If an employer revises a prototype to specify an investment alternative, is it still okay to rely on the prototype’s opinion letter?

[Peter Gulia]

A hypothetical employer is content to use its recordkeeper’s “pre-approved” prototype plan with one revision: The employer adds a provision mandating that, in addition to other investment alternatives that the plan administrator selects in its discretion, each of six mutual funds (specified by name) is a designated investment alternative that no plan fiduciary has power to remove (except to the extent that ERISA § 404(a)(1) requires the fiduciary to disobey the plan’s terms).

The employer wonders whether this one revision, which doesn’t seem to affect any § 401(a) qualification requirement, results in losing reliance on the prototype’s opinion letter.

Revenue Procedure 2005-16 includes the following provisions:

[19.02] Nonstandardized M&P Plans and Volume Submitter Plans — An employer adopting a nonstandardized M&P … plan may rely on that plan’s opinion … letter as described below if the employer’s plan is identical to an approved M&P … plan with a currently valid favorable opinion letter, the employer has chosen only options permitted under the terms of the approved plan, and the employer has followed the terms of the plan. Also see section 19.03(3) below. These employers can forego filing Form 5307 and rely on the plan’s favorable opinion … letter with respect to the qualification requirements, except as provided in [other conditions not relevant to this query].

[19.03(3)] An adopting employer can rely on an opinion … letter only if the requirements of this section 19 are met, and the employer’s plan is identical to an approved M&P … plan with a currently valid favorable opinion … letter; that is, the employer has not added any terms to the approved M&P … plan and has not modified or deleted any terms of the plan other than choosing options permitted under the plan or, in the case of an M&P plan, amended the document as permitted under section … 5.09[.]

[5.09] Adopting Employer Modification of Trust or Custodial Account Document — An employer that adopts a nonstandardized M&P plan will not be considered to have an individually designed plan merely because the employer amends administrative provisions of the trust or custodial account document (such as provisions relating to investments and the duties of trustees), provided the amended provisions are not in conflict with any other provision of the plan and do not cause the plan to fail to qualify under § 401(a). For this purpose, an amendment includes modification of the language of the trust or custodial account document and the addition of overriding language.

What do the experts think, may the employer still rely on the prototype’s opinion letter? Or should the employer submit Form 5307?

[Kevin C]

It would need to be submitted for a determination letter. 19.03(4) has more information on what kind of amendments can be made without having the plan no longer be considered identical to the pre-approved plan. I think the change they want to make would clearly be a change to the specimen language, so they would not have reliance on the opinion letter.

19.03(4) An employer's plan will not fail to be identical to an approved M&P or specimen plan merely because the employer modifies or amends the plan to:

(a) Add or change a provision and/or to specify or change the effective date of a provision, provided the employer is permitted to make the modification or amendment under the terms of the approved M&P or specimen plan as well as under §401(a), and, except for the effective date, the provision is identical to a provision in the approved plan. Thus, an employer is not required to restate its M&P or volume submitter plan in order to change options under the plan or to specify different effective dates. Also see section 5.02, which limits an employer's ability to amend an M&P plan without causing the plan to be treated as an individually designed plan, and section 5.11, which requires the employer to complete a new signature page when the employer changes options in an M&P adoption agreement.

(b) Correct obvious and unambiguous typographical errors and/or crossreferences that merely correct a reference but that do not in any way change the original intended meaning of the provisions. No such changes may affect any qualification requirements of the plan. The Service in its discretion may determine that any such changes are not considered identical.

© Adopt model, sample or other required good faith amendments that specifically provide that their adoption by an adopter of a VS and or M&P plan will not cause the plan to be treated as an individually designed plan or cause the plan to fail to be "identical" to the approved M&P or specimen plan within the meaning of this section.

(5) An adopting employer cannot rely on an opinion or advisory letter if the adopting employer has modified the terms of the plan's approved trust in a manner that would cause the plan to fail to be qualified.

[Guest Eric A]

For what it's worth, we've made similar modifications to our VS document and relied upon sections 19.03 and 14.04 of 2005-16 in concluding that we still had advisory letter reliance. In my opinion, the amendment you propose fits right into the "relating to investments and duties of trustees" exception under section 5.09. That's my two cents.

[Peanut Butter Man]

The rules for making a minor modification to a pre-approved volume submitter plan are very different than the rules for making a change to a pre-approved prototype plan. When it comes to changing pre-approved language, volume submitters and prototypes are as different as apples and oranges.

In my opinion, if you are relying on 5.09, I would file a determination letter application identifying the modification from the pre-approved language and let the IRS bless it.

[Guest Eric A]

"The rules for making a minor modification to a pre-approved volume submitter plan are very different than the rules for making a change to a pre-approved prototype plan. When it comes to changing pre-approved language, volume submitters and prototypes are as different as apples and oranges."

As a general matter that's true. However, section 5.09 of 2005-16 (which applies to prototypes) states: No IDP if the amendment relates to investments and the duties of the trustees.

[Peter Gulia]

Kevin C, Eric A, and Peanut Butter Man, thank you for your good help.