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July 5, 2017

The Clock is Ticking On ESOP Pre-Approved Plan Submissions

In an attempt to promote its stated objective of increasing the availability of pre-approved plans to small and mid-size employers, the Internal Revenue Service (“IRS”), in Revenue Procedure 2015-36, expanded its pre-approved plan program to employee stock ownership plans (“ESOPs”).  The IRS began accepting submissions for pre-approved ESOP plans on February 1, 2017.  The submission period closes on January 31, 2018.  The IRS has released sample plan language to assist drafters in preparing their submissions.

Prior to 2017, employers who sponsored individually designed employee benefit plans (including ESOPs) could apply to the IRS for favorable determination letters.  If granted, employers could rely on the determination letter as proof that the plan was drafted in a manner that complied with applicable federal law.  Determination letters were valid for a limited period of time and employers could periodically reapply for an updated determination letter.  In 2017, however, the IRS changed its procedures for issuing determination letters and will no longer accept periodic applications for updated determination letters.

The IRS will, however, continue to accept period applications for updated opinion and advisory letters for pre-approved employee benefit plans.  Employers may rely on opinion and advisory letters in the same manner that they relied on determination letters.  As a result, going forward, employers who currently sponsor an individually designed ESOP or who are considering sponsoring an ESOP in the future should consider whether a pre-approved ESOP is appropriate for their needs.  It is expected that employers will be able to adopt pre-approved ESOP plan documents beginning in 2020.


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