In the governmental non-ERISA marketplace, there are a number of investment providers and plan recordkeepers that offer and provide retirement plan documents for use by governmental employers that have been “pre-approved” by the IRS. Typically, these plans consist of a basic plan document, about 30 to 50 pages in length, that sets forth “boilerplate” plan language that cannot be modified, along with an adoption agreement containing a number of fill in the blanks and check the box options that are used by the adopting employer to select its plan’s features. When a plan is pre-approved by the IRS, it issues an opinion letter or advisory letter. The IRS letter indicates that the form of the plan has been vetted by the IRS and the IRS has determined that it meets the basic requirements for a tax-qualified plan under Internal Revenue Code section 401(a).
Generally speaking, a governmental employer can complete, execute, adopt and utilize a pre-approved plan without the necessity of obtaining its own favorable determination letter regarding the plan’s tax-qualification from the IRS. However, as with so many things, life is not always that simple. Here are a few cautions and concerns that public agencies that utilize such plans, particularly in California, should be aware of:
- Many pre-approved plans for governmental employers are sent out to public agencies for their completion and use with almost no guidance or instruction as to how they should be completed. Adopting employers need to get appropriate advice and help in filling out the various optional provisions of their plans – the failure to properly complete the proffered forms could lead to serious adverse tax consequences.
- Most public agency retirement plans adopted in California are now subject to the requirements of the Public Employees Pension Reform Act of 2013 (PEPRA). PEPRA requires affected plans to be amended to comply with its provisions. In many cases, PEPRA applies to defined contribution plans, as well as defined benefit plans, maintained by California public agencies. If an agency amends its pre-approved plan to comply with PEPRA it will, most likely, take its plan out of pre-approved status. An agency using pre-approved plans should get advice on the application of PEPRA to its plans and the advisability of getting its own IRS determination letters.
- Some pre-approved plans do not have sufficient flexibility to be used in some cases. For example, most of the pre-approved plans we have reviewed cannot accommodate an employer “matching” contribution made to one plan, which is based on the elective deferrals made under another plan. Also, many pre-approved governmental plans cannot accommodate the sponsor’s desire to provide designated allocations to various employee groups on a basis other than relative compensation. If an agency changes the pre-approved plan to accommodate this desire, it will, most likely, take its plan out of pre-approved status. At that point, it would be advisable for the agency to obtain its own determination letter.
- Some pre-approved plan documents automatically appoint the sponsoring entity as the “trustee” for the plan. In many instances, this will violate the California Financial Code.
- In some cases, the governmental pre-approved plan may be written in a way that confuses the adopting employer about its administrative and fiduciary duties under applicable state law.
- Many pre-approved plans are provided as part of a “bundled” retirement package that includes plan recordkeeping and plan investment services. While there is nothing inherently wrong with such bundled arrangements, it is important for public agencies to understand that they do not necessarily have to use a provider’s plan document in order to gain access to its recordkeeping services or investment options. Most providers will unbundle these services from the plan document at the agency’s request.
In future chapters, we will talk about the process of selecting providers in connection with an agency’s retirement plans and how to evaluate their offerings.