The Improper Use of Governmental “Pre-Approved” Plans

by | Sep 16, 2019 | Plan Administration, Plan Qualification

By Jeff Chang

There continues to be new, complicated problems arising from the improper completion and use of off-the-shelf governmental pre-approval plans.

Generally, a pre-approved plan from the document provider is reviewed and pre-approved by the IRS for its general use and form. Many of these plans have a lengthy adoption agreement (a check-the-box and/or fill-in-the-blanks component) that is not always easy to understand.

It is critically important for local governments and public agencies that use such plans to understand that the document provider (your recordkeeper and investment provider) does not always review and confirm that your operation or administration of the plan (as completed in the adoption agreement) complies with applicable federal and local law. Many local agencies incorrectly assume that, because they are using a pre-approved plan document, nothing can go wrong with it.

In addition to the few things mentioned in our earlier blog post, here are a few more things that we see “go wrong” with these plans:

  • Because these documents are drafted for a nation-wide governmental audience, they contain features that may be proper in several states, but not allowed in other states. This is the case of the “auto-enrollment feature” that we see in many of these plans. Our earlier blog post on auto-enrollment in California non-ERISA plans explains why it may not be appropriate to use this feature in many public agency plans.
  • A significant number of cities are using the “401(a) Opt-in” feature, which we also previously discussed, in an improper fashion. In some cases, these options are provided to employees who are promoted to a management position mid-career. This does not work. In other cases, employees are being allowed to electively convert unused leave into pre-tax 401(a) contributions upon termination of employment. This also does not work.
  • In more than one case, the document provider has allowed or enabled an employer to adopt a type of plan for which it is not even eligible (e.g., a special district adopting a 403(b) plan).

These problems usually can be fixed.  In many cases, however, that will require the time and expense of preparing and submitting a voluntary compliance program application (i.e., 9–12 months). There is another, much easier, solution.

Take the time and spend the money (a much smaller amount) to have your new plan document — and the various features you plan to adopt — carefully reviewed by an appropriate employee benefits attorney.

Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at or (916) 329-3685.

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