Rich Hochman's ASPPA ASAP
Rev. Proc. 2007-44 and 49
Aug. 3, 2007, E-mail Alert 2007-10

Background
In mid-June 2007, the Internal Revenue Service (IRS) released Revenue Procedure 2007-44 (http://www.irs.gov/irb/2007-28_irb/ar12.html), which was printed in the Internal Revenue Bulletin on July 9th. The guidance updates and supersedes Rev. Proc. 2005-66, and in part responds to the public comments that the IRS had received since the issuance in late 2005 of Rev. Proc. 2005-66. While Rev. Proc. 2007-44 included some requested enhancements to the amendment process, it contained new requirements that will affect the way industry practitioners do business. Among the provisions are new restrictions on the ability of practitioners to sponsor pre-approved plans, as well as limitations on the ability of those sponsoring pre-approved plans to obtain Determination Letters on behalf of clients. Accordingly, some previously routine industry practices will be unable to continue. While this asap will attempt to summarize many of the provisions of the Revenue Procedure, the meaning and implication of some provisions is still not clear and a follow-up asap may be warranted.

As a follow-up to Rev. Proc. 2007-44 and an update of the Employee Plans Compliance Resolution System (EPCRS), the IRS released Revenue Procedure 2007-49 (http://www.irs.gov/pub/irs-drop/rp-07-49.pdf) in early July. This revenue procedure addresses sponsors of GUST pre-approved plans that did not timely submit for EGTRRA. While Revenue Procedure 2007-49 does not represent a substantial rework of the EPCRS program, the good news is that it provided necessary guidance for some pre-approved plans that were in need of relief.

The Staggered Remedial Amendment Cycle
The concept of staggered cycle submissions was first addressed in Announcement 2004-71 and Revenue Procedure 2005-16, and finalized in Revenue Procedure 2005-66 for the EGTRRA restatement process. Pre-approved plans would be submitted once every six years beginning with defined contribution plans in 2005 and defined benefit plans in 2007. Individually designed plans had a five-year staggered cycle beginning in 2006 depending on the last digit of the employer’s taxpayer identification number. Rev. Proc. 2005-66 and the staggered amendment cycle were discussed in ASPPA asap 05-25.

Off-Cycle Individually Designed Plan Submissions
One issue that became apparent was the need for some employers to submit plans at other than their assigned times, i.e., “off-cycle.” While the IRS publicly voiced its opposition to plans being submitted off-cycle, as too many off-cycle submissions would undermine the new staggered system, many off-cycle plans continued to be submitted. Rev. Proc. 2007-44 recognizes the need for some plans to come in off-cycle, but tries to limit the number of plans that will be submitted that way.

The Rev. Proc. also addressed plan termination submissions by stating they will now always be treated as on-cycle. Newly established individually designed plans that would otherwise be off-cycle will nonetheless be treated as on-cycle and be allowed to submit for a Determination Letter if their regular filing cycle begins more than two cycles after the plan was adopted. Thus, for example, a “cycle A” plan that is adopted in cycle B or C can still be submitted during those cycles and be deemed on-cycle. However, if the plan were first adopted in Cycle D or E, the employer would have to wait for the next Cycle A to submit the plan.

Other plans will be allowed to submit off-cycle if the employer can show that a Determination Letter is needed as a result of an “urgent business need.” Examples include: (1) a new ESOP, if failure to obtain a determination letter will cause the loss of the underlying bank loan allowing for the plan’s existence; (2) a complex merger or acquisition where the deal will not be completed without a favorable letter on the acquired company’s plan. In its own newsletter, “Employee Plan News,” the IRS stated that its workload would increase as a result of the new Rev. Proc. and went on to say that they are not sure how it will prioritize these new submission types with existing on-cycle submissions that they have received. The IRS will consider urgent business need requests based on prevailing facts and circumstances, but it is expected that these requests will be granted only in limited cases where exceptional circumstances exist. It is important to note that the “new plan” relief is only applied to individually designed plans. Pre-approved plans will seemingly not be afforded the same accommodation.

