The sponsor of a
tax-qualified retirement plan and the plan’s fiduciaries have a
number of obligations once a plan is established. Many of these
obligations relate to the day-to-day operation of a plan. However,
plan document maintenance issues are sometimes overlooked.
This newsletter will summarize some of these issues and describe
the consequences of not timely amending plan documents. It will also
summarize the new IRS determination letter process.
Written Plan Document Requirement
Tax-qualified retirement plans are governed by the Employee
Retirement Income Security Act of 1974 ("ERISA"). All ERISA-governed
plans must be documented in a written plan document.
The IRS has the primary responsibility for the review of the
terms and conditions of a tax-qualified plan. The IRS reviews the
plan document when a determination letter is requested or during a
plan audit.
Plan documents can take various forms including individually
designed, volume submitter and prototype plans which are described
below.
Individually Designed Plans
This type of plan document is custom designed to meet the
employer’s specific needs. The employer has the greatest variety of
available options with this type of plan.
Volume Submitter Plans
Volume submitter plans generally look like individually designed
plans, but the IRS has pre-approved much of the document language
since it is expected they will see a large volume of these plans
utilizing the document options.
Prototype Plans
Prototype plans are pre-approved by the IRS and come with two
types of adoption agreements: standardized and non-standardized.
Standardized adoption agreements have very limited choices which
prevent the plan sponsor from designing a plan that will not satisfy
discrimination tests.
Non-standardized plans offer additional flexibility to exclude
certain forms of compensation for allocation purposes or exclude
certain employees from the plan or contribution eligibility.
Plan provisions usually take the form of a fill-in-the-blank
adoption agreement. The selection of available options varies by
sponsor of the prototype document. These documents are generally
sponsored by companies such as retirement consulting firms,
brokerage firms, banks, insurance companies and mutual funds.
Determination Letter Applications
A first way that the IRS may wind up reviewing a plan document is
when a determination letter application is submitted. A plan is
voluntarily submitted to the IRS for a determination that its terms
and conditions satisfy all applicable IRS tax-qualification
requirements.
Plan sponsors are not required to submit pension, 401(k), money
purchase or other tax-qualified plans for IRS approval. If, however,
a plan sponsor does not submit a plan and the IRS later determines
that the plan does not satisfy a legal requirement, the plan may be
"disqualified" with negative tax consequences for the plan’s
participants.
When a determination letter request is submitted, the IRS reviews
the submitted plan against a checklist of legally-required
provisions derived from the Internal Revenue Code and related
regulations. If the IRS concludes that the plan satisfies these
requirements, the plan will be issued a favorable determination
letter.
If the IRS concludes that the plan does not satisfy these
requirements or has questions about plan terms and when they were
adopted, it will contact the person submitting the determination
letter request for more information.
The Internal Revenue Code and related IRS guidance allows a plan
sponsor to adopt retroactive plan amendments in certain limited
circumstances. If a retroactive amendment is not permitted, the IRS
may refer a determination letter application to its employee plans
correction program which will trigger additional IRS fees.
Recent IRS Update of Determination Letter
Process
The IRS recently issued guidance (Revenue Procedure 2005-66)
updating the rules governing the determination letter process.
Although a plan sponsor may submit a determination letter
application at any time, the IRS has historically been faced with
periodic waves of determination letter applications. These waves
have generally occurred at the end of an applicable "remedial
amendment period." A remedial amendment period is a period of time
during which a plan sponsor may amend a plan retroactively to comply
with changes in applicable law.
The result of these waves was that the IRS often found itself
needing to adjust its staff (including using audit staff) to review
determination letter applications. The new determination letter
application process attempts to smooth these waves.
Impact on Volume Submitter and Prototype
Plans
The IRS has historically required that pre-approved plan
documents, such as volume submitter and prototype plans, be amended
from time-to-time to comply with applicable legal changes. If a
pre-approved plan satisfies applicable IRS requirements, an opinion
letter is issued to the sponsor of a pre-approved plan. Many
individual plan sponsors rely on this opinion letter rather than
submitting a request for their own determination letter.
