1 Plan Document Update Post PPA & 403(b) Richard Hochman, Managing Director McKay Hochman - DST Retirement Solutions Richard Hochman, Managing Director McKay Hochman - DST Retirement Solutions Rich has been involved with employee benefits for more than three decades. He is Managing Director of McKay Hochman Consulting (a service of DST) which is nationally recognized in the plan document, consulting and training arenas. Rich is a frequent speaker at industry forums including those offered by NIPA and ASPPA, as well as the Enrolled Actuaries Meeting. He received an Educator of the Year Award in 2012. During his career he has authored articles on a range of industry topics and testified at Regulatory hearings in Washington, DC. He earned a BA degree in Political Science, a BS degree in Business Administration, an MBA and a JD degree from the State University of New York at Buffalo.
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Plan Document Update Post PPA & 403(b)media01.commpartners.com/NIPA/2016/Session03/2S_Plan Document Update.pdfprovides for both prototypes and volume submitter plans. Plan Documents
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Plan Document Update Post PPA & 403(b)
Richard Hochman, Managing Director
McKay Hochman - DST Retirement Solutions
Richard Hochman, Managing Director McKay Hochman - DST Retirement Solutions
Rich has been involved with employee benefits for more than
three decades. He is Managing Director of McKay Hochman
Consulting (a service of DST) which is nationally recognized in
the plan document, consulting and training arenas. Rich is a
frequent speaker at industry forums including those offered by
NIPA and ASPPA, as well as the Enrolled Actuaries Meeting. He
received an Educator of the Year Award in 2012. During his
career he has authored articles on a range of industry topics and
testified at Regulatory hearings in Washington, DC. He earned a
BA degree in Political Science, a BS degree in Business
Administration, an MBA and a JD degree from the State
University of New York at Buffalo.
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Plan Documents Post PPA Restatement
• PLAN DOCUMENT STATUS
• Individually Designed Plans
• Have completed the PPA restatement cycle for
Defined Contribution and Defined Benefit Plans as of
January 31, 2016.
• For Cycle A Plans there is one more restatement
available with the ability to get a favorable
Determination Letter. As of 2017, the five-year
restatement cycle for individually designed plans is
eliminated.
Plan Documents Post PPA Restatement
• Existing Determination Letters that were issued
on Cycles B-E will no longer have a expiration
date. The expiration dates on those letters are
voided. What is not clear is reliance on those
letters if amendments are made to the
documents.
• Individually designed plans can still obtain initial
Determination Letters as well as Determination
Letters on plan termination.
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Plan Documents Post PPA Restatement
• Individually designed defined contribution plans
were provided the opportunity to amend onto a
pre-approved plan and will have reliance, if they
adopt the pre-approved plan by April 30, 2017.
• The 2017 deadline only applies to plans that had
not adopted the pre-approved document before
January 1, 2016.
Plan Documents Post PPA Restatement
• Two types of plans were previously not allowed on
pre-approved documents and had to be individually
designed.
• Cash Balance Defined Benefit Plans
• Employee Stock Ownership Plans (ESOPs)
• Cash balance provisions were permissible as part of
the PPA Defined Benefit restatement cycle. Those
documents were submitted last fall. The cash
balance provisions had to meet certain safe-harbor
requirements. Biggest issue being the use of actual
rates of return.
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Plan Documents Post PPA Restatement
• ESOPs will be permitted as part of the next DC
pre-approved restatement cycle. That
submission is currently scheduled for October
31, 2017 for mass submitters. The IRS has
already issued model ESOP language that can
be used for that submission.
• While not official, the use of Form 8905 will likely
be eliminated as of 2017; in conjunction with the
elimination of the five-year cycle.
Plan Documents Post PPA Restatement
• Pre-Approved Plans
• The PPA Defined Contribution six-year
restatement cycle ended April 30, 2016
(yesterday). The April 30, 2017 deadline
addressed earlier for IDPs does not apply.
• The PPA Defined Benefit cycle has been
extended. Documents were originally required to
be filed by January 31, 2014. However, due to
the cash balance change that deadline ultimately
became October 30, 2015.
