IRS Revises Opinion Letter Procedures for Pre-Approved Plans in Rev. Procs. 2021-37 and 2021-38

Practical Law Legal Update w-032-4796 (Approx. 6 pages)

IRS Revises Opinion Letter Procedures for Pre-Approved Plans in Rev. Procs. 2021-37 and 2021-38

by Practical Law Employee Benefits & Executive Compensation

Pre-Approved 403(b) Plans

In Rev. Proc. 2013-22, the IRS set out a process for securing pre-approval of a 403(b) plan and established a remedial amendment period during which plan sponsors of 403(b) plans may retroactively correct form defects in the plan (see Practice Note, Code Section 403(b) Plans: Overview and Legal Update, IRS Establishes Program for Pre-approved 403(b) Plans in Revenue Procedure 2013-22).

Under Rev. Proc. 2013-22, the first day of the initial remedial amendment period was January 1, 2010. Rev. Proc. 2013-22 was modified by Rev. Proc. 2017-18, which provided that the last day of the initial remedial amendment period was March 31, 2020. Accordingly, the initial remedial amendment period for 403(b) plans was January 1, 2010, to March 31, 2020. The IRS later extended the end of the initial remedial amendment period from March 31, 2020, to June 30, 2020 (see Legal Update, IRS Extends the Initial Remedial Amendment Period for 403(b) Plans and the Remedial Amendment Cycle for Pre-Approved Defined Benefit Plans).

In Rev. Proc. 2019-39, the IRS:

Established recurring remedial amendment periods for individually designed and pre-approved 403(b) plans with form defects that occur after the end of the initial remedial amendment period (see Legal Update, IRS Revenue Procedure 2019-39 Establishes Recurring Remedial Amendment Periods for 403(b) Plans).
Provided for a limited extension of the initial remedial amendment deadline.

Rev. Proc. 2020-40 expanded the situations in which the plan amendment deadline may be extended for discretionary amendments made to pre-approved qualified retirement plans and pre-approved 403(b) plans (see Legal Update, IRS Revenue Procedure 2020-40 Provides Extensions of Retirement Plan Amendment Deadlines).

In late 2020, the SECURE Act clarified that employees of non-qualified church-controlled organizations may participate in Code Section 403(b)(9) (26 U.S.C. § 403(b)(9)) retirement income accounts (see SECURE Act Compliance Chart).

Revenue Procedure 2021-37

Rev. Proc. 2021-37 modifies the opinion letter procedures in Rev. Proc. 2013-22 for pre-approved 403(b) plans to more closely align them with the procedures that apply to pre-approved qualified plans. Rev. Proc. 2021-37 makes the following changes:

The prototype and volume submitter plan programs are combined and replaced by a single opinion letter program for standardized and nonstandardized plans.
A pre-approved plan may have one of two formats: an adoption agreement plan or a single document plan.
An adopting employer of a nonstandardized plan that makes non-extensive amendments to the plan may lose reliance on the plan's opinion letter. The employer may, however, file for a determination letter using Form 5307 to obtain reliance for its plan.
The submission period for submitting on-cycle opinion letter applications for pre-approved 403(b) plans for the second cycle runs from May 2, 2022, to May 1, 2023. The IRS indicated it will issue a Cumulative List identifying the changes in 403(b) requirements before the on-cycle period for cycle two begins.
Pre-approved 403(b) plans must include a definition of "employee."
The IRS will not accept off-cycle opinion letter applications submitted during or after the employer adoption window, which is the approximately two-year period for adopting employers to adopt newly approved plan documents for that cycle.
Nonstandardized plans may provide for safe harbor or non-safe harbor hardship distributions.
The remedial amendment period for form defects first occurring after the initial remedial amendment period ends the later of:
- the end of the cycle in which the remedial amendment period would have ended for an individually designed plan; or
- the end of the first cycle in which an opinion letter application concerning the form defect may be submitted.
For non-governmental 403(b) plans, the interim amendment deadline is the end of the second calendar year after the calendar year in which the change in the 403(b) plan requirement is effective.
For governmental 403(b) plans, the interim amendment deadline is the later of the:
- end of the second calendar year after the calendar year in which the change in the 403(b) plan requirement is effective; or
- 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins on or after the date the amendment is effective.
The limited extension of the initial remedial amendment period provided in Rev. Proc. 2019-39 ends on the last day of the cycle in which an opinion letter application concerning the form defect may be submitted.
The initial amendment deadline provided in Rev. Proc. 2019-39 is extended to the later of:
- the end of the initial remedial amendment period (that is, June 30, 2020); or
- the end of the second calendar year (rather than the first calendar year) after the calendar year in which the change in the 403(b) plan requirements is effective.
A cycle one pre-approved 403(b) plan that is intended to be a retirement income account may be retroactively amended to permit employees described in Code Section 414(e)(3)(B) (26 U.S.C. § 414(e)(3)(B)) to participate in the plan. The plan may be amended retroactively to the first day of cycle two (that is, July 1, 2020).

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. Section 28 of Rev. Proc. 2021-37 provides information on how to submit comments.

Effective Date

The modifications made by Rev. Proc. 2021-37 are effective as of July 1, 2020.

Revenue Procedure 2021-38

The IRS also issued Rev. Proc. 2021-38, which modifies the interim amendment deadline described in Rev. Proc. 2016-37 for pre-approved plans qualified under Code Section 401(a) (see Legal Update, IRS Provides Determination Letter Guidance in Revenue Procedure 2016-37). Rev. Proc. 2021-38 eliminates the reference to an employer's tax-filing deadline for purposes of determining the interim amendment deadline. Accordingly, under Rev. Proc. 2021-38, the interim amendment deadline for a pre-approved qualified plan is the end of the second calendar year after the calendar year in which the change in qualification requirements is effective.

This change is intended to align the deadline for pre-approved qualified plans with the interim amendment deadline for pre-approved 403(b) plans under Rev. Proc. 2021-37.

Effective Date

Rev. Proc. 2021-38 applies to disqualifying provisions that are effective after December 31, 2020.

Practical Implications

Sponsors of pre-approved 403(b) plans should review the changes set out in Rev. Proc. 2021-37 for the second remedial amendment cycle. In addition, sponsors of pre-approved plans should take note of the new deadline for adopting interim amendments in Rev. Proc. 2021-38.

IRS Revises Opinion Letter Procedures for Pre-Approved Plans in Rev. Procs. 2021-37 and 2021-38 | Practical Law