Deadline for Updating Preapproved Retirement Plans Draws Near


Allen Smith, J.D. By Allen Smith, J.D. April 13, 2016

Employers with 401(k) and other defined contribution retirement plans that were preapproved by the IRS and adopted before Jan. 1 of this year don’t have much time left—only until April 30, 2016—to sign updated plan documents incorporating new amendments into their plans, according to the IRS.

Preapproved plans are sold to employers by a financial institution, advisor or similar “document provider,” the IRS notes. They allow limited customization but give the employer the reassurance that the IRS approved the plan’s wording.

By contrast, the IRS is granting an extra year—until April 30, 2017—for plans that switch after Jan. 1, 2016, from individually designed to preapproved designs. This extension is intended to encourage plan sponsors to convert an existing individually designed plan into a preapproved plan.

Not everyone is happy about being pushed to make such a switch, though, which some believe helps explain the IRS decision to drop individual determination letters for individually designed plans at the end of this year—so the push will then become more like a shove.

Review Restatement Documents Carefully

The document provider requests that the IRS approve a retirement plan as meeting the requirements of the Internal Revenue Code. The preapproved plan sponsor then makes the IRS-approved plan available to adopting employers.

For those plans that already are preapproved, plan sponsors have the opportunity to incorporate amendments into their plans during the remedial amendment period, Jorge Leon, an attorney with Michael Best & Friedrich in Chicago, said.

Typically, plans make amendments on an ongoing basis. Every six years—the remedial amendment cycle—plan sponsors should repackage the amendments within plans rather than letting plans sprawl with innumerable loose amendments, he said. If a plan sponsor is negligent and fails to make updates on time, the plan may not qualify for protected tax status, he cautioned. Also, “the more a plan strays from what was preapproved, the bigger the risk a plan is not preapproved anymore,” Leon said.

Employers should not sign the restatement documents in blind faith, cautioned Ann Caresani, an attorney with Tucker Ellis in Cleveland. “They need to review these documents, preferably with the assistance of an employee benefits attorney, to try to make certain that they understand all the plan provisions, that the provisions are consistent with their actual practices and that any protected benefits have been preserved,” she remarked.

Complicating things at the end of this year is the move by the IRS to phase out its determination letters for individually designed plans as of Jan. 1, 2017, due to inadequate resources, Leon noted. Opinion letters still will be provided for preapproved plans. Consequently, some employers have contemplated switching to preapproved plans “to give them peace of mind,” he said.

If an employer has not heard from its 401(k) record-keeper about the restatement deadline, “the time to make phone calls is now,” Leon added.

“One of the key problems with the IRS pushing employers into preapproved plans is that these documents are hundreds of pages long and not necessarily organized in a manner that is intuitive and easy to follow from an employer’s perspective,” Caresani said.

Lengthy Lead-In Time to Deadline

The deadline for updating plans is “more of a vendor issue than an individual employer/sponsor issue,” said Paul Hamburger, an attorney with Proskauer in Washington, D.C.

Document providers who sell preapproved plans update the plan in its entirety once every six years and request a new opinion letter from the IRS. The IRS generally approves all updated defined contribution plans at the same time.

The remedial amendment cycle is a concept the IRS created after Congress passed the Pension Protection Act of 2006 to help manage its workload, Caresani said. The IRS established a six-year remedial amendment cycle for preapproved plans, she explained.

The lead-in time for the April 30 deadline is lengthy. Most opinion letters for the latest round of preapproved defined contribution plan amendments were issued on March 31, 2014. Employers had more than two years, until April 30, 2016, to adopt these updated plans. After April 30, 2016, if an employer hasn’t adopted a restated plan, its plan does not comply with the tax laws and may be ineligible for tax benefits, states the IRS.

Fallout from Phase-Out

The phase-out of individual determination letters leaves many questions, Hamburger observed. These include:

  • Will plan sponsors be able to provide assurances as to plan qualification going forward for purposes of audit letters, corporate transactions or other agreements where a representation as to plan qualification has to be made? In the past, it was enough to provide a copy of the IRS determination letter. Will such existing letters be accepted in the future?
  • If plan sponsors cannot rely on determination letters for ongoing plans, will that cause sponsors to conduct more voluntary compliance reviews to ensure that plan operations are in order?
  • Will the lack of an IRS determination letter program lead to greater scrutiny of plan documentation and operation when the IRS or any other agency conducts an audit?
  • Will there be an increased use of preapproved prototypes?

Caresani said, “Employers that have individually designed plans have them for a reason, and it may be hard to pound a square peg into a round hole.”

She explained, “There are many alternatives that are permitted under applicable law but not included in preapproved plans.” For example, employee stock ownership plans have so many unique provisions that they were not permitted to be maintained in preapproved plans until recently, Caresani said. “Forcing employers into preapproved plans restricts them from establishing plans in a manner permitted by Congress,” she noted.

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.


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