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Recent Changes Affecting Your 401(K) and Profit Sharing Plan

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Liam K. Healy
January 11, 2018

The IRS has made changes to the process for amending and receiving approval for qualified retirement plans like 401(k) plans. The changes affected both "individually designed plans" and "pre-approved plans".

Changes that may apply to employers who previously used a volume submitter plan document or sponsored an individually designed plan are highlighted below. Please let us know if you would like more information.

Pre-Approved Plan.  Recent changes combined various forms of pre-approved plans (volume submitter, master & prototype) into one: a "Pre-Approved Plan". A Pre-approved Plan "Provider" (like a law firm or vendor) receives an "Opinion Letter".

Standardized or Non Standardized. A Pre-approved Plan is either a "Standardized" or a "Non-Standardized" Plan. A Standardized Plan is a kind of safe harbor plan. It offers enhanced reliance on the Opinion Letter but has limitations in plan design. Because of the limitations in who can be excluded from the plan and the simplistic contribution formulas, a Standardized Plan automatically passes "discrimination" and "coverage" testing and the Opinion Letter will reflect this. A Non-Standardized Plan offers less reliance on IRS approval (testing must be performed each year) but more flexibility in the plan design that can be used (certain employees can be excluded and highly compensated participants can receive greater contributions). The Opinion Letter for a Non-Standardized Plan will not say that the plan automatically passes discrimination and coverage testing.

Pre-Approved v. Individually Designed. A plan is considered an "Individually Designed Plan" if it is not a Pre-approved Plan. A plan may be deemed an Individually Designed Plan if client specific changes to a Pre-approved Plan are too significant.

Less Reliance for Individually Designed Plans. The IRS eliminated the amendment cycle for Individually Designed Plans during 2016. An Individually Designed Plan can now only apply for a "Determination Letter" upon plan formation and plan termination. A Pre-approved Plan may lose its ability to obtain approval from the IRS other than at plan termination if the Pre-Approved Plan document is changed too significantly.

Additional Changes.

  • The IRS will no longer review a plan's trust document. A plan's trust document must be separate from a plan document.
  • A Non-Standardized Plan may provide for safe harbor or non-safe harbor hardship distributions.
  • Rules relating to cash balance formulas in Non-Standardized Plans have been liberalized.
  • Certain plans like ESOPs and money purchase plans may now be combined with 401(k) plans in a Pre-approved Plan.

Where Are We Now? - The Six Year Cycle. Pre-approved Plans continue to be restated on a six year cycle. Many 401(k) plan sponsors finished the second restatement cycle in April 2016. The next restatement cycle began February 1, 2017. Practitioners update their Pre-approved Plan documents to comply with changes in 2018. They then submit the documents to the IRS for approval. It is expected that the IRS will review and approve the Pre-approved Plan documents and issue Opinion Letters during 2019 and 2020. It is expected that plan sponsors will need to adopt the newly approved documents between 2021 and 2023. Plan sponsors can incorporate recommended design changes and will need to submit any determination letter applications when they restate their plan document. Additional "interim" amendments may need to be made from time to time during a six year cycle.

Next Steps. Plan attorneys and other providers should be reviewing and updating Pre-approved Plan documents for submission to the IRS in 2018. Plan sponsors will need to restate their plans once the plan documents have been approved. We will watch for additional changes to these rules and will provide periodic updates.

Please contact a member of the Foster Swift Employee Benefits Practice Group if you have questions regarding your qualified retirement plan.