Advisory Committee on Tax Exempt and Government Entities (ACT ...

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PROTECTING PLAN BENEFITS:IMPROVING GOVERNMENTAL DEFINED CONTRIBUTION PLAN COMPLIANCEfavored status of participants’ accounts. As reported by the ACT in its 2007 report,“Improving Compliance for Adopters of Pre-approved Plans,” the IRS estimates that94% of all qualified retirement plans are pre-approved plans.Benefits of the Pre-Approved Plan ProgramPre-approved or M&P plans consist of a basic plan document and an adoptionagreement with the plan document containing only standard provisions. Plans adoptedunder the prototype system may be standardized or non-standardized, with the formerproviding greater security. Both M&P and Volume Submitter (VS) Plans are submittedunder the IRS Volume Submitter Program. 24A pre-approved plan document program provides a standardized form of agreement foremployers and may facilitate a lower cost of adoption as well as a reduced need foremployer-initiated amendments as tax laws change. These features may be particularlyadvantageous to small employers who possess limited resources and expertise. Inaddition to addressing compliance challenges, such a system may encourage moreemployers to adopt plans. In summary, the following are benefits associated with preapprovedplans.• Offer an economical way for employers to meet plan documentationrequirements and to obtain the security of IRS approval for the form of their plan• Benefit small plan sponsors whose resource constraints may preclude them fromretaining outside counsel to design an IDP• Allows employers to avoid the PLR request filing process and to avoid incurringprofessional and filing fees that might otherwise be necessary to gain assuranceof plan document complianceAs reported by the ACT in 2007, there are challenges associated with the current Pre-Approved Plan Program. These include compliance problems resulting from sponsoringorganizations’ failure to meet the requirements of Rev. Proc. 2005-16 and instanceswhere organizations sponsoring an M&P plan oversell their services, leading adoptingemployers to underestimate their compliance responsibilities. 25 Unfortunately, theDefined Contribution Listing of Required Modifications (LRMs), which are designed toassist service providers in drafting pre-approved plans, include only corporate 401(k)information. The absence of governmental plan LRMs can cause confusion and errorscommitted by practitioners attempting to use the prototype system to design agovernmental 401(a) defined contribution plan.24 Improving Compliance for adopters of pre-approved plans, IRS <strong>Advisory</strong> <strong>Committee</strong> on Tax-Exempt and Governmental Entities, 200725 Improving Compliance for adopters of pre-approved plans, IRS <strong>Advisory</strong> <strong>Committee</strong> on Tax-Exempt and Governmental Entities, 2007ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 18
PROTECTING PLAN BENEFITS:IMPROVING GOVERNMENTAL DEFINED CONTRIBUTION PLAN COMPLIANCEHistory of Pre-Approved PlansThe concept of Pre-Approved plans dates back to the early 1960’s. Originally, a masteror prototype plan was a standardized form of a qualified plan that could only be madeavailable by a trade or professional association, bank, insurance company, or regulatedinvestment company and was intended to be used by groups of self-employedindividuals. A more extensive history of the prototype system is detailed in Appendix E.Today, Rev. Proc. 2005-16 sets forth the IRS’s current procedures for issuing opinionand advisory letters regarding the qualification of pre-approved plans under Sections401(a) and 403(a) of the Code. It delineates the requirements and responsibilities ofSponsoring Organizations and Adopting Employers in connection with theestablishment, qualification and operation of pre-approved plans.The Rev. Proc. further provides that a Sponsoring Organization’s failure to comply withany requirement delineated, including the notice and recordkeeping requirements, mayresult in the loss of the ability to maintain a Master and Prototype plan or the revocationof an existing opinion letter.Employee Plans Compliance Resolution System (EPCRS)EPCRS is a collection of three programs which allow employers, plan sponsors,investment companies, third party administrators and entities that provide administrativeservices to qualified plans (403(b), SEP, or SIMPLE-IRA) to correct plan failures. Thecurrent requirements of EPCRS are set forth in Rev. Proc. 2006-27 26 .The three correction programs include:Self-Correction Program (SCP) – The plan sponsor discovers the failure(s) and correctsthe failure(s) without IRS involvement. Generally, this program is available to correctinsignificant operational failures or any other failure discovered and corrected by theend of the second plan year following the year in which the failure occurred. Thisprogram is available even for plans with insignificant failures that are under audit by theEmployee Plans Division of the IRS.Voluntary Correction Program (VCP) – The plan sponsor discovers the failure(s) andcorrects the failure(s) with IRS approval. A compliance fee is due based on the numberof participants in the plan. This program is generally available for operational failures,document failures, demographic failures, and employer eligibility failures.Audit Closing Agreement Program (Audit CAP) – This program is an option that isavailable for the purpose of resolving qualification failures identified by the IRS duringan audit of the plan. All types of failures are available for this program. Under thisprogram, the plan sponsor is required to pay a negotiated monetary sanction which26 Improving the EPCRS: A Roadmap for Greater Compliance, IRS <strong>Advisory</strong> <strong>Committee</strong> on Tax-Exempt and Government Entities, 2008ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 19
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