• Skip to primary navigation
  • Skip to main content
  • Skip to footer
Employee Benefits Law Group

Employee Benefits Law Group

Guidance. More than just Legal Advice.

  • What We Do
    • ESOPs
    • Mergers & Acquisitions
    • Retirement Plans
    • Equity & Executive Compensation
    • Health & Welfare Plans
  • Our Team
  • Resources
  • Contact
Employee Benefits Law Group
Home > Resources > ESOP > Finally! Pre-approved ESOP Plan Documents to Make Your Life Easier

Finally! Pre-approved ESOP Plan Documents to Make Your Life Easier

September 23, 2020 by Kevin Long

Historically, ESOPs were custom written documents produced by lawyers, which had to be submitted to the Internal Revenue Service for approval. These documents could be costly to amend and maintain. With the arrival this summer of IRS pre-approved “checklist driven” ESOP documents (similar to 401(k) plans), it is no longer necessary for individual employers to submit these plans to the IRS for approval. As an added bit of flexibility, the due date to decide whether to adopt an ESOP is extended, giving more flexibility for tax deductions.

What’s Changing?

Until this year, all ESOP plan documents were individually designed and drafted and had to be submitted to the IRS for individual determination letters. The IRS has now authorized pre-approved ESOP plan documents (PAPs). These documents are developed by ESOP law firms and submitted to the IRS by the law firm, in advance, as a “standard” plan for use by clients. The documents come with a determination letter that is good for any company that adopts a version of the plan without significant modifications. With the PAP, adopting employers may rely on the document as approved by the IRS eliminating the sometimes lengthy and annoying IRS determination letter process where individual IRS agents review the plan documents one at a time by hand.

Because ESOPs tend to be amended more frequently than other retirement plans, amendments were another issue. Updated provisions and ESOP design changes were often costly to draft, dangled off the main plan document, and were not covered by the plan’s existing determination letter. Between IRS determination letter filing cycles, amendments were subject to challenge by the IRS if the ESOP was audited. Amendments would eventually get approved through the five year IRS determination letter cycle. ESOP companies using PAPs can simply amend their plan documents by selecting new or different provisions on the design checklists that are part of the PAP document system. Each time an ESOP is amended, you will get a clean, completely integrated, and IRS-approved document without going back through the IRS approval process.

Is It Time to Restate Your ESOP?

Should you restate your ESOP to a new pre-approved plan if you already have an IRS determination letter for your current document? The pre-approved plan gives you a plan document that updates itself going forward—just like most 401(k) plans. The pre-approved plan sponsor (the ESOP law firm that created the plan) provides “clip-on” amendments if there are any required law changes. The amendments are provided to all companies that have adopted the PAP. Every six years the PAP sponsor (not the employer) submits the pre-approved document for updated approval by the IRS. This results in a much more efficient and cost-effective process for companies that sponsor ESOPs.

The process of moving to a pre-approved plan document puts ESOP companies through a checklist analysis system, reviewing how the plan is operated. Going through this process helps to eliminate any divots or differences in their individually designed ESOP documents that may have crept in over the years. It is also a chance to reevaluate the plan design if a comprehensive review has not been done lately with opportunities to improve the ESOP that may be new or may not have been considered previously. For some general comments to keep in mind about ESOP plan design, read this article.

Pre-approved documents also include an updated SPD, so that requirement will not be overlooked. SPDs do not require IRS approval and companies can choose to customize or use their own communications pieces if desired.

Talk to your ESOP attorneys to see if this is an option they offer and, if not, consider talking to a firm that does offer pre-approved ESOP documents.

Filed Under: ESOP

About Kevin Long

Kevin has personally worked on every one of our 400 ESOP cases. Designing new ESOPs or assuring sustainability for existing ESOPs, he guides companies to achieve goals with their benefit plans in a tax-advantaged manner while incentivizing their employees to greater productivity.
Learn More About Kevin

EDITOR’S NOTE: We did the best we could to make sure the information and advice in this article were current as of the date of posting to the web site. Because the laws and the government’s rules are changing all the time, you should check with us if you are unsure whether this material is still current. Of course, none of our articles are meant to serve as specific legal advice to you. If you would like that, please call us at (916) 357-5660.

Recent ESOP Posts

Selling an ESOP Company

The Top 5 “Speed Bumps” When Terminating an ESOP

What Can an ESOP Invest in Other Than Company Stock?

Don’t Miss Out! Subscribe

We cover all things employee benefits law.

Privacy Policy

We never share your info.

Let’s Start a Conversation

Have questions about your current benefit plan? Want to know what your benefit plan options are? Whatever your need, we’re here to help. Fill out a hassle-free request form, and one of our team members will follow up to get you on the path to success.

Get In Touch

Footer

Our experienced team guides you in all aspects of ESOPs, M&A due diligence, retirement plans, equity / compensation, and health and welfare benefits.
Sacramento Office
916-357-5660
11231 Gold Express Dr.
Suite 108
Gold River, CA 95670
San Jose Office
408-467-3860
2033 Gateway Place
Suite 500
San Jose, CA 95110
Phoenix Office
2550 W. Union Hills Dr.
Phoenix, AZ 85027
Los Angeles Office
310-571-8896
10880 Wilshire Blvd
Suite 1101
Los Angeles, CA
90024
San Diego Office
916-357-5660
550 West B Street
San Diego, CA 92101
  • LinkedIn
  • Email

Copyright © 2025 Employee Benefits Law Group · Privacy Policy · Site Design by Delos Incorporated