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Plan Documents Post PPA Restatement
• Those documents have been assigned to
agents. It is anticipated that the review process
will take approximately two years. Thus, Opinion
and Advisory letters would be issued in March of
2018. Restatements would begin May of 2018
and would end April of 2020.
• According to the IRS there were 65 lead plans
submitted and about half have cash balance
language.
Plan Documents Post PPA Restatement
• 403(b) Plans
• Until 2009 there was no requirement that 403(b)
arrangements have written plan documents.
• As of 12/31/2009, sponsors of 403(b)
arrangements were required to adopt plans that
met specific requirements. However, there was
no approval process for those documents.
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Plan Documents Post PPA Restatement
• The IRS ultimately announced the intention to
create a pre-approved 403(b) plan program.
• As announced, it was originally anticipated that
an individually designed plan program would
follow.
• In Rev. Proc. 2013-22, IRS for the first time
established the pre-approved 403(b) program. It
provides for both prototypes and volume
submitter plans.
Plan Documents Post PPA Restatement
• One of the features allowed under the 403(b)
program that is not allowed under the pre-
approved programs for either DB or DC
documents is that volume submitter plans can
have “flex provisions” that are not applicable to
all adopting employers. We had hoped to have
that applied to the DB program as well and it
wasn’t.
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Plan Documents Post PPA Restatement
• Upon announcing the pre-approved program, the
IRS also announced their intention to not have
an individually designed program and that there
will be no Determination Letters available to
403(b) arrangements. This raises a couple of
issues.
• Which is the better document for employers offering
403(b) plans?
Plan Documents Post PPA Restatement
• Under normal operating rules, employers may not
make modifications to the approved prototype plan
document language without causing the document to
be deemed individually designed. However, volume
submitter documents may be amended by adopting
employers; unless they are too substantial/significant.
Historically, an employer wishing IRS approval of the
modifications could submit for a Determination Letter
using Form 5307.
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Plan Documents Post PPA Restatement
• If an employer can easily fit onto a prototype, that
might be the way to go, but if the employer’s existing
document has provisions that don’t fit within the
framework of the prototype, they will likely be better off
adopting a volume submitter plan and making the
necessary modifications. An open issue is whether
they will be able to submit for a Determination Letter
on Form 5307. There currently is no provision for that
to be done in the 403(b) arena.
Plan Documents Post PPA Restatement
• If using a volume submitter document, how significant
can the changes be, before the document becomes
individually designed and theoretically has no reliance
on the underlying Advisory Letter? This is an
unknown.
• Due to the greater flexibility more employers will likely
use volume submitter documents than prototypes.
• What does an employer do, if their existing plan
does not fit on the finally approved documents?
Can they really operate a plan that has no IRS
approval?
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Plan Documents Post PPA Restatement
• Since the documents submitted last April are still
in review, it is not anticipated that Opinion and
Advisory Letters will be issued before early 2017.
All letters are typically issued simultaneously.
• It is anticipated that the window for employers to
adopt the approved 403(b) documents will open
May 1, 2017.
Plan Documents Post PPA Restatement
• The employer adoption period for pre-approved
plans has been two years. However, industry
representatives have already advised the IRS
that since this is the first ever 403(b) amendment
and restatement cycle that the window period
should be three years, not two. We will likely not
know the answer to this request until the
program opens.
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Plan Documents Post PPA Restatement
• Thus, if it goes as anticipated, the restatement
period will open May 1, 2017 and extend until at
least April 30, 2019, but possibly April 30, 2020.
• It is important to remember that the remedial
amendment period to fix 403(b) plan document
errors dating back to 2009 will not end until the
restatement period closes.
Plan Documents Post PPA Restatement
• Additionally, since there was no “PPA”
restatement period for 403(b) plans like there
was for DC and DB plans, the final documents
will reflect PPA, HEART and WRERA.
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Plan Documents Post PPA Restatement
• USER FEES
• IRS User Fees were increased dramatically
earlier this year. This will have an impact on
your plan document offerings for the next round
of restatements.
• When the PPA documents were submitted in
2012, prototype basic plan documents had a fee
of $12,000 including one adoption agreement.
Each additional adoption agreement was $1,000.
Plan Documents Post PPA Restatement
• Similarly, Volume Submitter Specimen
Documents with up to one Adoption Agreement
were also $12,000 with each additional Adoption
Agreement being $1,000.
