FIS Relius
IRS Proposes Changes To The Determination Letter Program and Pre-Approved Plan Programs 4/22/2004
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In anticipation of updating qualified retirement plans for EGTRRA, the IRS has announced proposed changes both to the determination letter program and to the Master and Prototype and Volume Submitter programs (these are referred to as "pre-approved plans"). The announcements, which had been expected, reflect research performed by the IRS over the past several years.

The IRS is expected to implement the proposed changes as part of the process of updating plans for EGTRRA. However, the IRS has not yet determined when EGTRRA updates will take place. It is possible the process may begin before the end of 2005. For the process to begin, the IRS must first determine whether to make the proposed changes set forth in these announcements and will need to finalize the proposed IRC §401(k) regulations.

Changes to the Determination Letter Program
In Announcement 2004-32, the IRS sets forth its plans for the future of the determination letter program. The IRS has been analyzing how the current determination letter program works and how it affects the workload of the Employee Plans division. Since legislative changes significantly impact the determination letter and other EP programs, the IRS experiences peaks and valleys in its workload that make it more difficult to allocate resources and personnel. The IRS had solicited comments from the public by proposing changes to the determination letter program in the form of two white papers (available on the IRS web site at

The IRS narrowed the options presented in the white papers to two viable alternatives – status quo or a staggered Remedial Amendment Period (RAP) approach. After analyzing the comments submitted by practitioners and other interested parties, the IRS has decided to implement a staggered RAP for individually designed plans (i.e., plans that are not pre-approved plans). Under this approach, there would be a RAP ending every five years based on each plan sponsor's taxpayer identification number. For example, sponsors with a TIN ending in 0 or 5 could have RAPs ending in 2010, 2015, 2020, etc. The details of this staggered system will be similar to the approach described in the second white paper, although all of the details are still being worked on. The IRS is also cognizant that once the process begins, actual experience may dictate further refinements.

With respect to pre-approved plans, the IRS is soliciting comments on a new approach that was not described in either of the white papers. The new proposal is to have a six-year cycle for pre-approved plans. In Year 1, the lead defined contribution plans would be submitted to the IRS. The IRS would approve these by the end of Year 3. Instead of the current twelve-month rule, employers would have a single deadline for updating their plans using the pre-approved plan, such as the end of Year 5. Once the IRS has approved the defined contribution lead plans, the lead defined benefit plans would be submitted (i.e., in Year 4). The IRS would take two years to approve those plans and employers would need to adopt the approved plan by a single deadline. In Year 7 lead defined contribution plans again would be submitted to the IRS to start the process over anew. As with the staggered approach for individually designed plans, the IRS recognizes the need to retain flexibility with this approach.

In addition to the staggered RAP approach, the IRS considered an annual plan amendment requirement. Under this feature, the IRS would require annual plan amendments for the interim years of the RAP cycle. The IRS has announced that, at this time, it will not implement an annual plan amendment requirement. There was not a consensus on this approach and many discussions on this topic centered on compliance issues rather than solving the resource concerns which were the primary focus of the white papers. However, the IRS makes clear it may require interim amendments if the IRS deems it appropriate, as occurred with EGTRRA and IRC §401(a)(9) amendments.

Changes to the Master and Prototype (M&P) and Volume Submitter Programs
Over the years, there has been a narrowing of the distinction between M&P and Volume Submitter plans. One of the primary causes of this was the change to the reliance rules (as first set forth in IRS Announcement 2001-77) whereby Volume Submitter Plans are generally treated in the same manner as nonstandardized M&P plans. The IRS had contemplated combining the two programs into a single pre-approved plan program that essentially would be an enhanced Volume Submitter program. However, the IRS has decided to keep both programs for several reasons. The M&P program has a long history and therefore is familiar to sponsors and employers. In addition, the IRS wishes to retain a program that prohibits employers from modifying the pre-approved plan document. While the two programs will continue to be maintained, the IRS has decided that it would be appropriate to set forth the rules for both programs in a single revenue procedure.

In Announcement 2004-33, the IRS has invited the public to comment on the consolidated revenue procedure. The Announcement includes a draft of the new procedure. The proposed Revenue Procedure will make changes to both programs that either: (1) eliminate more of the differences between the M&P and Volume Submitter Program; or (2) simplify and streamline the two programs. Some of the more significant changes to the programs are:

  1. Nonstandardized M&P plans no longer will have to satisfy the uniformity requirement of IRC §401(a)(4). This means that cross-testing (e.g., age-weighting) will be permitted in defined contribution nonstandardized M&P plans.
  2. Volume Submitter Plans may, but need not, include a provision permitting the volume submitter practitioner to amend plans on behalf of adopting employers. Currently, only M&P plan sponsors may adopt "sponsor level" amendments. This ability has proven to be quite useful for EGTRRA and IRC §401(a)(9) updates.
  3. Standardized paired M&P plans would be eliminated because of their limited importance due to changes in the reliance rules and the law (i.e., the repeal of IRC § §415(e) and the changes made to IRC §404).

We will continue to monitor developments in this area and will provide updates as appropriate.