In its own analysis of the Rev. Proc., the IRS acknowledges both minor tweaks and significant changes. Some of the changes are reflected in the paragraphs that follow; you are advised to see Section 3 of the Rev. Proc. for a complete summary of those changes.

Pre-Approved Defined Benefit Plan Deadline Extended
The deadline for the submission of mass submitter and national sponsor pre-approved defined benefit plans was extended from October 31, 2007, to January 31, 2008. Many document providers had advised the IRS that they could not meet the October 31 deadline since the IRS had not issued the LRM model language yet. (The LRM was released the same day as the Rev. Proc., some four and one-half months after the window for submissions opened.) These documents will be reviewed by the IRS during 2008 and most likely part of 2009. The earliest that the industry should expect their use is probably not until late 2009 or sometime in 2010, just about the time that preapproved defined contribution amendments are completed.

Pension Protection Act of 2006 Amendments
Perhaps one of the most important issues that the Rev. Proc. addressed was the issue of Pension Protection Act (PPA) amendments. Based on the express language in the Act, PPA amendments are not required until the last day of the first plan year beginning on or after January 1, 2009. (The 2011 plan year is applied for governmental plans.) The good news is that this applies to both required and discretionary amendments. In the meantime, plans can operate in accordance with the new PPA provisions and will amend to include them later. There had been speculation, based on the guidance previously provided in Rev. Proc. 2005-66, that discretionary amendments, such as adding non-spouse beneficiary rollover provisions, would have to be done no later than the end of the plan year that the new provisions first applied. Accordingly, there is no rush to amend plans for PPA, other than plans that are terminating. Since 1987, IRS guidance provided that any terminating plans had to be amended to bring them into conformity with all applicable statutes and regulations at the time of termination. For defined contribution plans terminating in 2007, there could be issues relating to non-spouse beneficiary rollovers and hardship distributions. However, most provisions do not take effect until 2008.

Due to the fact that PPA amendments theoretically do not have to be made until 2009, an interesting dichotomy occurred for the submission of defined benefit plans. As referenced above, the submission of pre-approved defined benefit plans started this year. If PPA provisions were not included, then they would theoretically not be included in the documents until the next submission cycle, which begins in 2013. Recognizing that this would not be appropriate, the IRS made a distinction between pre-approved and individually designed plans. The distinction actually first appeared when the IRS released the 2006 Cumulative List in January of this year. M&P plan sponsors and Volume Submitter practitioners are required to include PPA 2006 law changes that are effective in 2006 and 2007 and appear on the 2006 Cumulative List in plan documents submitted for opinion and advisory letters. Employers can rely on letters issued with respect to such provisions.

However, the IRS will not consider PPA provisions in its review of determination letter applications for individually designed plans using either the 2006 or 2007 Cumulative List. Determination letters issued for individually designed plans using either Cumulative List may not be relied upon with respect to any PPA provision, though the language may appear in the document.

Cumulative List Changes
When originally conceived, the Cumulative List outlining the provisions for the subsequent year’s submissions was supposed to be issued in November of each year. Thus, the 2005 Cumulative List was supposed to be issued in November 2004, the 2006 Cumulative List in November 2005 and so on. Unfortunately, due to the amount of guidance that was being issued and the timing thereof, the Cumulative Lists were never published in November. Changes had to be made if the IRS was going to meet its self-imposed deadline. Under the new Rev. Proc., except as otherwise provided in the applicable Cumulative List, the Service will not consider in its review of any opinion, advisory or determination letter submission, any guidance or statutes issued or enacted after the October 1 preceding the issuance of the list. However, as reflected in the PPA guidance discussed two paragraphs above, due to the nature of the once every-six-years pre-approved submission cycle, the October 1 deadline may need to be extended for the Cumulative List as it applies to pre-approved submissions. Conversely, some guidance, even if issued or enacted before the October 1 date, as well as other qualification requirements that become effective in subsequent years, may also be excluded from the Cumulative List. Thus, if appropriate, some guidance may be addressed through the use of interim amendments.

