Introduction
The §415 final regulations require a plan amendment. Based on the way we drafted our documents we don't see any §411 cutback problems and so the earliest need for an amendment is 6/30/2008. We are actually trying to work things so that in most cases the EGTRRA amendment and restatement may be done simultaneously with §415 rather than having to do them separately and possibly having to add §415 amendments to both the GUST and EGTRRA documents. Our amendment will be issued shortly. Below is the full story.

Background to Remedial Amendment Period Cycles
When the IRS first proposed the staggered amendment cycle for EGTRRA restatements, there were discussions with the practitioner community about on-going plan compliance.  The IRS was proposing that instead of all plans being submitted at one time, burying their staff with hundreds of thousands of plans to be reviewed; the submission process for employer plans would more closely align itself to a “driver’s license” approach.  Plans would be approved at a set time and then would be re-submitted every set period of years.  The chosen period was five years.  Accordingly, so-called “Cycle A plans” would be submitted in the 2006 submission cycle (February 2006 – January 2007) and then re-submitted again in the 2011 cycle and the 2016 cycle and so on.  To assist in determining what provisions would be included in any particular amendment cycle, the IRS created the “Cumulative List” concept.  Plans being submitted in a particular cycle would need to contain all the provisions enumerated on the Cumulative List issued just before the opening of the particular cycle.  Thus, Cycle A plans had to include all the provisions enumerated on the 2005 Cumulative List, which was issued just before the opening of Cycle A.  The cumulative lists are updated annually to reflect the provisions that need to be incorporated into the next cycle’s documents.  Pre-approved plans are on a different six-year cycle, because the annual amendment process was not workable for the vendors and adopters of those plans.

Plan Amendment Background
Fortunately or unfortunately, depending on your viewpoint, the retirement plan field is undergoing constant change, be it the Internal Revenue Code, ERISA provisions, Regulations or the interpretation thereof.  As a result the issue came up, how do we handle amendments between the scheduled restatements and submissions?  Some might remember that during the 1990s, there were numerous law changes that later became known by the acronym “GUST”.  The GUST amendment process did not start until 2000.  How were amendments handled in the interim?  Plans were basically operated in “good-faith” compliance with the then prevailing laws and regulations and were only later updated to actually reflect their operation and the required language.  While the practitioner community thought that this was a workable process, the IRS took the position that this left too much room for non-compliance.  Additionally, while plans operated in accordance with the then existing rules and regulations, they were not being operated in accordance with their terms.  This was problematic for IRS.  Though the practitioner community generally opposed it, the IRS proposed the use of annual amendments for interim compliance.  In fact, many of the practitioners involved in the discussions with the IRS about the new restatement and submission process thought that the concept of annual amendments was addressed and would not be used.  Surprise!! 

Deadline for Interim versus Discretionary Amendments
In December 2006, the IRS released its list of “Interim Amendments” required for the 2006 plan year.  Of course, by the time the guidance was issued, it was very difficult for document sponsors to get the necessary amendments out to all the adopting employers in a timely and efficient manner.  Responding to industry complaints, the IRS revised its Cumulative List process in Revenue Procedure 2007-44 to speed up the release of the list.  Additionally, it agreed, as best it could, to speed up the release of the list of required and discretionary amendments.  As part of the process, amendments that were previously considered “required” to maintain a plan’s qualified status were now being called “interim.”  Thus, when the IRS released the 2007 list in August, amendments were broken down into two categories, “interim” and discretionary. 

Revenue Procedure 2007-44 gave us different deadlines for when interim and discretionary amendments needed to be completed.  As a general rule, discretionary amendments must be executed by the end of the plan year during which the provisions are implemented.  Interim amendments need not be executed until the due date for filing tax returns, including extensions, for the tax year during which the change was implemented, if that date is later than the end of the plan year. Of course, special rules might apply for some amendment deadlines, as they do for the amendments under the Pension Protection Act of 2006.

Final §415 Regulations and Amendment Timing
One of the most confusing issues currently facing the industry is that of the Code §415 amendment.  The IRS issued the proposed §415 regulations in May 2005. One of the key changes related to the issue of post-severance compensation and its inclusion in the §415(c) definition of Compensation.  The final regulations were issued in April 2007 and are effective for limitation years beginning July 1, 2007 and later.  Because of the timing of the release of the Final Regulations, providers of pre-approved (prototype and volume submitter) defined contribution plans were not able to include the 415 changes into the EGTRRA documents that are currently in the approval process and that employers will start to adopt in the later part of 2008. 

