Problem #1 (cont): Type of Plan Document

Failure to keep a 401(k) plan document up-to-date is the first common mistake in the IRS 401(k) Fix-It Guide.  To keep a 401(k) plan document up-to-date, it is often helpful to know what type of plan document the employer has.  Plan documents fall into two broad categories:  pre-approved documents and individually designed documents.

  • A pre-approved document is a document where the plan document sponsor has filed in advance with the IRS to get advance approval for the plan language. The IRS issues an opinion letter to the plan document sponsor, and generally the employer may rely on the plan document sponsor’s opinion letter.  The IRS will only grant pre-approval for certain types of plan language.  In the past, pre-approved plans often only had limited options, but today the IRS will pre-approve most common features, so there are very robust pre-approved plan documents available.  There are two general categories of pre-approved plan documents: prototype documents and volume submitter documents.
  • An individually designed document is a plan document which has not been pre-approved by the IRS.  Most individually designed documents are prepared by ERISA attorneys to accommodate plan language or plan types that cannot be handled on a pre-approved document.  For example, the IRS does not pre-approve plan language for ESOPs or cash balance plans.  These plans always need an individually designed document.  Individually designed documents do not have the benefit of relying on a plan document sponsor’s opinion letter, so employers who use individually designed documents commonly apply for IRS determination letters.

Knowing the plan document type is important for two reasons:

  • First, pre-approved plans are generally restated every six years according to deadlines that apply for all pre-approved plans.  The last restatement deadline for pre-approved 401(k) plans was April 30, 2010.  Individually designed plans are required to be restated every five years based on the plan’s cycle.  A plan’s cycle generally depends on the last digit of employer’s employer identification number.  So, knowing the type of plan document is necessary to determine the plan’s restatement deadlines.
  • Second, pre-approved plan document sponsors may sometimes adopt IRS-required amendments on behalf of employers.  So, it may not be necessary for an employer to sign every single interim amendment.  However, employers using individually designed plan documents must adopt every single amendment.

Read more articles in this series:

IRS Resources for Your 401(k) Plan