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ESOP Cycle 3 Pre-approved design plan


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Hi, hoping someone less dense than me can help since I haven't been able to find any straightforward information on my own :)

I'm trying to understand the nuance behind if a individually designed plan ESOP that previously received a determination letter (that has since expired, but it looks like the expiration date has been waived across all IDP's) needs to switch over to the Cycle 3 pre-approved plan design?

I read that employers should consider adopting a pre-approved plan since IDP Esops are no longer being reviewed by the IRS.  However, what would compel an employer to switch over?  e.g., it doesn't seem that there is much enforcement in this area and I'm trying to find laws or rulings that would motivate or otherwise incentivize an employer with an IDP ESOP plan to switch over to a cycle 3 pre-approved plan design.

Hopefully that's somewhat clear.. thanks in advance.

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There is nothing that would compel an employer sponsoring an individually designed ESOP or any other type of qualified plan to adopt a preapproved plan. Since determination letters are no longer being issued for IDP's, the employer might want to switch to a preapproved plan to get the ability to rely upon the advisory or opinion letter resulting from the IRS' review of the volume submitter or prototype plan document. This gives the employer the assurance that the form of the plan satisfies the plan qualification requirements applicable to that type of plan. In light of the IRS' cessation of determination letters for IDPs, some law firms have taken to offering to issue opinion letters that the form of the plan satisfies applicable plan qualification requirements. However, the price for that type of letter is likely going to be very steep, possibly requiring the payment of several thousand dollars. The reason for the steep price is that the law firm is effectively guaranteeing the qualification of the form of the plan.

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To my mind, the Employer has to have some way to update the plan for ongoing law changes and resulting changes in the LRMs.  More, some parts of EPCRS required reliance on a favorable letter, and after the IRS has published a required amendment, the previous letter (even without an expiration date) may not satisfy.

Seems like a pre-approved document would be a no-brainer: relatively inexpensive with great reliance.  I think the better question is "what alternative is better?"  Maintaining the IDP long term likely isn't cost effective.

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  • 2 weeks later...

I'm a huge fan of pre-approved plans, for many reasons, including those stated above. The reliance that QP Guy mentions helps me to sleep at night!! However, I will say that there are some plans out there that have very "unusual" provisions that won't "fit" into a pre-approved plan. Depending upon the importance of those provisions to the sponsoring company, it may be necessary to remain with an IDP.

That said, I would always try to use a pre-approved document if at all possible and reasonable. 

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