Document vendors and other providers of pre-approved defined contribution plans must submit documents for approval to the IRS by April 2, 2012. With the upcoming deadline, we would like to clarify how the pre-approval process works by addressing a number of frequently asked questions. There are a few technical terms used throughout this Q&A (in italics the first time the defined term is used), see Addendum B for a glossary.

For more details on the PPA restatment, the document types that will be offered for the PPA cycle, expected time-frames, software updates, and more - join us for our February 22nd webinar.

Q1: Documents are being submitted to the IRS in April 2012, when do I need to have my customers restate their plans?

A1: Pre-approved defined contribution plans will need to be restated in a two year window. This window will likely open in early 2014 and close in early 2016. If a plan is currently on an EGTRRA pre-approved document, there is generally no need to restate the plan until this two year window opens.

Q2: So I don't need to do anything with my plans until 2014?

A2: That's probably not correct. Each year there are often interim required amendments that must be adopted by plan sponsors to update plans for changes in law. These interim amendments are not pre-approved by the IRS but are good faith amendments to help ensure the plan is operated according to current law. Whether or not an interim amendment is required depends upon whether there have been any changes in law and IRS guidance that affect the plan. In addition, plan sponsors may wish to add new features to their plans. If the sponsor is simply adding loans (or another discretionary amendment), the amendment to add this feature is often simple and can be handled in a stand-alone amendment. If the sponsor wishes to add a safe harbor feature, for example, this may require adding/changing the matching formula and eligibility rules. It may be simplest to just restate the plan to accommodate all the changes. It's perfectly acceptable to use either course of action. You simply need to ensure that you are not modifying pre-approved language with any amendment. If you are in the process of changing to a new document vendor, you may simply want to restate the plan instead of trying to draft an amendment based on your prior vendor's plan language.

Q3: As a TPA do I need to sign up with a particular document vendor by April 2, 2012?

A3: No. The April 2nd due date primarily applies to drafters of pre-approved plans. If you would like to have an opinion/advisory letter in your own name for a document drafted by a document vendor (be a word-for-word adopter) and you have already decided which vendor to use, you generally want to get your application in with that vendor in April - but you can still apply for a letter in your own name after the April 2nd deadline. In fact, you can currently still apply for a letter in your own name for an EGTRRA document (whose two year restatement cycle window closed in early 2010).

If you currently do not have a letter in your own name and are undecided about whether to apply for a letter, you do not need to decide by April 2nd. While some document vendors require their customers to get letters in their own name, not all vendors have this requirement. Many vendors will allow you to be a "middleman" and use the vendor's opinion/advisory letters for your customers' plans. It's certainly not a requirement of the IRS that all document service providers get a letter in their own name.

If you do decide to get a letter in your own name for a particular vendor's document(s), you can change your mind. If you applied for a letter in your own name with one document vendor and change your mind before the IRS has issued emails to the document vendors that pre-approval letters will soon be issued, you can ask the IRS to transfer your application to a different vendor without an additional fee.

The IRS does not require TPAs and other document service providers to only use one pre-approved document vendor or to stay with a particular vendor for an entire cycle. It is perfectly acceptable to use documents from multiple vendors within or between cycles. You can also apply for a letter in your own name with multiple vendors within the same cycle (of course, working with multiple documents is not necessarily administratively simple to do).

Q4: But I read that there could be "severe consequences from the IRS" if we are not on a "pre-approved plan sponsor list" by April 2nd. What kind of consequences are there? How do I get on such a list?

A4: As we indicated in previous answers, IRS permits applications for word-for-word adopters after April 2. After a thorough review of written IRS procedures and conversations with other document vendors, we know of no "severe consequences" for not being on a list. In order to completely answer this question, we'd like to give a little background on what these "lists" are and how they are used. See Addendum A for a complete response to this question.

Q5: I was using a document vendor for my EGTRRA pre-approved documents and I'm thinking of switching now before the next restatement to a new vendor. What happens to the pre-approval status of my plans if I change vendors?

A4: Plans that have been correctly drafted on a pre-approved document continue to be pre-approved. Despite claims made to the contrary by other document vendors, changing business relationships does not and cannot cause a pre-approved document to become individually designed.

Q6: So what does cause a pre-approved document to become individually designed?

A6: This is generally covered in IRS Revenue Procedure 2011-49. The following can make a plan individually designed:

  • Amendments made to pre-approved language. In general, the following rules apply:

    • For prototype plans, any change to the pre-approved language will cause the document to become individually designed.

    • Volume submitter plans can accommodate minor modifications to the pre-approved language without becoming individually designed. It is generally recommended that a volume submitter with a minor modification be submitted to the IRS for a determination letter on a Form 5307.

  • If a sponsor/practitioner/employer chooses to discontinue/abandon a plan the plan can become individually designed. For example, if a document service provider has a letter in its own name and goes out of business, its customers would generally need to restate to a new pre-approved document (a Form 8905 can be used in the interim).

Note that failure to pay a document vendor a fee or not being on a vendor "list" is not one of the items listed that can cause a document to become individually designed.

Q7: So what do I need to worry about if I am switching document vendors?

A7: You will need to learn the new document and track which customers are on your "old" versus "new" document to ensure each plan is accurately being administered. If you have letters in your own name, you'll need to track which documents/plans are using which letter for purposes of interim amendments. In general, whomever has an opinion/advisory letter for the applicable plan can sign interim amendments on behalf of the employer/plan sponsor.

