Richard Hochman, Managing Director McKay Hochman ...2 Richard Hochman, Managing Director McKay Hochman - DST Retirement Solutions Rich has been involved with employee benefits for

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Plan Document Update Post PPA & 403(b)

Richard Hochman, Managing Director

McKay Hochman - DST Retirement Solutions

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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.

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• 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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• 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.

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• 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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• 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.

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• 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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• 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.

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• 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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• 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.

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• 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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• 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?

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• 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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• 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.

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• 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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• 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.

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• 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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• 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.

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• 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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• 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.

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• 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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• 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.

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• 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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• 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.

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• 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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• 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.

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• 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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• 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.

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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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• 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

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• 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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• 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.

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• 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

submitted.

https://www.irs.gov/pub/irs-pdf/f8950.pdf

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• Form 8951 Compliance Fee – reflecting the 50%

discount.

• Form 14568 Part I Model VCP Submission

Compliance Statement. This form is a model

compliance statement. Use attachments to this form to

explain what the failure was, how it will be corrected,

and what steps will be taken to make certain the error

will not occur again.

• Form 14568-B, Part II , Schedule 2, Nonamender

Failures



https://www.irs.gov/pub/irs-pdf/f14568b.pdf



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• Letter 5265,Acknowledgement Letter. Include a

completed copy of this letter if you would like the IRS

to confirm that we received your application.

• A signed and dated Form 2848 if you want an

attorney or other qualified individual to represent your

organization with regard to this VCP submission.

Include a signed and dated Form 8821 if you want

the IRS to mail copies of any correspondence

regarding this VCP submission to anyone besides

you.

https://www.irs.gov/pub/irs-tege/letter5265.pdf



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• A check made payable to the United States Treasury

for the appropriate fee, plus a photocopy of the check.

Attach both to the Form 8951.

• A signed copy of the EGTRRA plan document (or

adoption agreement, if applicable) and a copy of the

IRS opinion/advisory letter for the plan that you have

adopted.

• A signed copy of your pre-EGTRRA plan document (or

adoption agreement, if applicable) in effect prior to the

EGTRRA restatement and a copy of the IRS

opinion/advisory letter for this older plan document.

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• Completing Form 8950

• Follow the official Instructions as well as the items

below.

• Item 2: If you are completing and signing the form, but

want us to contact a different employee of the plan

sponsor directly for additional information, enter the

appropriate individual’s contact information and

include a completed Form 8821. If a Form 2848 is

included, check the appropriate box and do not enter

any other information for Item 2.

https://www.irs.gov/pub/irs-pdf/i8950.pdf

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• Signature block: The signer must be an owner of the

plan sponsor or an employee authorized to sign

documents on behalf of the plan sponsor. See

Instructions for Form 8950 for more information on

“Who Must Sign”.

• Item 3: Check the box for “VCP regular submission.”

• Item 4: Enter the name of the plan, the three-digit

plan number, the month the plan year ends, and

amount of plan assets

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• Item 5: Check the box associated with the type of

retirement plan.

• Item 6: Check the box for “Yes” and the box for

“Schedule 2.”

• Item 7a: Check the box for “Yes.”

• Item 7b: Check the box for “No.”

• Item 7c: Enter the following in the text box: “Six Year

Cycle for adopters of pre-approved defined

contribution plans.”

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• Explanation for Item 7B on Form 8950 - Create a

document that includes the sponsor’s name, the plan

number and the sponsor’s EIN at the top of the page.

Title the document “Explanation for item 7b on Form

8950.” In the body of the document state: “No

determination letter application is included in this

submission because the plan sponsor is correcting the

reported failure by adopting a pre-approved plan

document with an opinion or advisory letter on which

the plan sponsor has reliance.”

