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

PROTECTING PLAN BENEFITS:IMPROVING GOVERNMENTAL DEFINED CONTRIBUTION PLAN COMPLIANCEAppendix EInternal Revenue Service’s Pre-Approved Qualified Plan ProgramOver the past 20 years, the use of Master and Prototype plans (“M&P plans”) andVolume Submitter plans (“VS plans” and together with M&P plans referred to hereinafteras “Pre-approved Plans”) has increased dramatically. The Internal Revenue Serviceestimates that at least 94% of all qualified retirement plans are Pre-approved Plans.In order for employer-sponsored retirement plans, such as 401(k) plans, profit-sharingplans and defined benefit pension plans (including cash balance plans), to enjoy the taxbenefits offered to those employers and to employees covered by those plans, theInternal Revenue Code imposes a complex set of rules, which are implemented througha series of regulations, rulings and other IRS guidance. These Code requirementsinclude rules regarding (i) eligibility to participate, (ii) vesting of benefits, (iii) accrual ofbenefits or allocation of employer and employee contributions, (iv) prohibitions ondiscrimination in favor of highly-compensated employees, (v) distribution of benefits,(vi) use of plan assets for the exclusive benefit of plan participants, and (vii) obligationsand timing of required amendments to the plans.This series of lengthy and complex requirements imposed on qualified retirement plans,including the large number of permitted alternatives, requires knowledgeable assistancein the design, implementation and ongoing administration of those plans.The ACT and the IRS has received anecdotal evidence as well as comments receivedin the surveys described later in this report that there has been much confusion in thearea of qualified plans adopted by governmental entities. Part of the confusionstemming from the fact that the current pre-approved program does not provideinformation on the Code provisions that do or do not apply to governmental entities.Generally, there are two classifications into which all qualified retirement plans can bedivided, pre-approved plans and individually designed plans (“IDPs”). Pre-approvedplans are plans which are submitted to the IRS by a sponsoring organization andreceive an opinion letter or advisory letter pre-approving the plan's language. An IDP isa plan which is specifically designed for one employer or a group of employers and thensubmitted to the IRS for a determination letter. The purpose of the document approvalprocess is to provide employers and plans assurance that their plan document complieswith the requirements of the Code and other IRS guidance.Generally the approval process for a pre-approved plan is based on a 6-year approvalcycle. 30 Sponsoring organizations were required to submit defined contribution Preapprovedplans to the IRS for EGTRRA and other requirements (outlined in the 2004Cumulative List) 31 by January 31, 2006. Those plans have received the new EGTRRAapproval letters on March 31, 2008, and may now be used by Employers to restate their3031Rev. Proc. 2005-66, 2005-37 I.R.B. 509Notice 2004-84, 2004-52 I.R.B. 1030ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 41