ACT Report
Rev. 07/01/10; E-mail Alert 2010-10

The Employee Plans (EP) subcommittee of the IRS’s Advisory Committee on Tax Exempt and Government Entities (ACT) presents an interesting and very thorough history of the determination letter process over the years. From pre-ERISA through current laws, code sections and procedures, the determination letter process development through time is very well presented and ends with the current determination letter five-year cycle and pre-approved plan six-year cycle. The ACT report then critiques the first (nearly-finished) five-year cycle and the interim amendment process and then makes its recommendations for further improvement of these and other processes. 

ACT provides a forum for the IRS to hear the perspectives of stakeholders in the benefit plan community on existing and proposed IRS policies and procedures.  Stakeholders are employee plan specialists, plan sponsors, benefits attorneys, third party administrators, plan document providers, actuaries, accountants, consultants, etc.  This article will highlight the interim amendment proposals made to the IRS, with emphasis on two suggested methods to improve the interim amendment process. We will then highlight some of the other recommendations.

Background on the Interim Amendment Issue
Many of the comments received were critical of the interim amendment process as it "is more difficult to manage, results in unnecessary additional costs to plan sponsors, and increases the likelihood of missing amendment or filing deadline." Stakeholders noted that "the rules and uncoordinated deadlines were confusing and traps for the unwary and wary alike, and that they posed a compliance challenge for even the most sophisticated plan sponsors and experienced practitioners. Employers, third-party administrators, consultants and attorneys found it difficult and challenging to track the separate sets of interim amendments required for different types of tax-qualified plans, each with different adoption deadlines. In many instances, there is a lack of guidance or clarity regarding when amendments are needed and what the amendments must contain."

"Likewise, the interim amendment rules have also imposed a significant additional burden on the Service. The dramatic increase in the number of plans that have been corrected through the VCP under EPCRS and through closing agreements to resolve interim amendment and nonamender issues confirms and substantiates this view. From the Service’s perspective, the cumbersome nature of the interim amendment requirement has diverted, and will continue to divert, significant resources from other priorities. The complexity of the requirements has made it difficult for the Service’s auditors in the field to know when a plan has been timely amended. In the absence of any reform to these rules, this drain on resources will increase substantially in the future if sponsors of individually designed plans were to file off-Cycle applications for determination letters, as a defensive strategy to gain assurance their plan documents were being maintained in compliance with the interim amendment rules."

Six alternatives to the current interim amendment process
ACT considered six alternatives for enhancing the interim amendment rules before narrowing it down to a recommendation for two of those alternatives.  After the list of six alternatives, we present below specifics on the two alternatives recommended to the IRS. 

1. "Keep the interim amendment requirement in its current form.
2. Require the timely adoption of all applicable interim amendments by a clear deadline set each year.
3. Require the biennial adoption of all applicable interim amendments by the end of established two-year periods, or require the adoption of all interim amendments by the midpoint of the plan’s Cycle.
4. Permit delayed adoption of plan amendments by the end of the remedial amendment period, subject to adoption of a cumulative summary of plan changes on an interim basis.
5. Require the annual or otherwise timely adoption of certain core amendments (“Core Amendments”), and permit the delayed adoption of non-core amendments (“Non-Core Amendments”) to the end of the applicable Cycle. The distinction between Core and Non-Core Amendments is set forth below.
6. Require the adoption of all interim amendments by the end of the remedial amendment period, provided any amendments impacting “section 411(d)(6) protected benefits” within the meaning of Treasury Regulation § 1.411(d)-4 are adopted in accordance with the current rules."

ACT recommended two of the above alternatives (5 and 6)

1. Core Interim Amendments
The IRS would issue guidance in response to changes in law to define amendments as either Core or Non-Core.  Core amendments would include mandatory or discretionary amendments that:

• Are of importance to participants and affect benefits, rights, and features,
• Permit or require participant action,
• Prospectively decrease or eliminate any 411(d)(6) protected benefits (except as permitted), or
• Are deemed by the IRS as core amendments

Core amendments would be required to be adopted by the later of:

• Last day of the plan year in which it becomes effective,
• Plan sponsor’s tax filing deadline (plus extension) for the year which the provision becomes effective, and
• Deadline established under the relevant statute (except if the amendment prospectively decreases or eliminates a 411(d)(6) protected benefit)

Non-core amendments would include:

• Plan changes that are purely operational, ministerial, or technical,
• Immaterial changes that would effect only a small amount of plan participants, or
• An area in which incorporation by reference is permitted

Non-core amendments would be delayed until the end of the remedial amendment period (RAP).  ACT recommends that plan sponsors operate non-core amendments on a “best efforts” basis as though the amendment had been adopted during the interim period.  Plan sponsors would be required to provide a notice to participants, similar to the summary of material modification (SMM) rules.

2. Interim Amendments for 411(d)(6) Benefits Only
This approach would make the plan amendment process much easier for plan sponsors to administer.  The IRS would require interim amendments to be made prior to a plan’s RAP only to avoid a cutback under 411(d)(6).  All other amendments would be subject to a “best efforts” compliance standard and must be adopted prior to the end of a plan’s RAP.  Participants would receive written communication informing them of the plan changes.

At a recent conference an IRS representative stated that the IRS takes the ACT report very seriously, and would be carefully considering the two above proposals and other proposals on changes to the interim amendment process.

Additional ACT Recommendations
The report also contained recommendations for streamlining the determination letter process, improving customer service, and a review of the fee structure for certain nonamender failures that are corrected using the Voluntary Correction Program provisions provided under ECPRS.

The ACT also recommends:

• Creation of a new IRS position, entitled taxpayer advocate or designated EP determination letter specialist for resolution of unique issues that arise during the determination letter process.
• The IRS modify its prior plan documentation requirements for employers that do not have copies of their most recent determination letters.
• The Service address several specific issues in connection with its development of an approval letter program for §403(b) plans.
• There were also suggestions related to funding, training and staffing for the EP Determinations unit. 
• The Service clarify when interim amendments are due by publishing a single Annual Notice with an interim amendment chart stating the effective dates and deadlines for adoption of any amendments.  The chart would contain a reference to the law, a description of the required change, effective date, due date, whether the change is discretionary or mandatory, and any additional comments.  

Click here to see the full ACT report which contained other topics and other recommendations.

For more on this subject come to either our Retirement Plan Insights or Practitioner seminars.