Under the new determination letter process, pre-approved plans
must be submitted once every six years for a new opinion letter. The
timing of this six-year cycle depends on the type of plan
involved--the cycle will differ for defined contribution and defined
benefit plans.
When the review of a cycle of pre-approved plans (which is
anticipated to last two years) has neared completion, the IRS will
publish an announcement stating a uniform date by which all
employers using a pre-approved plan must adopt the newly approved
plans. It is expected that this date will give virtually all plan
sponsors adopting a pre-approved plan a two-year window in which to
adopt the updated plan and, if necessary, submit the plan for its
own determination letter.
Impact on Individually Designed Plans
Under the new determination letter process, individually designed
plans have a five-year remedial amendment period that, in most
cases, is based on the last digit of a plan sponsor’s federal
employer identification number.
A plan sponsor may apply for an updated determination letter
during the last twelve months of its five-year filing cycle. In
general, a plan sponsor may submit either a restatement or a working
copy that incorporates all amendments. The sponsor’s favorable
determination letter will include an expiration date, so the sponsor
will need to refile if it wants to preserve reliance.
Interim Amendments
Changes to a plan document, either due to Internal Revenue Code
tax-qualification requirements or because of a discretionary plan
design change, must be reflected in a timely adopted good-faith
"interim" amendment. An interim amendment addressing a disqualifying
plan provision will be treated as timely adopted if the plan
amendment is adopted by the due date (including extensions) of the
employer’s tax return for the year in which the change is first
effective. However, any discretionary change must be adopted by the
end of the plan year in which the plan amendment is effective
(unless earlier adoption is necessary to prevent a cutback under
applicable IRS guidance).
Plans must always be operated in compliance with a new or changed
tax-qualification requirement as of its effective date regardless of
when an amendment is adopted.
Plan Audits
A second way that the IRS may wind up reviewing a plan document
is when the IRS conducts an audit of a plan. The IRS, as part of its
enforcement activities, may request the plan document and other
information about the plan.
Although these activities have been relatively infrequent in
recent years, the IRS has recently begun renewed enforcement
activities. As part of its renewed efforts, the IRS is working to
streamline the audit process to avoid "open ended" audits that
consume significant amounts of time. Instead, many IRS auditors are
likely to initially focus on a few core areas of concern when
conducting an audit.
Of course certain audits, such as the IRS’s new Employee Plans
Team Audit program for large employers, may be far more
comprehensive.
Timely plan amendments are key to avoiding problems when a plan
is audited. Although the IRS may also focus on operational
activities, a clear plan document helps to streamline the audit
process. Plan sponsors who fail to timely adopt plan amendments to
comply with law changes may utilize the IRS’s Voluntary Correction
Program ("VCP"), as long as the plan is not under examination by the
IRS. Reduced filing fees apply if the VCP filing is within one year
of the missed deadline.
If the IRS finds that a plan has not been timely amended during
an audit, a plan and plan sponsor may be subject to significant IRS
closing agreement fees and, in the worst case, a plan may lose its
tax-qualified status.
Summary Plan Description and Summary of
Material Modification
A summary plan description ("SPD") generally describes the
material terms of a plan, including all contribution rules,
distribution rules, fees and other participant rights under the plan
in a manner designed to be understood by an average plan
participant.
An updated summary plan description must be provided once every
ten years if there have been no plan amendments and every five years
if plan amendments have been adopted. A plan administrator must
provide a summary plan description to a participant or beneficiary
within 90 days of becoming a participant or becoming eligible to
receive benefits from a plan. Also, unless a new SPD is provided
each time an amendment is adopted, a plan administrator must provide
a summary of the amendment in a summary of material modifications to
participants and beneficiaries within 210 days after the close of a
plan year in which an amendment is adopted.
Conclusion
There are a number of ongoing plan document maintenance
activities that are easily overlooked by plan sponsors and
fiduciaries. Pre-approved and individually designed plan sponsors
should keep in mind the need to timely amend their plan for
discretionary and Internal Revenue Code-mandated changes and be
aware of the new remedial amendment periods.
Complying with IRS requirements involve a commitment of time and
effort. However, taking steps to comply with these requirements now
can help to prevent the need for more time consuming and costly
efforts to achieve after-the-fact compliance at a later date.
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