Other Changes From Prior Guidance
Effective as of July 9, 2007, Form 6406, the Short Form Application, will no longer be accepted for determination letter applications. The Form had been used with “minor” amendments. Going forward, plans will have to be restated when they are submitted for determination letters. Apparently, short form or tack-on amendments will no longer be accepted. Restatements will be based on the most recently issued Cumulative List.

Rev. Proc 2007-44 provides further explanatory guidance about the respective five and six-year cycles. As part of this guidance, the definitions relating to “prior adopters,” “new adopters” and “intended adopters” of pre-approved plans have changed. An important aspect of these definitional changes is that it is now clear that the sole purpose of Form 8905 is if an employer on the individually designed five-year stagger cycle wants to switch to the pre-approved six-year schedule. While some IRS representatives had maintained this was their intent all along, the old Rev. Proc. was not clear on this issue, especially for those employers who first adopted their plan after February 16, 2005. Thus, it now appears that the mass adoption of Form 8905 (Certification of Intent To Adopt a Pre-Approved Plan) was unnecessary.

Since, theoretically, any change made to a prototype makes a plan individually designed, the Rev. Proc. clarifies the rules allowing an employer to remain in the six-year cycle after making certain types of amendments rather than having to satisfy the five-year staggered remedial amendment period. With certain exceptions, an employer that modifies a plan so that it is no longer considered a Master or Prototype or Volume Submitter plan will nevertheless stay in the six-year cycle for the current and subsequent six-year cycles. An employer that is an intended adopter or prior adopter of a pre-approved plan that instead adopts an individually designed plan, or an employer that amends an M&P or VS plan to incorporate a type of plan not allowed in the pre-approved program (such as an ESOP) and makes such amendment more than one year after the date the employer initially adopted the pre-approved plan, remains in the six-year cycle until the end of the current cycle and then switches to the five-year cycle. Alternatively, if the nature of the amendments is such that the IRS does not want to consider the plan a pre-approved plan or the employer amends a preapproved plan to incorporate a type of plan not allowed in the pre-approved program within one year of the date that the employer initially adopted the plan, the plan immediately falls into the five-year staggered cycle. For the record, other than the first year switch of plan types, the kind of amendment that would be required for this to happen has never been enumerated.

Revenue Procedure 2005-66 provided some exceptions to the rules for determining an individually designed plan’s five-year cycle. Exceptions were made for multiple employers, multiemployer plans and members of controlled groups. Rev. Proc. 2007-44 expands and clarifies the rules and adds new rules for controlled group elections.

Because of confusion about the system, some employers who were on Cycle A did not realize it until after the close of Cycle A on January 31, 2007. The Rev. Proc. now provides that if sponsors, practitioners or employers made a determination with respect to a particular plan based on a reasonable good faith interpretation of Rev. Proc 2005-66 that the plan was not a Cycle A plan, but under Rev. Proc 2007-44, the plan is, in fact, a Cycle A plan, then the employer has until January 9, 2008, to submit the plan to the IRS. The plan will be considered “on-cycle” for Cycle A and will be reviewed by the IRS using the Cumulative List in effect based on the date of the submission.

Changes to Pre-Approved Plan Policies
Perhaps of most interest to many benefits practitioners and ASPPA members is the fact that new provisions were added to explain what constitutes an off-cycle filing for pre-approved plans. The Rev. Proc. for the first time addressed the issue of a final EGTRRA submission deadline for pre-approved submissions. While most practitioners were well familiar with the January 31, 2006, deadline for pre-approved defined contribution plans provided for in Rev. Proc. 2005-16, and had met that deadline, the Rev. Proc. provides that practitioners who had not previously offered pre-approved defined contribution plans only have until sometime in early 2008 to submit plans for Advisory and Opinion Letters. The actual deadline for potential new sponsors will be coordinated with the announcement of the employers’ period for adoption of pre-approved EGTRRA plans. When the review cycle for pre-approved plans has neared completion (after approximately a two-year review process), the Service will publish an announcement providing the date by which adopting employers must adopt the newly approved plans. This will be a uniform date that will apply to all adopting employers, unlike the 12-month rule that applied under GUST and was different for every plan sponsor based on the date of their latest letter. Sponsors or practitioners who missed the January 2006 deadline must submit new pre-approved plans prior to the beginning of such announced adoption period, to give the Service time to review such plans and to provide time for adopting employers to adopt such plans. Again, while the exact date is not known at this time, it is anticipated that the two-year window will start sometime around the beginning of the second quarter of 2008. It is possible that the pre-approved defined contribution submission deadline will be sometime in mid-first quarter of 2008.

