12/11/2013
Introduction
On November 21, 2012 the IRS issued Revenue Procedure 2012-50 allowing governmental individually designed plans to restate during Cycle E instead of the upcoming Cycle C. This delay gives governmental defined contribution plans time to consider using pre-approved documents during the upcoming PPA cycle. We recommend that any and all governmental defined contribution plans consider switching to the 6-year cycle.
The IRS has recently announced that governmental plans considering using a pre-approved plan during Cycle E must sign a Form 8905 (Certification of Intent To Adopt a Pre-approved Plan) prior to January 31, 2014 and keep this signed form for its records in order to avoid an unnecessary determination letter filing once the plan is restated no later than 1/31/16.
Below we provide details on how the 5- and 6-year cycles differ and provide information on how to switch to the 6-year, pre-approved plan cycle.
Background
If a plan is individually designed, the five year cycle generally applies according to the sponsor's EIN. Governmental plans are one of the exceptions to this rule. If a governmental plan is individually designed, it would normally fall into cycle C and current plans would need to be restated during the one-year window ending on January 31, 2014.
| Last Digit of Sponsor EIN | Exceptions | Cycle | Cycle 2 Open - End |
| 1 or 6 | Controlled group or affiliated service group | A | 2/1/11 - 1/31/12 |
| 2 or 7 | Multiple employer plans | B | 2/1/12 - 1/31/13 |
| 3 or 8 | Governmental plans | C | 2/1/13 - 1/31/14 |
| 4 or 9 | Multi-employer plans | D | 2/1/14 - 1/31/15 |
| 5 or 0 | Governmental plans - by temporary election | E | 2/1/15 - 1/31/16 |
Under Revenue Procedure 2012-50, the deadline for governmental individually designed plans to restate is extended to January 31, 2016. The IRS similarly provided a reprieve for governmental plans during the first 5-year cycle in Revenue Procedure 2009-36. In both Revenue Procedures the IRS provided that the election to move to Cycle E "applies only to that plan and only to that cycle". The third restatement cycle will again have governmental individually designed plans in Cycle C.
In order to be eligible for the extension to Cycle E, Revenue Procedure 2012-50 requires individually designed plans to file a determination letter application for the plan during the one-year submission period for the second Cycle E (February 1, 2015 through January 31, 2016).
Note that the delay permitting a later restatement does not delay any required interim amendments. Interim amendments for changes in law typically need to be adopted as frequently as each year to keep plans in compliance.*
Must Governmental Plans Be Individually Designed?
No. A common misperception when looking at the chart shown above is that any plan falling under the exceptions must be individually designed. Governmental plans, multiple employer plans and, of course, plans sponsored by controlled groups can all use pre-approved plan documents. Governmental plans are permitted to participate in the six-year cycle as a volume submitter under Revenue Procedure 2011-49. The only exception is governmental plans that include so-called "DROP" provisions (Deferred Retirement Option Program) or similar provisions (features found in governmental defined benefit plans) are considered individually designed plans.
So How Does the 6-Year Cycle Work? How is it Different from the 5-Year Cycle?
Maintaining a pre-approved plan on a 6-year cycle tends to have a number of advantages: the time between restatements is longer (6 years instead of 5), restatement windows are longer (2 years instead of 1 year) and, most importantly, the 6-year cycle restatements themselves tend to be much less costly.
The 6-year cycles do not depend on an employer's EIN. There are only currently two 6-year cycles - one for defined contribution plans and one for defined benefit plans:
- EGTRRA Defined Contribution Restatement deadline: April 30, 2010
- EGTRRA Defined Benefit Restatement deadline: April 30, 2012
- PPA Defined Contribution Restatement deadline: early 2016
- PPA Defined Benefit Restatement deadline: early 2018
Each restatement period has a two-year window in which to restate the documents. The window opens once IRS issues pre-approval letters for plans that have applied for pre-approval. For example, IRS issued letters for the EGTRRA defined contribution restatement in early 2008. IRS pre-approval letters for the next defined contribution plan restatement (PPA) are expected in early 2014.
Pre-approved documents tend to be more economical to prepare because they are designed and created at a much larger scale by document vendors. In addition, if the pre-approved document is acceptable for the sponsor without any modifications, then there is no filing to be made to the IRS and no additional IRS fees would apply. Under the individually designed model, the cost to draft the document is generally higher and the document is then filed for a determination letter with the IRS (Form 5300 base filing fee: $2,500). Even if modifications need to be made to the pre-approved volume submitter plans, the IRS filing fee is much more reasonable for a determination letter on a minor modification: currently $300 on a Form 5307.
Are Pre-Approved Governmental Plans Available in the Market?
In the current 6-year cycle (EGTRRA), the pre-approved governmental plans that we have seen tend to treat governmental plans as an after-thought. However, new rules for the next restatement period require pre-approved governmental plans to have separate basic plan documents from non-governmental plans. We think this will make pre-approved governmental plans for the next (PPA) cycle much easier for sponsors and advisors to understand and apply.
ftwilliam.com intends to offer a profit sharing governmental plan and a money purchase governmental plan for the next cycle. Both plans have been drafted to have pick-up contributions and have open-ended questions to insert applicable state laws that may apply to the plans. The plans have been designed to be as flexible as possible and we expect most governmental plans can use the documents without modifications. See below for more information on how to switch to a pre-approved plan and the 6-year cycle.
What if Something Needs to be Changed in the Pre-approved Document?
Most changes to a pre-approved volume submitter document are 'minor modifications'. For example, if the plan has a feature that cannot fit into the pre-approved plan checklist, the plan can add the necessary custom language to the document. We recommend submitting the changes for approval to the IRS on a Form 5307. The form 5307 is an "Application for Determination for Adopters of Master or Prototype (M&P) or Volume Submitter (VS) Plans". It is the same determination made via a Form 5300 but because the volume submitter is the base document, the fee is substantially less as described above.
If no changes are made to the pre-approved volume submitter document, it is not possible to file for a determination letter since the document is pre-approved.
How Do Governmental Plans Switch to a Pre-approved Plan?
If a governmental plan intends to (or thinks it might) use a PPA pre-approved DC PPA document once these plans are available (likely in 2014), the governmental entity should sign a Form 8905 (Certification of Intent To Adopt a Pre-approved Plan) prior to January 31, 2014 and keep this signed form for its records. At the time the plan is due for a restatement, the plan should restate to a pre-approved volume submitter document. If no Form 5300, 5307, or 5310 filing is made once the plan is restated, the employer should keep the original certification in its records and does not need to file the Form 8905 with the IRS.
If the governmental plan is restated to a pre-approved plan during cycle E but the sponsor did not sign a form 8905 prior to January 31, 2014, the IRS has stated that these plans must still file a determination letter in order to be eligible for the extension to cycle E. If there are no modifications to the pre-approved plan, it is not clear how this filing would be made. Sponsors may need to make minor modifications to a volume submitter in order to be eligible to file for a determination letter on a form 5307. It's not clear when this fililng would be due but we would recommend filing no later than January 31, 2016 (which will be prior to the deadline to restate to a PPA document for a pre-approved plan). If additional guidance is made available to clarify this process, this article will be updated and reissued.
* For example, IRS recently clarified that some governmental plans participating in a group trust may need to be amended in order to comply with Revenue Ruling 2011-1 and provided due dates for those amendments.
If you have any questions please feel free to contact us at support@ftwilliam.com or call 800.596.0714.