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• Completing Form 2848 or 8821

• Form 2848 - Include a completed and signed Form

2848 with your submission if you want an attorney or

other eligible person to represent you in

communications with the IRS about this VCP

submission. If your submission does not include a

Form 2848, the IRS will contact the individual who

signed Form 8950 or the employee named in Item 2 of

Form 8950 provided you included a completed Form

8821.

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• In the Matters section of Form 2848 (or the Tax

Matters section of Form 8821), enter “Voluntary

Correction Program (Rev. Proc. 2013-12)” under

“Description of Matter.” Enter “8950 and 8951” under

“Tax Form Number,” and enter “N/A” under “Years or

Periods.”

• Remember that only certain individuals are

authorized to represent an employer. The IRS

announced earlier this year a freeze of the ERPA

program.

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• Instructions are also provided for completing Forms

14568 and 14568-B

• Mailing your VCP submission

• First class mail:

Internal Revenue Service

P.O. Box 12192

Covington, KY 41012-0192

• Express mail or private delivery service:


201 West Rivercenter Blvd.

Attn: Extracting Stop 312

Covington, KY 41011

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• What happens next?

• The VCP submission will be reviewed for

completeness. If anything is missing, and your

submission is substantially incomplete the IRS may

return it to you.

• The VCP submission will be assigned to a specialist

for review. If the specialist has any questions

regarding your submission, he or she will contact you

or your authorized representative by mail or phone.

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• Once your submission is approved, the Model

Compliance Statement you submitted (Form 14568

and incorporated attachments) will be signed on

behalf of the IRS and mailed to you. This document is

your VCP compliance statement.

• You can expect to receive your compliance statement

four to six months after you mail your submission to

the IRS. If you haven’t received your compliance

statement after six months, you may call 626-927-

2011 (not a toll-free number) to check on the status of

your submission.

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• Keep your compliance statement and signed plan

document in a safe place. If the IRS later audits your

plan, the compliance statement will show that the

failure you identified was corrected through the

Voluntary Correction Program. A financial institution

holding plan assets may also ask to see a copy of the

compliance statement before it will make requested

distributions.

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• Umbrella Closing Agreement parameters for

Multiple Plan submission:

• Minimum of 20 plans covered by closing agreement.

• $5,000 fee for the first 20 plans plus $250 for each

additional plan. Maximum amount: $50,000 (similar to

the Group Submission fee arrangement under VCP)

Note: When we first announced this program on April

1, 2016, the base fee was $10,000. We reduced that

fee to $5,000 to offer a 50% reduction for the first year

after the April 30, 2016 deadline.

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• The closing agreement should include plans

maintained by eligible participating employers for

whom the service provider can certify that they

have a record of their:

• Consent to participate - affirmative agreement to

participate in the closing agreement program

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• Prior document compliance - adoption of pre-approved

defined contribution plans for the Economic Growth

Tax Relief Reconciliation Act of 2001 (EGTRRA) by

the required deadline stated in Notice 2004-84; or if

late, IRS compliance statements to correct for the late

adoption of EGTRRA documents.

• Correction of the document issue - execution of the

PPA restatement using the service provider’s pre-

approved document

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• Financial institutions or other service providers

that apply and are approved will have until the

later of 120 days from the closing agreement

execution date or May 1, 2017, to:

• provide a final list of employers covered by the closing

agreement

• pay additional fees (if applicable).

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• You can send a letter outlining your proposal to:


TE/GE:EP:VC Group 7554

Request for Voluntary Closing Agreement

9350 Flair Drive, 3rd Floor

El Monte, CA 91731

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• MID-YEAR AMENDMENTS OF 401(k) PLANS

• On January 29th, the IRS issued long awaited

guidance on Mid-year amendments to “safe-

harbor” 401(k) plans (Notice 2016-16).

• The notice significantly increases the number of

instances in which a Safe Harbor (SH) plan may

be amended during the plan year and provides

clarification on what mid-year changes and

amendments remain prohibited.

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• The notice also clarifies when an updated SH

notice is required and the timing for distribution

of that notice.

