IRS revamps rules for off-the-shelf 401(k) plans

What’s in a name? An awful lot if you use an off-the-shelf 401(k) plan. These plans—called “master & prototype” plans or “volume submitter” plans—benefit everyone. You don’t have to spend big bucks to design and maintain an individualized plan and the IRS doesn’t have to spend its limited time and resources auditing that plan.

The IRS is dumping the M&P and VS distinctions in favor of standardized and nonstandardized plans. Other changes are intended to make these plans even more attractive to plan sponsors. (Rev. Proc. 2017-41, IRB 2017-29)

Standardized plans. Vendors of standardized plans must obtain opinion letters from the IRS stating that their plans are tax-qualified. Vendors must also get updated letters from the IRS when laws or regulations require amendments to their plans.

You may rely on vendors’ opinion letters if your plan is identical to a standardized plan and the coverage and contributions or benefits that are available under the plan don’t favor highly compensated employees. Nevertheless, you can make some changes to a standardized plan without forsaking reliance on the vendor’s opinion letter.

  • You can adopt sample or model amendments published by the IRS that specifically provide that their adoption won’t cause your plan to vary from the standardized plan
  • You can adopt amendments that adjust the limitations in tax code Section 415 to reflect annual cost-of-living increases, other than amendments that add automatic cost-of-living adjustment provisions to the plan
  • You can adopt amendments to the plan’s administrative provisions (e.g., provisions related to investments, claims procedures and employer contact information), provided the amendments don’t conflict with other plan provisions and don’t cause your plan to become unqualified.

Nonstandardized plans. If you want more flexibility than a standardized plan provides, you can opt for a nonstandardized plan. You can rely on a vendor’s opinion letter, provided your plan is identical to the nonstandardized plan. You can make the same changes to your plan that you can make to a standardized plan. In general, however, you won’t be able to rely on the opinion letter for an assurance that you’ve met the nondiscrimination requirements.

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Vendors of nonstandardized plans may allow you to select an allocation formula for employer nonelective contributions that satisfies one of the current design-based safe harbors, or you can select a benefit formula that satisfies one of the current design-based safe harbors, and the ability to select a safe harbor definition of compensation. Key: If you choose these plan designs, you may rely on the opinion letter with respect to the nondiscrimination requirements, including the ADP and ACP tests.

DON’T GET TOO CREATIVE: If you make too many amendments to a standardized or nonstandardized plan, or you make amendments that aren’t allowed, you won’t be able to rely on the vendor’s opinion letter. The IRS will consider your plan to be an individualized plan. It will then be up to you to ensure that your plan remains in compliance by seeking determination letters from the IRS.