Depending upon the timeframes involved in moving employers to the new document, you may want to consider having employers sign a Form 8905 to indicate the intent to move to a new pre-approved document.

Q8: We are a law firm and used to support and draft our own pre-approved plan document. We're thinking of switching to a mass submitter's document. What do we need to do?

A8: This is the same response as in Q7. Our answer does not change simply because you drafted the document in the previous cycle.

Addendum A

Q4: But I read that there could be "severe consequences from the IRS" if we are not on a "pre-approved plan sponsor list" by April 2nd. What kind of consequences are there? How do I get on such a list?

A4: In order to completely answer this question, we'd like to give a little background on what these "lists" are and how they are used. To put all this in context, the IRS wants to ensure that plan sponsors/employers have retirement plans that conform with current law. In order to have up-to-date plans, there are essentially two requirements to consider: restatement cycles (every 6 years) and interim amendments (usually as often as once a year). Plans that are pre-approved are on a 6-year cycle and all need to be restated during the same 2-year window (next window is likely early 2014-2016). Between restatements, the documents need to be updated with interim amendments for changes in laws/regulations. The IRS wants to ensure that document providers are assisting their customers and helping employers meet interim amendment and restatement deadlines. There are a number of requirements that the IRS makes sponsors/practitioners abide by in order to be able to offer pre-approved plans in the marketplace. The main two requirements are: record keeping and a new requirement to sign an interim amendment certification.

Record Keeping. As long as the 6-year cycle has existed, the IRS has had a recordkeeping requirement for document drafters that have opinion/advisory letters. These requirements also apply to "word-for-word" adopters that have opinion/advisory letters in their own name for documents drafted by others. In the most recent Revenue Procedure (2011-49), the requirements are provided as follows for prototypes ("M&P Plans") - nearly identical rules also apply to volume submitters:

.02 Maintenance and Availability of Records of Adopting Employers — An M&P plan sponsor must maintain, or have maintained on its behalf, for each of its plans, a record of the names, business addresses, and taxpayer identification numbers of all employers that have adopted the plan. However, a sponsor need not maintain records with respect to employers that, to the best of the sponsor’s knowledge, ceased to maintain the plan as an M&P plan more than three years earlier. Upon written request, a sponsor must provide to the Service a list of such adopting employers that indicates, to the best of the sponsor’s knowledge, which of such employers continue to maintain the plan as an M&P plan and which of such employers have ceased to maintain the plan as an M&P plan within the preceding three years.

To our knowledge, IRS has never asked for this "list" (record of names, business addresses and TINs) from a mass submitter. It is our understanding that the IRS reserves this right in instances where it is concerned the document vendor is abandoning plans and plan sponsors or otherwise not assisting its customers with interim amendments and other requirements. Looking in detail at the Revenue Procedure, there is not a deadline for "middlemen" (document service providers that do not have a letter in their own name) to be on any particular list. In fact, the Revenue Procedure never addresses "middlemen" at all. The Revenue Procedure is concerned primarily with document drafters and those that are applying for letters in their own name.

Interim amendment certification. New for the next cycle, IRS is requiring all entities applying for opinion/advisory letters to complete a Certification Regarding Interim Amendments (http://www.irs.gov/pub/irs-tege/cert_interim_amendments.pdf). The certification states that the sponsor/practitioner has made all necessary interim amendment required by the IRS and timely communicated the amendments to adopting employers. The IRS has indicated that it will require document vendors to obtain this certification from all document customers - including "middlemen" that do not have a letter in their own name but use the vendor's pre-approval letter.

Document drafters/vendors handle these requirements in different ways. Many document vendors will pass the recordkeeping requirement onto "middlemen" that use the vendor's opinion/advisory letter via business agreements/contracts. Others do not allow their customers to use their opinion/advisory letter and require their customers to all obtain an opinion/advisory letter in the customer's name with the IRS (by applying as a "word-for-word adopter" of the vendor's document). ftwilliam.com allows customers to use its opinion/advisory letters but passes the recordkeeping requirements to its customers via its online user agreement (accessible to users in the 'admin menu'). Customers that use a vendor's pre-approval letter will need to sign the Certification Regarding Interim Amendments per the IRS requirements.

Addendum B

Glossary of Terms

Opinion Letter: Pre-approval letter for a Prototype plan. Document drafters and mass submitters typically obtain an opinion letter for their plans and their customers (word for word adopters) can often also apply for an opinion letter in their name for the same document.

Advisory Letter: Pre-approval letter for a volume submitter plan. Document drafters and mass submitters typically obtain an opinion letter for their plans and their customers (word for word adopters) can often also apply for an opinion letter in their name for the same document.

Determination Letter: An IRS approval letter for a plan after it has been drafted for a particular employer (filed on a Form 5307 or 5300).

Word-for-Word Adopter: A document service provider that obtains an opinion/advisory letter in its name.

Middleman: A document service provider that chooses not to obtain its own opinion/advisory letter.

M&P Plan: Prototype plan.

Sponsors: Entities with opinion letter(s) for a prototype plan.

Practitioner: Entities with practitioner letter(s) for a volume submitter plan.

Mass Submitter: document vendor with at least 30 sponsors/practitioners for a given plan type.

If you have any questions please feel free to contact us at support@ftwilliam.com or call 800.596.0714.

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