yet gotten any guidance from IRS on how to handle them. Those will likely be included in a 2019 Interim Amendment, unless the IRS issues guidance early enough to incorporate it sooner.

• Plans will operate under the new rules and will amend by the appropriate subsequent deadline.

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• As to the loan issue for those terminating employment with an outstanding balance, the IRS issued Notice 2018-74, which provided a new IRS Form 402(f) Notices

• The Notices reflect both Roth and Non-Roth amounts. If distributing both, you need to provide both Notices to participants, approximately 17 pages they won’t read.

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• It is just the distribution notices talking about the extension of the 60 days, it does not address the actual procedures that will be followed

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403(B) PLANS

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403(b) Plans

• Written plan document requirement in 2007 regulations

– Originally, plan had to be adopted by January 1, 2009

• Notice 2009-3 – transition relief

– Written plan adopted by January 1, 2010

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403(b) Plans

• Announcement 2009-89 – If plan adopted before 2010, the sponsor has a remedial amendment period to correct defects in form of the plan, retroactive to January 1, 2010, provided sponsor adopts a pre-approved plan or timely applies for a determination letter

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403(b) Plans

• Revenue Procedure 2013-22 established procedures for issuing pre-approved letters for prototype and volume submitter 403(b) plans

– No Determination Letters through Form 5307 application

– Reliance is substantially similar to the approved Volume-Submitter Plan (no definition)

• No ability to submit Form 5300 Determination Letter application for individually designed plans (reverses prior guidance)

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403(b) Plans

• Revenue Procedure 2017-18:

– A plan that does not satisfy the requirements of Code §403(b) in form on any day during the remedial amendment period will be considered to have satisfied those requirements if, on or before March 31, 2020, all provisions of the plan that are necessary to satisfy Code §403(b) have been adopted and made effective in form and operation from the beginning of the remedial amendment period

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403(b) Plans

• Remedial-amendment period (RAP) for 403(b) plans:

– If the employer adopts a pre-approved 403(b) plan or a proper individually designed plan before the end of the RAP with its provisions retroactively effective to the first day of the remedial amendment period, the adopting employer is protected against adverse tax consequences with respect to defects in the form of the plan

– Defect in the form of the plan

• A provision, or the absence of a required provision, that causes the plan to fail to satisfy the requirements of Code §403(b)

• Any defect must be corrected on or before the last day of the remedial-amendment period

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403(b) Plans

• IRS guidance in March 2, 2017 Employee Plans News

• During RAP, sponsors of pre-approved and individually designed 403(b) plans may correct plan provisions that fail to meet Code §403(b) requirements by:

– Adopting a 403(b) pre-approved plan (with a 2017 approval letter) by March 31, 2020

– Amending their individually designed plan by March 31, 2020

– Correct by adding required provisions or correcting defective provisions

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403(b) Plans

• Self-correction of defective 403(b) plan

• Relief available during RAP

– Noncompliance in form – absence of required provision

– Noncompliance in form and resulting operation –erroneous required provision

– Noncompliance in form – erroneous discretionary (optional) provision

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403(b) Plans

• If compliance in form but not in operation, sponsor must correct under EPCRS

• Relief not available during the RAP

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