Using pre-approved plans to lessen the user fees - master, prototype and volume submitter plans. (Employee Benefit Plans)by Rafferty, John F., Jr.
Prior to OBRA 87, if an employer adopted an individually designed pension or profit sharing plan and submitted that plan to the IRS for a determination letter, there was no charge for reviewing the plan. OBRA established a User Fee program and Rev. Proc. 88-8 established the initial amounts of the User Fees. Under Rev. Proc. 89-4, the User Fee for submitting an individually designed plan with fewer than 100 participants was increased to $450.
All pension and profit sharing plans must be amended to comply with TRA 86 by the later of the due date for filing the employer's income tax return for the taxable year in which the 1989 plan year begins or the last day of the 1989 plan year. For the purpose of determining this date, the IRS will presume that an automatic extension has been filed to extend the due date of the 1989 tax return of the employer. Therefore, for calendar year corporations with a calendar plan year, the due date for amending the plan is September 15, 1990. Sole-proprietorships and partnerships have until August 15, 1990, to amend their plans, assuming no approved second extension request is obtained.
By using prototype, master, and volume submitter plan documents, it is possible for an employer to adopt or amend a pension or profit sharing plan and reduce or eliminate the User Fee. The IRS has established a number of programs and procedures which can be used by employers and plan sponsors to reduce the expense of complying with the new law.
National Office Master and
The National Office Master or Prototype Plan is a pension or profit sharing plan which is sponsored by a bank, insurance company, brokerage house, credit union or trade or professional organization, and which has been pre-approved by the IRS. These consist of a basic plan document which contains all of the non-elective provisions of the plan and a separate adoption agreement which contains all of the options that may be selected by an adopting employer. The sponsoring organization submits the basic plan document and the adoption agreements to the IRS National Office and receives an opinion letter that the form and language of the plan documents are acceptable.
The terms Master Plan and Prototype Plan are similar and are normally used together as meaning the same thing. However, there is a fine distinction between these two terms. The distinction relates to how the assets are held by the trustee or custodian. A Master Plan has a single funding medium for the joint use of all employers who have adopted the plan. A Prototype Plan, on the other hand, has a separate funding medium established for each adopting employer. Otherwise, Master and Prototype plans are identical.
After the sponsoring organization receives its opinion letter, an employer may adopt the plan and rely upon the sponsor's letter that the plan language is qualified. If the plan is standardized, the employer is not required to file for a separate IRS determination letter; the employer is automatically assured that the plan is qualified. However, if the plan is non-standardized, the employer must apply to the IRS for a separate favorable determination letter to be assured that the plan as drafted is qualified.
A standardized plan meets certain requirements set forth by the IRS in Rev. Proc. 89-9. In general, the plan must cover all employees except those excluded under the minimum age and service rules and those excludable under the collective bargaining and non-resident alien exceptions. Furthermore, the vesting schedules in the plan must be at least as favorable as the Top Heavy vesting schedules. In addition to some other requirements, one final rule is that a standardized defined contribution plan must not require employment on the last day of a plan year or completion or 1,000 hours of service during a plan year as a condition of receiving an allocation. A similar rule applies to defined benefit plans.
If a master or prototype plan fails to meet these rules, it is a non- standardized plan, and the employer who adopts the plan would need to submit it for a determination letter. The IRS User Fee for submitting a pre-approved non-standardized plan is $100.
The primary benefit of a National Office Master or Prototype Plan is derived by a small employer who wants to place all plan assets with the plan's sponsoring organization and who does not need the flexibility of a more customized plan design.
The major advantages to an employer of using a master or prototype are:
1. There is generally a lower cost of adopting the plan and lower IRS User Fees if the plan is submitted for a determination letter.
2. Any employer who adopts a previously approved master or prototype plan of a sponsoring organization automatically has until the last day of the twelfth month after the sponsoring organization receives its opinion letter on the new plan from the IRS to adopt the approved TRA 86 amended plan. This will give most such employers a further extension of the time to amend their plans for TRA 86.
3. Any employer who adopts a master or prototype plan which was timely submitted to the IRS for an opinion letter by the sponsoring organization will have automatic extended reliance. The employer may rely on the favorable opinion letter issued to the sponsoring organization until the earlier of the date established for plan amendment by subsequent legislation or the last day of the last plan year beginning before January 1, 1995.
