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Pre-Approved Plans: Reliance and Relief

By John Iekel

Be prepared. The motto of the Boy Scouts of America, but applicable in so many situations. Susan Diehl, PenServ Plan Services President, in the recent NTSA webcast “The New 403(b) Plan Document, Part I: Why March 2020 Is Important to 403(b) Employers,” focused on a mechanism by which a plan may be prepared: the pre-approved plan.

Pre-approved plans — those whose form the IRS has officially approved — offer a plan and an employer the assurance that the plan contains all of the provisions the 403(b) regulations require. And why does that matter? “Reliance is the biggest deal,” said Diehl, adding, “it’s a protection against taxation.”

To obtain that assurance, Diehl reminded, the IRS reviews a plan as well as its adoption agreement, administrative appendix and vendor attachments. After it reviews those documents, the IRS sends an approval letter if everything passes muster. Caveat: the IRS does not review custodial agreements nor annuity contracts. But, Diehl cautioned, a firm “should update them nonetheless.”

Kinds of Pre-Approved Plans

There are two kinds of pre-approved plans: prototype and volume submitter.

Prototype plans are prepared in a format that contains an adoption agreement — standardized or non-standardized — that is separate from the plan. Generally, no changes may be made after approval, not even typos. IRS letters announcing its approval of prototype plans are referred to as opinion letters.

Volume submitter plans, in the past, generally were prepared as a plan document with no adoption agreement. Unlike prototype it is possible to make minor changes There may be changes made to the document, but only if the document remains substantially the same. This means that you need to be careful what you add and keep track of every change from the IRS-approved version. Even though only minor changes are allowed, Diehl said “it was critical that we were given a bit more flexibility.” IRS letters conveying approval of volume submitter plans are referred to as advisory letters.

For both kinds of pre-approved plans, Diehl observed, the IRS issues listings of required modifications (LRMs), which also contain sample language for plans and adoption agreements and are intended for use by those who draft pre-approved plans.

Why March 2020 Matters

March 2020 matters, Diehl said, because of the remedial amendment period (RAP). The RAP is period during which the employer must restate the plan, and is always retroactive so as to incorporate all changes made during the period. The first RAP for 403(b) plans ends on March 31, 2020; since 403(b)s have a six-year RAP cycle, the next will end on March 31, 2026.

Restatement — replacing the current plan document with one that is completely revised to encompass all of the legislation and other guidance that has been issued in the six-year period —is an opportunity “to clean up past mistakes,” Diehl said. But restatement is not an option; the IRS requires it. And employees could end up paying for a plan’s failure to meet that requirement, she warned, by suffering tax consequences. And, she said, it “doesn’t matter if it’s a school district or an ERISA plan.” If the plan is not fixed this way, Diehl warned, it will be necessary to fix it through the IRS Employee Plans Compliance Resolution System (EPCRS).

There is an alternative to restatement, however — amendment, in which an employer changes a provision in their adoption agreement. Examples include changing the name of the employer and adding a Roth-deferral option to the plan. Amendments can be voluntary or be required by the IRS.

And therein lies another reason why March 2020 matters. Diehl noted that the IRS said that amendments to 403(b) plan documents that will bring them into conformity with the PPA were not required until the end of the first RAP — which for 403(b)s happens to be March 31, 2020.

Not Mandatory, but…

Is it mandatory that an employer secure IRS pre-approval for its plan? No. Nonetheless, if a plan has not done so, if it conducts an audit the IRS will have to read the plan to verify compliance; if the plan has done so, the auditor will skip that step. Diehl suggested that IRS review may not be a bad idea, remarking, “You have to keep in mind that the IRS has always focused on documents — especially when an auditor walks into the room.”

Accessing NTSA Webcasts

The NTSA webcast “The New 403(b) Plan Document, Part I: Why March 2020 Is Important to 403(b) Employers,” is available on demand by clicking here.

Information on upcoming NTSA webcasts is available here.