• Comments are also being sought by the IRS

about how the rules should apply to plans when

the employer has engaged in acquisitions or the

plan has been merged.

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• Mid-year changes to an SH plan are defined as a

change that is effective on a day other than the

first day of the plan year or a change that may be

effective as of the first day of the plan year, but

adopted later in the year.

• The Notice basically allows any amendment

unless it is one the list of prohibited

amendments.

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• Participants must receive appropriate updated

notice of any such amendments. As applicable,

participants must be given a window to modify

their elective deferrals once the notice is

provided.

• Any amendment that changes information

provided in the initial SH notice, requires an

updated notice to be provided.

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• The timing for the updated notice replicates the

timing for the initial notice.

• At least 30 (but not more than 90) days in

advance of the effective date of the amendment.

If notice cannot be given in that timeframe

(because, for instance, the amendment has a

retroactive effective date) the notice must be

provided within 30 days of the date the

amendment is adopted.

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• If the change is not an item detailed in the SH

notice, the supplemental notice is not required.

• Specifically prohibited amendments include:

• A mid year change to the “type” of safe harbor plan

(example references change from “traditional to

QACA”). Question: Is a Match SH to a Non-Elective

SH a different type? Why does it matter?

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• Increasing the number of years required to become

vested for QACA SH contributions;

• Any change reducing the number of employees

currently eligible to receive SH contributions. (It is

permissible to amend the plan to make the eligibility

requirements stricter, but only with regards to

employees who are not yet eligible for the plan.)

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• A mid-year change (i) to modify (or add) a formula

used to determine matching contributions (or the

definition of compensation used to determine

matching contributions) if the change increases the

amount of matching contributions, or (ii) to permit

discretionary matching contributions.

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• However, this prohibition does not apply if, at least 3

months prior to the end of the plan year, the change is

adopted and the updated safe harbor notice and

election opportunity are provided, and if the change is

made retroactively effective for the entire plan year

(which may require a plan that provides for periodic

matching contributions as described in §§ 1.401(k)–

3(c)(4) and (5)(ii) and/or 1.401(m)–3(d)(4) to be

amended to provide for matching contributions based

on the entire plan year)

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• Thus, a plan may only be amended to increase

the employer match or add a discretionary or

fixed matching feature if that amendment is

retroactive to the first day of the plan year and

provides for a matching true-up.

• Remember that ordinarily plans prohibit a true-up

of matching contributions unless the matching

computation period is annual.

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GETTING READY FOR 403(b) RESTATEMENTS

• GETTING READY FOR 403(b)

RESTATEMENTS

• As expressed earlier, it is currently anticipated

that the restatement cycle for 403(b) plans will

likely start May 1, 2017.

• If it is like the other pre-approved programs, the

restatement window will be at lest two years, but

it could possibly be three.

• The documents that employers adopted may not

fully reflect the final regulations.

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• Determine when the employer adopted their

current document. If the document was adopted

on or before 12/31/09, any document defect can

be fixed when the new approved document is

adopted.

• However, if an existing plan was not timely

adopted by the end of 2009, the employer should

submit for relief under the EPCRS program if

they have not already done so.

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• Do not wait for the documents to be approved

before submitting to EPCRS.

• There was no requirement that the plan be

amended for PPA and subsequent legislation.

The new approved documents will contain all

that language. Make sure that the plan operated

in compliance with the laws and the documents

when adopted reflect the actual plan operation.

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• Make sure that the employer has copies of all

their documents so that the provisions can be

mapped over to the final approved plan

document. Understand that the final approved

plan may not provide for all the existing

language. If you have questions contact your

document vendor to address your concerns. It is

possible that your language could be added into

the approved documents.

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• Some plan provisions may have to be

memorialized as prior provisions and will not be

effective once the new plans are adopted. Thus,

you may want to prioritize which employers are

being amended early on in the cycle and which

you are holding back for later in the adoption

window.

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Questions