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IRS Revises Opinion Letter Procedures for Pre-Approved Plans in Revenue Procedure 2017-41 and Issues 2017 Cumulative List in Notice 2017-37
Practical Law Legal Update w-009-0248 (Approx. 8 pages)
IRS Revises Opinion Letter Procedures for Pre-Approved Plans in Revenue Procedure 2017-41 and Issues 2017 Cumulative List in Notice 2017-37
by Practical Law Employee Benefits & Executive Compensation
| Published on 11 Jul 2017 • USA (National/Federal) |
On June 30, 2017, the Internal Revenue Service (IRS) issued Revenue Procedure 2017-41, which restructures the process for issuing opinion letters regarding qualification for pre-approved retirement plans, and Notice 2017-37, the Cumulative List of Changes in Plan Qualification Requirements for Pre-Approved Defined Contribution Plans for 2017.
On June 30, 2017, the IRS issued:
- Revenue Procedure 2017-41 (Rev. Proc. 2017-41), which restructures and simplifies the IRS' procedures for issuing opinion letters regarding the qualification in form of pre-approved plans under Internal Revenue Code (Code) Sections 401, 403(a), and 4975(e)(7) (26 U.S.C. §§ 401, 403(a), and 4975(e)(7)).
- Notice 2017-37, which provides the Cumulative List of Changes in Plan Qualification Requirements for Pre-Approved Defined Contribution Plans for 2017 (2017 Cumulative List).
Rev. Proc. 2017-41 simplifies and expands the pre-approved plan opinion letter program by:
- Eliminating the distinction between master and prototype plans (M&P plan) and volume submitter plans (VS plans).
- Liberalizing the types of plans available for pre-approved status.
- Providing greater flexibility in the design of pre-approved plans.
To learn more about pre-approved plans, see Practice Note, Pre-approved Plans: Design Choices, Tax-qualification Rules and Best Practices.
Rev. Proc. 2017-41 is effective on October 2, 2017. It applies to opinion letter applications for a pre-approved plan's third and subsequent six-year remedial amendment cycles.
The 2017 Cumulative List will be used to submit opinion letter applications for pre-approved defined contribution plans during the third six-year remedial amendment cycle (third-cycle opinion letter applications).
To learn more about the determination letter program, see the Retirement Plan Determination Letters Toolkit.
Rev. Proc. 2017-41
- Modifies and partially supersedes Rev. Proc. 2015-36 regarding pre-approved plan opinion letter applications submitted with respect to a plan's third (and subsequent) six-year remedial amendment cycles. Rev. Proc. 2015-36 provided procedures for IRS opinion and advisory letters on the qualification in form of pre-approved plans, and it still applies to opinion and advisory letter applications submitted with respect to a defined contribution or defined benefit plan's previous six-year remedial amendment cycles (see Legal Update, IRS Modifies Procedures for Issuing Opinion and Advisory Letters in Revenue Procedure 2015-36 and Issues LRMs for ESOPs and Cash Balance Plans).
- Modifies:
- Rev. Proc. 2016-37, which eliminated, as of January 1, 2017, the staggered five-year remedial amendment cycle system for individually designed retirement plans and significantly narrowed the circumstances in which an individually designed plan could receive a determination letter. Rev. Proc. 2016-37 also made certain modifications to the six-year remedial amendment cycle system for pre-approved qualified retirement plans (see Legal Update, IRS Provides Determination Letter Guidance in Revenue Procedure 2016-37).
- Rev. Proc. 2017-4, which provided updated procedures for determination letter requests and the user fee program. It superseded Rev. Procs. 2016-4, 2016-6, and 2016-8 (see Legal Update, IRS Revenue Procedure 2017-4 Revises Determination Letter Procedures).
Changes to the Pre-Approved Plan Opinion Letter Program
Rev. Proc. 2017-41 restructures the opinion letter program for pre-approved retirement plans by making the following changes to Rev. Proc. 2015-36:
- The M&P Plan and VS Plan programs are combined and replaced by a single opinion letter program for standardized plans and nonstandardized plans (which are defined in Sections 4.09 and 4.05, respectively) (Section 4.07(1)).
- A pre-approved plan may have one of two formats: as an adoption agreement plan or a single document plan (Section 4.07(3)). An adoption agreement plan is a basic plan document with an adoption agreement. The basic plan document contains all of the non-elective provisions applicable to all adopting employers, and the adoption agreement contains the options that may be selected by each adopting employer (no options may be provided in the basic plan document portion of the plan). A single document plan is a plan document without an adoption agreement.
- An adopting employer of a nonstandardized plan may adopt minor modifications to the plan (Section 8.04). An employer that modifies a pre-approved plan may file for a determination letter to obtain reliance for its plan. The procedures for applying for a determination letter in this situation are located in Section 20.03(3) of Rev. Proc. 2016-37 and Sections 12 and 13 of Rev. Proc. 2017-4 (as updated annually).
- A money purchase plan may be combined with a 401(k) plan or a profit-sharing plan in the same pre-approved plan document. If the provisions of a basic plan document are identical for all plans using that document, separate defined contribution adoption agreements may be associated with the same defined contribution plan basic document, and separate defined benefit adoption agreements may be associated with the same defined benefit plan basic document. However, defined contribution plans and defined benefit plans may not use the same basic plan document. Standardized and nonstandardized plans may not be combined in a single adoption agreement or in a single document plan. (Sections 9.06 and 9.07.) To learn more about money purchase plans, see Practice Note, Requirements for Qualified Retirement Plans: Additional Qualification Requirements for Defined Benefit and Money Purchase Pension Plans.
