Morgan Lewis recently relayed an IRS announcement regarding prototype ESOP plans. In IRS Revenue Procedure 2015-36, the IRS said it will allow prototype and volume submitter employee stock ownership plan (ESOP) documents. The IRS hopes that this will not only reduce its own costs in reviewing plan documents, but also reduce the costs to companies that are considering ESOPs by allowing them to avoid custom-created plan documents.
The Revenue Procedure provides that a pre-approved ESOP cannot be a standardized plan and cannot have a money purchase plan feature. However, it can have a 401(k) feature (i.e., it can be a KSOP). Further, the IRS will not issue approval letters under this new program for ESOPs that hold preferred stock.
The Revenue Procedure states that a pre-approved ESOP must meet all of the requirements of the Internal Revenue Code (IRC) Section 401(a), the requirements set forth in the Defined Contribution Plan Listing of Required Modifications, the requirements set forth in the Employee Stock Ownership Plan Listing of Required Modifications and Information Package (ESOP LRM), the requirements in the Revenue Procedure, and the requirements in the 2014 Cumulative List of Changes in Plan Qualification Requirements (IRS Notice 2014-77, as updated). The ESOP LRM contains samples of plan provisions that satisfy certain requirements of the IRC applicable to ESOPs, and the IRS encourages plan sponsors to use such language as applicable. The IRS will not consider pre-approved ESOP applications until the next defined contribution application period, which begins on February 1, 2017.
As a first step, employers that currently maintain an individually designed ESOP should review their ESOP documents to determine whether to transition to a prototype and volume submitter ESOP document. Those that decide to adopt a pre-approved ESOP will need to complete IRS Form 8905 (Certification of Intent to Adopt a Pre-Approved Plan) before the end of their ESOP’s current five-year remedial amendment cycle. Form 8905 serves as a record of an employer’s intention to transition from an individually designed plan to a pre-approved plan.
Because the possibility of prototype and volume submitter ESOP plan documents is new, and given the unique nature of ESOPs, we anticipate that many issues and questions will arise as employers begin to analyze the costs and benefits of using such documents.
Thank you to our friends at Morgan Lewis for this update.