The §415 changes will have to be done by separate amendment even if executed simultaneously with the EGTRRA restatement.  In fact, depending on timing, the §415 amendment may need to be attached to both the employer’s GUST and EGTRRA documents.  (Obviously, the language will be included in the EGTRRA pre-approved defined benefit plans that are currently being drafted and which will be submitted before the end of January 2008.  However, since those plans will likely not be utilized until 2010 at the earliest, §415 amendments will be required for the GUST DB documents.)  For plans with calendar year, plan year and tax year, the amendment theoretically does not have to be executed until sometime in 2009.  However, the amendment may need to be executed earlier if there is a possibility of a Code §411(d)(6) cutback.

Qualified Plan Definition of Compensation
In order to address the 415 amendment deadline it becomes necessary to address some issues about the use of compensation in qualified retirement plans.  The first issue is that many plans use different definitions of compensation for different purposes.  Plans may use different compensation definitions for allocation purposes, discrimination testing under Code §§401(k) and (m) and 401(a)(4) as well as determining who is a key employee or highly compensated, whether someone has exceeded the annual additions limit and how much a participant might need to receive as a top-heavy minimum.  If that isn’t confusing enough, the regulations under Code §415 allow the use of alternative definitions of compensation such as Code §§3401(a) and 6041/6051 for certain purposes. 

For example, when working with standardized prototypes, we are required to use a total definition of compensation that satisfies the requirements of Code §414(s).  However, we are then told that the Code §§3401(a), 6041/6051 and §415 definitions all satisfy this requirement.  When discussing elective deferrals, we are told that the amount of compensation we defer against need not satisfy Code §414(s), however when the deferrals are tested under Code §401(k) the definition of compensation used in the test must satisfy the §414(s) definition.  Both the §3401(a) and the §6041/6051 definitions are net of elective deferrals, while the §415 definition has included elective deferrals since 1998.

§415 and Post-severance Compensation
At this point is might be helpful to briefly look at the change in the post-severance language in the §415 regulations.  The IRS has always held and still holds that severance pay does not qualify as compensation for qualified plan purposes. Accordingly, such amounts are not included for §415 calculation purposes and thus may not be deferred against.  What has confused matters, however, is that some plans had always excluded all amounts received by the participant after separation of employment. 

We are now told that some amounts received after separation must be included. Specifically, some amounts that accrued before separation, but which are not paid until after must be included in a plan’s definition of compensation for 415 purposes.  For example, an hourly paid employee terminated employment on Friday November 30, 2007.  He received a paycheck that day, but it only reflected earnings up though November 17, 2007.  On December 14, 2007 he gets a final paycheck for the period November 18- November 30.  Previously, the plan had to exclude these amounts. Now the plan must consider these amounts for 415 purposes and likely allow deferrals against them.  Among the other implications is that a non-key employee would need to receive a top-heavy minimum allocation on that amount, if the plan were top-heavy.

A couple of clarifying points:

• Only amounts that would be received by the employee if they had not terminated may be counted.
• Only amounts received by the later of 2½ months after termination of employment or the end of the limitation year during which termination occurred may be counted.  Thus, in the example above (assuming a calendar year limitation year) with the termination on November 30, 2007, only amounts received by February 15, 2008 would be included.
• The employer may, but need not, choose to include accrued vacation and sick pay at the time of termination, if it is paid to the participant within the 2½ months or if later the end of the limitation year period.
• For the first time ever, the employer may elect to include amounts received from a non-qualified deferred compensation plan, if the amounts are paid within the above referenced time frame, based on the settlement option chosen by the participant before the amounts were deferred.  This has the potential to impact key and highly compensated employee status.

Potential §411(d)(6) Cutbacks May Require Earlier Deadline for §415 Amendment
We next need to address the §411(d)(6) cutback issue.  Unfortunately, there is nothing in the IRS guidance that discusses the interplay of the Final 415 Regulations and the anti-cutback rules.  But.. Regardless of the general rules provided in Revenue Procedure 2007-44, regarding the timing of amendments, an amendment cannot result in a violation of the anti-cutback rules of Code §411(d)(6). 

Whether an amendment raises anti-cutback issues depends on whether there was a change in the plan’s allocation formula that causes a reduction once a participant has earned the right to share in the allocation.  A change in the definition of compensation used for allocations is considered by the IRS to be a change to the allocation formula.  Thus, an amendment may be required before any participant accrues a benefit. 