4. If a plan amendment is required, the sponsoring organization can make certain amendments without action by the employer.
Regional Prototype Plans
A new program established by the IRS for amending plans to conform with the TRA 86 is the Regional Prototype Program. Although it is very similar in many respects to the National Office Master and Prototype Program, there are a number of significant differences. The rules for regional prototype plans are set forth in Rev. Proc. 89-13.
The sponsor of a regional prototype plan must be a firm where at least one member or employee is authorized to practice before the IRS with respect to employee plan matters. Typically, the sponsors of regional prototype plans will be law firms, accounting firms and pension consulting firms. To be a sponsor, the firm must have at least 30 clients within two IRS regions that are expected to adopt the regional prototype plan or have at least three clients that are expected to adopt a mass submitter regional prototype plan.
A firm which sponsors a regional prototype plan submits the plan to the IRS Regional Office where the sponsor is located. Once the IRS issues a favorable opinion letter, the sponsor makes the plan available to its clients for adoption in a manner similar to the National Office program. Depending on whether the employer adopts a standardized or non-standardized plan, he or she may or may not apply for a separate IRS determination letter. The rules for standardized plans are the same as in the National Office Program. If the employer submits the plan, the User Fee is $100.
The regional prototype plans are generally more flexible than national office master and prototype plans, especially in the area of plan investments. Plan trustees should have considerable flexibility in making plan investments and should not be required to place investments with a sponsoring organization.
Small pension consulting firms, accounting and law firms which would not qualify as regional prototype sponsors will be able to adopt a mass submitter's regional prototype plan for a lower cost. The only requirement is that the firm must have at least three clients that are expected to adopt the regional prototype plan.
The major advantages to an employer of using a regional prototype plan are:
1. Lower IRS User Fees if the plan is submitted for a determination letter, no IRS fee if the plan is a standardized plan which is not submitted.
2. Automatic extended reliance until the earlier of the date established for plan amendment by subsequent legislation or the last day of the last plan year beginning before January 1, 1995.
3. If a plan amendment is required, the sponsoring organization can make certain amendments without action by the employer.
The regional prototype program will be a major improvement for the clients of pension firms. These clients previously maintained individually designed plans which were very costly to design and qualify.
Volume Submitter Plans
Another program established by the IRS for amending and submitting plans for qualification letters under the TRA 86 is the Volume Submitter Program.
Most firms which draft pension plan documents for clients have developed standard language which is used in every plan. In addition, certain sections of the plan have variable provisions which are substituted to satisfy the particular needs of that client. In the past, plans were submitted to the IRS for a qualification letter as individually designed plans. The IRS agents reviewed the plans and made suggested changes. Since each plan was reviewed by a different IRS agent, there was no consistency among them regarding changes. Some agents accepted language that others did not. This made plan qualification a very difficult process.
Under the new Volume Submitter Program, the firm writing the plan is able to submit a specimen of the language to the IRS for approval and include all variable language which it intends to use in the plan. The IRS reviews the language and approves it. Subsequently, any plan written by the firm using the approved language will be eligible for a reduced User Fee. Unlike the master or prototype programs above, there is no opinion letter issued by the IRS on the specimen plan. Any adopter of the specimen plan must submit it to the IRS for a qualification letter, for a User Fee of $100.
In all respects, a volume submitter plan looks like an individually designed plan. There is no separate adoption agreement as with a master or prototype and the employer's name appears in the document instead of the sponsor.
As the volume submitter plan is treated like an individually designed plan, there is no extended reliance or extension of the period for amending plans under TRA 86. Any plan amendments must be made by the employer.
The major advantages of the volume submitter plan are:
1. Lower IRS User Fees than individually designed plans.
2. The plan document is customized. It does not have the appearance of a prototype.
3. There is greater plan design flexibility than with a prototype.
Individually Designed Plans
If an employer has one of the plans which does not qualify for one of the special IRS programs (e.g., ESOP, Stock Bonus plans, etc.) or if he or she has special design requirements that do not fit one of the programs, the only alternative is an individually designed plan. By adopting the special programs, and charging higher User Fees for individually designed plans, the IRS apparently hopes to reduce the number of plans in this category.
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