An employer may adopt a pre-approved retirement plan sold by a service provider, financial institution or advisor. Pre-approved plans allow limited customization but give the employer the reassurance of an IRS-approved plan.
If you use a pre-approved retirement plan, you must adopt a new plan at least once every six years. See Deadline to Adopt Restated Pre-Approved DC Plans.
Is a pre-approved plan right for you?
- Most pre-approved plan document providers will take care of amending the plan to comply with law changes, making it less likely that you’ll miss a plan amendment deadline.
- The document provider may provide valuable administration services such as sending employee notices and summary plan descriptions and maintaining plan participant records.
- Your costs are usually lower than an individually designed plan, which requires the hiring of a plan drafter.
- Consider whether you can accept the limited options of the plan you’re buying. A pre-approved plan is less customizable than an individually designed plan.
How to select and adopt your pre-approved retirement plan
- Provider - Choose a document provider. See the tips for adopting employers for questions to ask when shopping for a plan.
- Plan type - Compare alternatives before choosing a pre-approved plan and ensure you understand the terms of the plans you’re considering. You must follow any set definitions and terms in the plan you choose.
- Adoption agreement choices – The adoption agreement is a separate, employer-specific document attached to the plan document. Most plans allow you to select alternative plan provisions, such as when the employee becomes eligible to participate in the plan or employer contribution formulas. The written choices you select in the adoption agreement become the legal terms of your plan and you are bound to follow them while operating your plan.
- Sign and date – The plan is not effective until you sign and date it.
- Start saving – Begin operating your plan. See A Plan Sponsor’s Responsibilities.
Making changes to the plan
You may want to change the terms of your retirement plan from time to time (for example, to change the employer contribution formula). In addition, all plans must be regularly amended to reflect law changes.
- Optional changes to your plan document: Contact your document provider before making changes.
- If you have an adoption agreement and you decide to change your plan features, you must sign a new adoption agreement before you change the way you operate your plan.
- If your plan doesn’t have an adoption agreement, you may still be able to make minor changes to your plan without losing reliance on the pre-approved plan’s letter.
- Required plan amendments related to law changes: Normally, your document provider will provide you with copies of any required plan amendments. If a document provider does not adopt them for you then you must ensure that you sign the amendments no later than the required deadlines. In some instances, you may be required to operate your plan according to a law change before the plan document is amended. Your document provider should notify you when these amendments or operational changes are necessary.
- Optional plan amendments related to law changes: Some plan amendments related to law changes require you to make choices, so the document provider will not make these changes on your behalf. For example, do you want your plan to include a newly authorized feature or benefit, such as Roth accounts or income annuities? If you choose to authorize an optional change, you must sign the amendment by the required deadline.
If you make significant changes to your pre-approved plan document
If you change the pre-approved plan document or adoption agreement other than making selections in the adoption agreement or making certain IRS-allowed changes (see Revenue Procedure 2015-36, sections 5 and 14), the IRS may treat the plan as a new individually designed plan. In other words, the plan document is so different from the pre-approved plan that the IRS reviewed and approved that it’s treated as an entirely new plan. If your plan becomes individually designed, you can no longer rely on the pre-approved document provider’s opinion or advisory letter. If you would like IRS assurance on your modified plan document, you may apply, if eligible, for your own determination letter (on Form 5300). See What is a favorable determination letter?
You must adopt an updated plan at least once every six years
You can adopt a new pre-approved retirement plan at any time to initiate a plan.
All document providers must completely update their pre-approved plan documents and request new approval letters from the IRS every six years. Generally, you must adopt your updated pre-approved plan within two years after the IRS issues its letter.
Deadline to adopt an updated profit-sharing, 401(k) or other defined contribution plan
- April 30, 2017, is the extended deadline to adopt a pre-approved defined contribution plan for plans adopted on or after January 1, 2016, other than a plan that is adopted as a modification and restatement of a defined contribution pre-approved plan that had been maintained by the employer prior to January 1, 2016. See Notice 2016-3.
- April 30, 2016, was the final deadline to adopt a pre-approved defined contribution plan restated for items on the 2010 Cumulative List (sometimes called a “PPA” plan because the plan reflects the Pension Protection Act of 2006) for those employers under a pre-approved defined contribution plan prior to January 1, 2016. See Announcement 2014-16. Adopting employers who missed the deadline may correct the error using the Voluntary Correction Program.
- April 30, 2010, was the deadline to adopt a pre-approved defined contribution plan restated for items on the 2004 Cumulative List (sometimes called an “EGTRRA” plan because the plan reflects the Economic Growth and Tax Relief Reconciliation Act of 2001). See Announcement 2008-23). Adopting employers who missed the deadline may correct the error using the Voluntary Correction Program.
Deadline to adopt an updated defined benefit plan
- April 30, 2012, was the deadline to adopt a pre-approved defined benefit plan restated for items on the 2006 Cumulative List (sometimes called an “EGTRRA” plan). See Announcement 2010-20. Adopting employers who missed the deadline may correct the error using the Voluntary Correction Program.
Does an adopting employer need its own determination letter?
A main purpose for using a pre-approved plan is the reassurance of knowing the IRS has already made a determination on the plan’s tax-qualification, so the adopting employer does not need to seek its own determination from the IRS. Instead, the adopting employer generally relies on the opinion or advisory letter issued to the pre-approved plan sponsor (the institution or advisor selling the plan).
- M&P – An employer who adopts a master & prototype plan (standardized or non-standardized) may not apply for its own determination letter. Instead, the employer will rely on the letter issued to the plan sponsor.
- VS - An adopting employer who made limited modifications to the terms of the approved plan may apply for a determination letter on Form 5307, Application for Determination for Adopters of Modified Volume Submitter Plans (instructions). If the modifications are extensive, causing the plan to be treated as an individually designed plan, the employer may, if eligible, file Form 5300, Application for Determination for Employee Benefit Plan.
See Revenue Procedure 2015-6, Sections 8 and 9, for more information on determination letter applications for pre-approved plans.