401(K) Plan Administration


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As the plan sponsor, the employer is responsible for keeping a plan in compliance. This includes making sure the plan document is written to comply with all requirements in the Internal Revenue Code, as well as making sure the plan is administered to follow its terms in operation and maintaining the appropriate records reflecting plan terms and operation. For a link to an IRS website which provides an overview of a plan sponsor’s responsibilities, click here.

An important part of keeping a 401(k) plan in compliance is developing “internal controls.”  Internal controls are generally business processes and procedures designed to detect and prevent mistakes in the 401(k) plan, including procedures for plan operations review and plan document updates.  It is important to note that hiring a service provider does not relieve a plan sponsor from the responsibility of keeping their 401(k) plan in compliance.  A plan sponsor must proactively establish its own internal controls to improve communication and compliance.  This will prevent problems from occurring as a result of a lack of communication between the plan sponsor and service providers, especially following a change in payroll companies or plan service providers.

For more information about the importance of internal controls, click here.  The 401(k) Compliancedashboard was created to help plan sponsors understand their 401(k) plan compliance requirements and to be part of the internal control procedures that the plan sponsor uses to meet those requirements.

As part of developing “internal controls” for the plan, the plan sponsor must also gather and maintain all documents related to the plan and its administration.  For more information regarding record retention requirements and best practices, click here.

You can also click here for a link to the IRS website main page for plan sponsors.

Preapproved Plans

Recently, the IRS replaced the previous “master and prototype” plan and “volume submitter” plan scheme with two new plans: a “standardized preapproved plan” and a “non-standardized preapproved plan.”  Either one of these preapproved plan documents may take one of two forms:

  1. A basic plan document, which sets forth all of the available basic plan provisions; and (ii) a separate adoption agreement, which permits the adopting employer to choose, from among the available plan provisions, those features that it wishes to include in its plan; or
  2. A single document that closely resembles an individually designed plan, except that any unchosen options are simply removed from the text of the plan document that is customized and adopted by an individual employer.

Prior to being offered on the marketplace, the IRS reviews the standardized or non-standardized plan document, regardless of which of the above forms it takes, including each of the options available under the plan. This is done on the basis of a six-year cycle.  The IRS then issues an “opinion letter,” which generally states that the plan, as embodied in the document or documents submitted to it, meets the requirements of a qualified plan under Section 401(a) of the Internal Revenue Code. ]

Standardized Preapproved Plan

Employers who adopt a standardized preapproved plan document either make plan design decisions by checking boxes and filling in blank lines on the adoption agreement, or by otherwise selecting among the optional plan features, depending on the form the plan document takes.  However, in a standardized preapproved plan, the employer may choose only among those options made available in either the adoption agreement or plan document.

As long as an adopting employer chooses only those options made available under a standardized preapproved plan, then it may rely on the IRS opinion letter issued for the preapproved plan.

However, should an employer adopt an amendment that goes beyond the permissible options, then it generally loses its reliance on the IRS opinion letter and has, in effect, adopted an individually designed plan, which may necessitate filing for an individual determination letter. Employers should always seek legal counsel when determining whether a plan amendment would be permissible under any preapproved plan.

Non-Standardized Preapproved Plan

Employers who adopt a non-standardized preapproved plan document either make plan design decisions by checking boxes and filling in blank lines on the adoption agreement, or by otherwise selecting among the optional plan features, depending on the form the plan document takes.  However, the scope of the permitted changes is generally wider and more flexible under a non-standardized preapproved plan.

As long as an adopting employer makes only those changes that are permitted under a non-standardized preapproved plan, then it may rely on the IRS opinion letter issued for the preapproved plan.

However, should an employer adopt an amendment that goes beyond the permissible options or changes, then it generally loses its reliance on the IRS opinion letter and has, in effect, adopted an individually designed plan, which may necessitate filing for an individual determination letter. Employers should always seek legal counsel when determining whether a plan amendment would be permissible under any preapproved plan.

Individually Designed Plans

If a plan does not use either a standardized or non-standardized preapproved plan document, then the plan is referred to as an individually designed plan. The chief advantage of using an individually designed plan is that it generally offers greater flexibility than can be afforded in either of the two types of preapproved plan documents.

Although not legally required, to help ensure that the document of an individually designed plan meets with each of the qualification requirements of the Internal Revenue Code, the plan sponsor should, upon adoption of the plan, file an application with the IRS, requesting the IRS to review the document and issue a favorable determination letter as to the plan’s qualified status. In general, individual determination letters are only available in the case of plans that have never before been issued a determination letter, terminating plans, and in additional special circumstances that the IRS may identify.

Determination Letters

The determination letter submission process is a complex process, replete with traps for the unwary. It should not be undertaken by non-professionals, but is instead typically performed by specialists such as ERISA attorneys and/or employee benefits consulting firms.

The Internal Revenue Service (IRS) has made several major changes to its determination letter program, and in order to make an informed decision regarding the appropriate plan document type to use going forward, it has become increasingly important for plan sponsors to understand the types of 401(k) plan documents available, and the IRS rules that apply to each type of plan document.

Recent Changes to the Individual Determination Letter Process

Due primarily to a lack of internal resources, in 2015, the IRS announced that it would make vast changes to its determination letter program for individually designed plans. Since then, official guidance has been issued which significantly modifies the prior formal procedures for issuing and receiving determination letters for individually designed plans. The changes are generally effective as of January 1, 2017. (Corresponding changes have been made to the process for obtaining opinion letters for preapproved plans. These changes ==-for preapproved plans only — were recently updated –see [401(k): IRS Extends Interim Amendment Deadline for Preapproved 401(k) Plans – ComplianceDashboard] for details.)

Previously, plan sponsors of individually designed plans (including individually designed 401(k) plans) were permitted to apply for a determination letter every five years during the “cycle” which applied for the plan. These cycles were labeled Cycles A through E. A plan’s cycle was typically determined based on the last digit of the plan sponsor’s employer identification number (EIN).

However, other special rules sometimes required the plan to be submitted during a different cycle. For example, governmental, multiemployer and multiple employer plans were required to file during a specified cycle, regardless of the plan sponsor’s EIN. It was also possible for an employer to make special elections which overrode the usual cycle rules, such as by making a controlled group election, which allowed all plans in a controlled group to file in Cycle A, or in the cycle that applied based on the EIN of the parent company. The new IRS guidance eliminates this staggered five-year Cycle program going forward (except for the final Cycle A, which ended on January 31, 2017).

Previously, the IRS also accepted “off-cycle” determination letter applications which could be filed for a plan outside of its normal cycle period. Effective July 21, 2015, the IRS announced that it will no longer accept off-cycle determination letter applications, except for new plans and terminating plans (as explained below).

Effective January 1, 2017, a sponsor of an individually designed plan will be permitted to submit a determination letter application for a plan only if:

An interesting development that has sprung from the dramatic changes made to the individually determination letter program is that a number of high-profile law firms have begun offering plan document auditing programs that in many ways mimic the former determination letter application process. The end product is typically a legal opinion letter stating that, in the opinion of the firm, based on the documents presented to it, the plan in written form should meet each of the qualification requirements of Section 401(a) of the Internal Revenue Code.