Hopes that cross-tested profit-sharing plans could be used with standardized or prototype documents to make them more affordable and easier for an employer to adopt hinges on new language expected from the IRS.
Cross-tested plans, with their ability to allow bigger contributions to certain groups of employers, are no newcomer to the retirement market, but one that encourages small employers to offer a plan, according to planning professionals. Formerly, they could only be used with individualized or custom documents, which are more expensive and require more administrative maintenance.
The IRS has collected comments and is due to release a “listing of required modifications” (LRM), basically new requirements that retirement plans will have to meet in order to use the standardized Master & Prototype (M&P) Plans, as they are called.
The hope is that the IRS will allow more options for employers to go to a less expensive document with the need to amend the documents less frequently. Some employers now have to amend their forms annually, making offering cross-tested plans with different allocation groupings a somewhat costly administrative burden.
However, the IRS is looking to make changes from a context of compliance, notes Robert Richter, VP, Document Consulting Services for SunGard Corbel in Jacksonville, Florida, who is responsible for drafting these plan documents. The agency is “worried employers will inadvertently select a plan design that requires significant non-discrimination testing,” he says. They could fail to realize that a cross-tested plan has “a non safe harbor plan design that requires some fairly complex non-discrimination testing.”
There is the potential–under whatever new language is released–that 99% of the cross-tested plans aren’t going to fit the plan design allowed in the prototypes, Richter says. Employers are making decisions about what document they will use in 2008 and 2009 under EGTTRA, and these documents and restatements would have to be filed by January 31, 2006, he warned.
Martin Pippins, IRS actuary working on the LRM, says that although there is no time frame for release of the finalized language, “it is a very high priority.”