Hypothetically, this could be as little as three months into a plan year if a standardized prototype is being utilized. 

When will there be §411(d)(6) problems is the issue at hand.  If a plan allocates using a set percentage of everybody’s compensation, even multiple percentages in a cross-tested plan, there should not be a cutback problem.  If hypothetically, everybody will receive an allocation of either five or ten percent of their compensation and the definition of compensation is amended to add the post severance pay, then there is no cutback issue.  Terminees will receive an increased amount and continuing workers will not see any change.  If, however, for some reason the definition is changed to now delete accrued vacation or sick pay, then there would be a potential reduction issue.  The other fact set where there is a potential for a cutback is where the employer contributes a discretionary amount, say $10,000, that will be allocated among the participants.  If the amendment is made after participants have accrued benefits and now terminees will receive an increased amount, then continuing employees would face an illegal cutback in benefits.  Of course, this can be remedied in that year by the employer not making a contribution. This would result in there being no reduction. While this is drastic, it is a possible short-term fix to the cutback problem. 

Plan Document Provisions for Benefit Accrual Are Key to Amendment Timing
The question then becomes when do participants accrue their benefits? Obviously, if there are no accrual requirements then it is the first day of the plan year.  In a standardized prototype with a 500 hour rule the IRS has previously issued guidance indicating accrual after three months.  In a plan with a 1,000-hour rule the same guidance assumed five months.  The best possibility is a plan with a last day rule, so that there is no accrual until the last day of the year. (Note that plans using the excess integration method will likely have similar issues; since an increase in one participant’s allocation will likely result in a reduction to one or more other participants.  This is problematic if the amendment is made after participants have accrued a right to receive an allocation.)

With the above as a basis, we need to try and address which plans may need amendment.  The first piece of advice is that if you obtain your documents from a major provider, look to that provider for their advice. 

Deadlines for Plans to Be Amended for §415
Also, there will be different answers for individually designed plans and pre-approved plans.  One last complicating factor is that §415 is based on limitation years and the IRS guidance as published addressed amendments as first being required for plan years beginning July 1, 2007.  Of course while most plans have the same plan and limitation year that is not always true.

For individually designed plans, documents under Cycles A and B clearly did not contain language from the Final Regulations.  Those plans will clearly need to be amended to add appropriate language at least for top-heavy and highly compensated purposes.  To the extent their definition of compensation for allocation purposes did not include any reference to regular pay that is earned before termination and paid after they will also need to be amended for that.  A voluntary amendment can also be made for accrued vacation and sick pay and nonqualified deferred compensation amounts as addressed above.  The same would apply to most Cycle D plans and all Cycle E plans.  If we assume that most individually designed plans contain a last day rule, the earliest those plans would need to be amended is June 30, 2008, as long as there is no §411 cutback problem requiring an earlier amendment.  Of course some employers will be able to amend as late as September 15, 2009, the due date for filing their corporate tax return with extensions..

For Cycle C plans, with submissions starting February 1, 2008 and ending January 31, 2009, it is likely that the amendment for §415 will be part of their overall submission.

For pre-approved plans the answer varies depending on numerous factors.  If we start with standardized plans with calendar year tax and plan years, then the employer probably wants to have the amendment done by March 31, 2008, if there is a potential for §411(d)(6) problems.  If there is no §411 problem, then the amendment can be done by the due date for filing the employer’s tax return.  This might allow for simultaneous execution of the employer’s EGTRRA restatement.  Obviously, if the employer’s plan year began July 1, 2007, August 1, 2007 or at any time before before January 1, 2008, the employer has until at least June 30, 2008, or July 31, 2008, ie. until the end of the off-calendar plan year, to amend.  It is unlikely that they will be able to execute the amendment simultaneously with their EGTRRA restatement.  Advisors should be careful to have them attach a copy of the executed §415 amendment to their EGTRRA restatement, so that an examiner does not have problems finding the amendment on audit.  Based on the timing of this release, we will not address §411 cutback problems for these plans.

For nonstandardized and volume submitter plans with plan years starting January 1, 2008, the analysis is very similar to that above.  However, the May 31, 2008 date should be substituted for March 31, date above, if there are §411 issues. Again, if there are no §411 issues, ideally, attempts should be made to execute the §415 amendment simultaneously with the employer’s EGTRRA restatement.  Again employers will likely have until sometime in 2009 to execute the amendment, depending on their tax filing deadlines.