- A nonstandardized plan that contains an employee stock ownership plan (ESOP) may include a 401(k) plan (Sections 9.06 and 9.07.) (Under Section 4.09, standardized plans cannot contain an ESOP.) To learn more about ESOPs, see Practice Note, Employee Stock Ownership Plans (ESOPs).
- A cash balance plan may now permit the rate used to determine an interest credit to be based on the actual return on plan assets. However, the rate used to determine an interest credit cannot be based on a subset of plan assets (Section 6.03(7)(c)). Rev. Proc. 2017-41 notes that only a nonstandardized plan can have a cash balance formula. To learn more about cash balance plans, see Practice Note, Cash Balance Plans.
- Rev. Proc. 2017-41 allows the submission of an opinion letter application for a non-electing church plan. To learn more about church plans, see Practice Note, Church Retirement Plans.
- Any nonstandardized plan may provide for either safe harbor or non-safe harbor hardship distributions.
- Under Section 16.02 of Rev. Proc. 2016-37, the third six-year remedial amendment cycle for pre-approved defined contribution plans began February 1, 2017 and ends January 31, 2023. Rev. Proc. 2017-41 changed the beginning date of the defined contribution plan on-cycle submission period for the third six-year remedial amendment cycle to October 2, 2017, and the ending date to October 1, 2018. (Section 9.02.)
- The IRS will no longer rule on the exempt status of a pre-approved plan's related trust or custodial account under Code Section 501(a). Opinion letters provide IRS determinations on the qualification of plans adopted by particular employers.
- The IRS is updating the forms that are used to request an opinion letter (Forms 4461, 4461-A, and 4461-B) and will announce when the forms become available. Until then, opinion letter applicants should submit the Submission for Pre-approved Defined Contribution Plan Opinion Letter provided in Appendix A of Rev. Proc. 2017-41. (Sections 6.01 and 9.03.) Opinion letter requests should be accompanied by the applicable user fee listed in Appendix B of Rev. Proc. 2017-41.
- References to specific requirements under Title I of ERISA have been removed and replaced with a statement that opinion letters will not consider Title I issues. Title I is administered by the DOL. This change in language is intended to clarify the scope of reliance on opinion letters and is not a substantive change in the IRS' position. For more information on Title I of ERISA, see Practice Note, Title I of the Employee Retirement Income Security Act (ERISA): Overview.
- The procedures for a determination letter application by an adopting employer to obtain reliance under Code Sections 415 and 416 have been modified to permit an application to be made on IRS Form 5307, Application for Determination for Adopters of Modified Volume Submitter Plans.
Future Changes and Comment Request
The IRS and the Treasury Department expect to continue to periodically update the opinion letter program, and they invite further comments on how to improve the program. The IRS and Treasury have received comments on the issue of conversion from an individually designed plan to a pre-approved plan, particularly the continuation of certain legacy benefit formulas, and they invite further comments on what effect amending legacy benefit formulas in a plan document would have on reliance on the plan's opinion letter. Section 22 of Rev. Proc. 2017-41 provides information on how to submit comments.
Effective Date
Rev. Proc. 2017-41 is effective on October 2, 2017 and will apply solely to applications for opinion letters submitted with respect to a plan's third and subsequent six-year remedial amendment cycles.
Notice 2017-37
The 2017 Cumulative List in Notice 2017-37 identifies changes in the qualification requirements of the Internal Revenue Code that must be taken into account in a pre-approved defined contribution plan document for third-cycle opinion letter applications. The Cumulative List provides specific matters that the IRS will use to determine whether a defined contribution plan document that filed for an opinion letter has been properly updated.
There are five new qualification requirements discussed in the 2017 Cumulative List:
- Notice 2015-86, which provides that qualified retirement plans are not required to make additional changes as a result of the Supreme Court's decision in Obergefell v. Hodges. However, a plan sponsor may decide to amend its plan to make certain discretionary amendments (see Same-Sex Marriage Developments for Retirement Plans Toolkit).
- Proposed IRS regulations under Code Section 401(a) on the normal retirement age for Code Section 414(d) governmental pension plans (see Legal Update, IRS Issues Normal Retirement Age Proposed Regulations for Governmental Pension Plans).
- Notice 2016-16, which clarified when mid-year amendments to safe harbor plans are permissible (see Legal Update, IRS Notice 2016-16 Clarifies Permissible Mid-Year Changes to Safe Harbor Plans).
- Proposed regulations that would provide that the amounts used to fund qualified matching contributions (QMACs) and qualified non-elective contributions (QNECs) must be nonforfeitable and subject to distribution restrictions at the time they are allocated to plan participants' accounts, rather than when they are first contributed to the plan (see Legal Update, IRS Issues Proposed Regulations on QMACs and QNECs).
- The Protecting Americans from Tax Hikes (PATH) Act of 2015, which allows rollovers from employer-sponsored retirement plans to a Savings Incentive Match Plan for Employees-Individual Retirement Account (SIMPLE-IRA), if the retirement plan has existed for at least two years (see Legal Update, Consolidated Appropriations Act of 2016 Postpones Cadillac Tax and Permanently Extends Transit Benefit Parity and Practice Note, Savings Incentive Match Plan for Employees Individual Retirement Accounts (SIMPLE IRAs).
Practical Implications
Sponsors of pre-approved retirement plans should be aware of the revised opinion letter program set out in Rev. Proc. 2017-41, especially when submitting applications to the IRS for opinion letters with respect to a plan's third and subsequent six-year remedial amendment cycles. The IRS' stated purpose for the changes to the program is to expand the plan provider market and encourage employers that currently maintain individually designed plans to convert to the pre-approved plan format.
Sponsors of pre-approved defined contribution plans should be aware of the 2017 Cumulative List provided in Notice 2017-37, which provides the changes in the qualification requirements that must be taken into account in pre-approved plan documents.