Why do pre-approved plan (i.e. master, prototype and volume submitter) defined contribution documents have to be rewritten for EGTRRA and sent to the IRS for approval by January 31, 2006? What happens if this procedure is not followed?
Rev. 01/12/06, E-mail Alert 2006-1

In May 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) was enacted. EGTRRA revolutionized retirement plans more than any law since the Tax Reform Act of 1986 (TRA 86). EGTRRA created catch-up contributions, Roth 401(k), increased rollover portability, increased deferral limits for 401(k)s, 403(b)s and 457(b) plans and increased IRA limits and many other changes. The IRS provided that if the employer adopted a “good-faith” amendment at that time, a complete amendment and restatement of the plan document would not be required earlier than the last day of the 2005 plan year.

Over the last few years, the IRS working with the industry has studied the restatement process in order to better spread the workload involved with plan amendments. With the release of Revenue Procedure 2005-66, the IRS formally issued a new process for plan document restatements, beginning with the EGTRRA document. Pre-approved plans, i.e. master, prototype and volume submitter plans would be on a six-year cycle. Individually designed plans would be on a five-year cycle. Click here for a chart of the IRS restatement cycles. The defined contribution pre-approved plans are the first to be accepted by the IRS under the new program. In fact, the IRS deadline for submitting plan documents re-written for EGTRRA was extended from 2005 to January 31, 2006. Thus, all pre-approved defined contribution plans of document drafters and sponsors of their plans (not the employer) who are seeking their own opinion/advisory letters are to be submitted by that date.

The IRS six-year cycle then calls for approximately two years during which the IRS will review and negotiate any issues with the document drafters and then approve the EGTRRA document for use. Once the document is approved, the IRS will formally announce the deadline, expected to be January 31, 2010, for employers to adopt the EGTRRA document. Thus, even though we have to rush the EGTRRA document in right now, it will be roughly two years before it is available for plan sponsors (employers) to adopt. Our best estimate of when employers will have to adopt the EGTRRA document is starting in mid-2008. We will keep you posted.

What is "Reliance?" Reliance is the term used to express that the document is approved for use by the IRS. What is “Reliance” i.e. what is the significance of a favorable Opinion/Advisory Letter:

1. The document cannot be challenged as to the way it is in form – only in how the plan was operated.
   
2. Establishes the basis to support the company's income tax deduction.
   
3. Protects employee participants from having to report their share of the employer's contribution as taxable income.
   
4. Assures that the trust fund will not have to pay tax on plan earnings.
   
5. Establishes the basis on which a participant can take advantage of favorable tax treatment on distribution of plan benefits.
   

Without reliance, it will be more difficult for a plan to receive a Favorable Determination Letter, if one is sought, a plan may also be found to be out of compliance during an IRS audit. A plan that does not follow the guidance for being restated, may enter the voluntary compliance program of the IRS known as the Employee Plan Compliance Resolution System (EPCRS), which has preset penalty amounts for plans that are not restated. Under current EPCRS provisions, a plan amended in the first year after its deadline has the penalty cut in half. Further, these amounts are much less than the penalty involved when an IRS audit discovers that a plan has not been restated for a law change. We know that the IRS has announced that it is stepping up the examination program and will look at more plans.

If any pre-approved sponsor has not yet signed up with a document drafter to submit their plan to the IRS by January 31, it is not too late to join us. Contact us at 973-492-1880.

Individually designed plan employers will not have to amend their plans until January 31st of 2007 or later, depending on the employer’s taxpayer identification number.

Bill Grossman, QPA