Would you bet millions of dollars on your ability to accurately
predict how the IRS will interpret the tax code? That's what a
plan sponsor that adopts a plan that isn't approved by the IRS
does. Even though they are not legally required to obtain
determination letters, virtually all plan sponsors with their own
plan documents apply regularly for favorable determination letters
approving their plan language.
The Internal Revenue Service has just
announced that it is not only discontinuing its requirement
that individually-designed plans seeking approval be reviewed for
new determination letters every five years, but it will no longer
review these plans except on adoption and termination. The excuse
given is lack of manpower and resources, but the decision leaves
adopters of individually-designed plans in a quandary.
How are they to make sure that their plans are in
compliance, given the seemingly ever-changing statutory and
regulatory requirements and the serious consequences, up to
retroactive disqualification, for failure to do it
Here are some suggestions for plan sponsors and the IRS to
If you are a plan sponsor:
Could you move to a
pre-approved plan? The IRS will continue to approve the
language in prototype and volume submitter plans used by vendors
such as Fidelity and Vanguard and some banks and law firms. This
would simplify life, but at the cost of sacrificing flexibility.
Most of these plans have limited ability to accommodate custom
provisions, or provisions designed to protect plan fiduciaries,
such as contractual statutes of limitations for participant
lawsuits or plan governance delegations.
Encourage your law firm to
develop a volume submitter plan. Plans are legal documents
that are best drafted by lawyers, and these might accommodate more
flexible legally-recommended options than vendor pre-approved
documents. Large vendor documents often seem to be drafted to make
life simpler for the vendors. However, your law firm will need a
minimum number of adopters to do this.
If you keep your own
document, consider getting legal qualification opinions from your
employee benefits counsel on a regular basis. These will
be particularly helpful in audits and litigation, but may also be
sought by buyers in acquisition transactions.
If you keep your own
document, consider adopting model and sample amendments issued by
the IRS, which are "safe harbors" with language intended
to automatically satisfy the legal requirements. Note,
however, that these also will limit flexibility and may not work
without modification if there are unusual or complicated plan
If you keep your own document, make
sure to hire the most competent drafters. The consequences of
drafting mistakes will get much more serious and expensive.
The IRS should consider the following changes to preserve
Modify its rule that a document
defect found on audit goes automatically into the closing agreement
program, and is not eligible for the less expensive voluntary
correction program (VCP) penalties.
Modify its long-criticized rule that
interim and discretionary amendments must be adopted by the end of
the year in which they are effective or the plan sponsor's tax
return deadline for that year. There should be reasonable extended
remedial amendment periods for adopting amendments to reflect
changes in the law. (That would also limit the frequency with which
qualification opinions might have to be obtained from
Approve major modifications to a
plan, such as conversion to another type of plan as if a new plan
had been adopted at the effective date of the change.
Issue more model and sample language
and add choices, similar to the way that adoption agreements can be
used for different choices.
The basic decision made by the IRS seems to be set in stone.
However, it will be a blow to the private pension system if these
changes make individually-designed plans too risky to maintain.
Defined benefit plans, in particular, are already being
discouraged by overly complex regulation and ever increasing PBGC
premiums. Since individually-designed plans have long been a way to
customize provisions to meet an employer's own business needs,
the IRS should make special efforts such as those suggested above
to keep them alive.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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