• Basic Prototype Plans support both standardized
and non-standardized adoption agreements, as
well as, profit-sharing, money purchase, target
benefit and 401(k) arrangements. Thus the
major vendors submitted multiple adoption
agreements.
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Plan Documents Post PPA Restatement
• Volume submitter plans had different specimen
documents for Money Purchase, Profit-sharing
and 401(k), though multiple adoption agreements
was not the norm.
• User Fees for document vendors have increased
significantly, likely limiting their offerings for the
next cycle. This may impact what TPA’s and
others will offer to their adopting employers.
Plan Documents Post PPA Restatement
• Under the new fee schedule, the prototype basic
plan document will remain at $16,000, however,
each additional adoption agreement will now cost
$11,000.
• For volume submitters, the fee has doubled from
$14,000 to $28,000 and each additional adoption
agreement is also $28,0000.
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Plan Documents Post PPA Restatement
• For example, a provider with a base document
and 12 Adoption Agreements paid a user fee of
$23,000 in 2012. To provide the same package
of documents in 2017, (the next scheduled
submission) the user fee will be $137,000. That
is an increase of nearly 6 times.
• Among the likely changes is elimination of
money purchase adoption agreements.
Plan Documents Post PPA Restatement
• It is also likely that stand along profit-sharing
plans will be on a 401(k) adoption agreement,
without using the elective deferral and matching
provisions.
• Industry practitioners have talked about the need
to revamp the pre-approved program so that it
works better for both the IRS and the retirement
industry.
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Plan Documents Post PPA Restatement
• PRE-APPROVED DC PLANS THAT MISSED
THE PPA DEADLINE
• Due to the timing of the issuance of PPA Opinion
and Advisory Letters in 2014, the major
document providers had requested that the PPA
restatement cycle not begin on May 1, 2014. The
IRS rejected that request, but said that they
might consider extending the deadline. That did
not happen.
Plan Documents Post PPA Restatement
• All pre-approved DC plans that were adopted
using EGTRRA documents, had to be restated
onto the PPA approved documents by April 30,
2016.
• The consequences of failing to adopt the pre-
approved plan by the deadline is that the plan is
no longer entitled to tax-favored treatment. This
reduces the employer’s deduction for
contributions made to the plan and the
participants’ ability to rollover distributions.
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Plan Documents Post PPA Restatement
• Individual employers that missed the deadline
can make VCP submissions, to get their plans
requalified. Those submitting before April 30,
2017, will be eligible for a 50% reduction in fees.
Plan Documents Post PPA Restatement
Example
• An employer with 25 plan participants would
normally have a VCP filing fee of $750. However,
if they make a VCP submission by April 30, 2017
the filing fee is only $375 — a fifty percent
reduction. Potential filing fees after the April 30,
2017 deadline can range from $500 to $15,000.
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Plan Documents Post PPA Restatement
• On its website, the IRS offers information about
how to “Correct the Failure to Adopt the Pre-
Approved Plan by the Applicable Deadline.” The
URL is:
https://www.irs.gov/Retirement-Plans/Correct-the-
Failure-to-Adopt-the-Preapproved-Plan-by-the-
Applicable-Deadline
Plan Documents Post PPA Restatement
• On its website the IRS not only addresses the
individual employer approach, but also
addresses a newly announced program,
whereby a financial institution or service provider
can request an “umbrella closing agreement” that
covers individual employers affected by the
failure to update their plans.
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Plan Documents Post PPA Restatement
• The “umbrella” approach is similar to the group
submission under VCP, but eliminates the need
for the financial institution or service provider to
have made a systematic error.
• While plan sponsors may continue to make VCP
submissions, the IRS invites financial institutions
or other service providers to submit proposals for
umbrella closing agreements to correct the
failure on a larger scale by addressing employers
affected by the failure as a group.
Plan Documents Post PPA Restatement
• The website provides a sample submission kit to
assist with the individual employer
submission. It still addresses the prior April 30,
2010 deadline, but has been updated to reflect
the new forms.
• he VCP submission should include
• Form 8950 Application for VCP.
• An explanation for item 7(b) that a Form 5300 was not