With the IRS deadline of April 30, 2012 fast approaching to restate GUST defined benefit plans onto EGTRRA pre-approved prototype and volume submitter plan documents, I’ve heard a lot of discussion about how the IRS will not pre-approve 412(i) plan documents for use as prototypes or volume submitters. (412(i) plans are also referred to as 412(e) plans or 412(e)(3) plans due to the Pension Protection Act of 2006 renumbering 412(i) to 412(e)(3)). Some of my colleagues are so passionate about this topic that they will not entertain the notion that sections 6.03 and 16.02 of Rev. Proc. 2005-16, which contains the types of plans the IRS will not pre-approve as prototypes or volume submitters, does not include all 412(i) plans.
In fact, it states just the opposite. Section 6.03(16) of Rev. Proc. 2005-16 says the IRS will not issue EGTRRA opinion letters for “Fully-insured section 412(i) plans, other than plans that, by their terms, satisfy the safe harbor for section 412(i) plans in section 1.401(a)(4)-3(b)(5)”.
Section 16.02(15) contains identical language applicable to advisory letters issued to volume submitter plan documents.
The Defined Benefit List of Required Modifications (DB LRMs), which the IRS issued in June of 2007 to help plan document providers write their EGTRRA ndefined benefit prototype plan documents, includes a number of sections containing suggested language for 412(i) plan documents. DB LRM 31 explains what provisions a pre-approved 412(i) prototype plan document should contain before the IRS will consider issuing an opinion letter to that plan document, pre-approving it for use as a prototype plan document. It says:
“Because of the potential for discrimination, fully-insured section 412(i) plans in the Master and Prototype program must satisfy the safe harbor for section 412(i) plans contained in section 1.401(a)(4)-3(b)(5) of the regulations. In general, to be eligible for this safe harbor, a section 412(i) plan must:
1. satisfy the accrual rule of Code section 411(b)(1)(F) (see LRM 32);
2. constitute an insurance contract plan within the meaning of Code section 412(i) (see LRM 32);
3. incorporate the section 412(i) fresh-start rule in LRM #23 and the definition of frozen projected benefit in LRM 32.
4. contain a benefit formula that would satisfy the requirements of either Regulations section 1.401(a)(4)- 3 (b) (4) (i) (C) (1) (safe harbor for unit credit plans using fractional accrual rule) or (C) (2) (safe harbor for flat benefit plans) if the participant’s stated normal retirement benefit accrued ratably over each employee’s period of plan participation through normal retirement age.
5. provide that the scheduled premium payments under an individual or group insurance contract used to fund an employee’s normal retirement benefit are level annual payments to normal retirement age (see LRM 32);
Provide that the premium payments for an employee who continues benefiting after normal retirement age are equal to the amount necessary to fund additional benefits that accrued under the plan’s benefit formula for the plan year (see LRM 32);
6. apply experience gains, dividends, forfeitures, and similar items solely to reduce future premiums (see LRM 87) ;
7. provide that all benefits are funded through contracts of the same series which, among other requirements, must have cash values based on the same terms (including interest and mortality assumptions) and the same conversion rights. A plan does not fail to satisfy this requirement, however, if any prospective change in the contract series or insurer applies on the same terms to all employees in the plan (see LRM 32); and
8. provide that if permitted disparity is taken into account, the normal retirement benefit formula satisfies the requirements of section 1.401(l)-3 of the regulations, and the 0.75-percent maximum excess or offset allowance is reduced by multiplying the factor by an additional 0.80 (see LRM 27D).)”
The IRS then provides suggested sample language in several sections of the 2007 DB LRMs designed to meet these requirements.