Plan sponsors who had valid GUST Opinion or Advisory Letters and who missed the 2006 deadline were to be addressed in subsequent EPCRS guidance. That guidance, discussed more extensively at the end of this asap, was provided in Rev. Proc. 2007-49, released July 3, 2007. Among the first questions asked was: “What if the firm or institution wishing to sponsor the document didn’t exist until 2009?” The answer under the Rev. Proc. appears to be they could sponsor their own document as of 2011 when the next round of pre-approved defined contribution documents are submitted for PPA. There was some discussion that maybe they could offer a word-for-word identical plan from a mass-submitter. However, under 2007-44, even that is not provided for. This means that new pre-approved plans cannot be submitted for Opinion or Advisory Letters for as much as three years, and if the guidance is not modified, it presents a clear business challenge for new practitioner firms and document providers. It is hoped that the IRS will reconsider this particular aspect of the Rev. Proc., which came as a surprise to industry practitioners who had been involved in discussions with the IRS regarding the new submission process for many years. For those new sponsors who submit during the January 2006 through early 2008 window, they would not have retroactive reliance on their documents and it would appear that employers adopting their document would have to submit for a favorable Determination Letter, using the Form 5307 or 5300 as appropriate. That would even apply to employers who were on valid GUST plans. A question that arises is: “Why would an employer with a valid GUST plan document who made, or whose document Sponsor had made, all the appropriate interim amendments lose their GUST reliance?” The employer can switch to another timely submitter and keep reliance, but loses reliance by going to a first-time provider.

Limitation on Use of Form 5307
Part of the reason for not allowing new pre-approved submissions after January 2008 has to do with the fact that the IRS intends to cut off submissions of Form 5307 even for new employer plans. While not discussed directly in the Revenue Procedure, the implication appears to be that the IRS will only accept Form 5307 submissions during an approximate two-year window after the issuance of the bulk of Opinion and Advisory Letters. Based on the latest discussion with the IRS, the two– year window is estimated to be from approximately the beginning of the second quarter of 2008 until the end of the first quarter of 2010. This is the period that correlates with the EGTRRA restatement period for pre-approved defined contribution plans. For numerous reasons, many TPA firms owned by ASPPA members submit every employer’s adoption of their pre-approved plan documents. That ability would end in 2010. Employer DC pre-approved plans would then not be able to be submitted on a Form 5307 until approximately some time in 2013 or 2014. An open question is about employers who make modifications to the EGTRRA Volume Submitter document as approved and theoretically are required to submit for Determination Letters.

As referenced above, an employer who adopts a pre-approved plan sponsored by a firm that makes the January 2008 deadline, but which did not previously sponsor pre-approved plans, needs to submit for a Determination Letter to obtain reliance.
Question: A new employer adopts a 401(k) plan in March 2010: They can and apparently must submit to obtain reliance. What if this employer doesn’t adopt their plan until July 2010? What reliance do they have? These among other questions remain unanswered.

Limitations on Pre-Approved Plan Sponsorship
Another new detail is the fact that a sponsor or practitioner who timely submitted any document prior to the January 2006 deadline is prohibited from submitting any other pre-approved defined contribution plan at this point. That means, for example, that they can’t expand their business lines. For analogy purposes, a hypothetical small financial institution that worked with single employee plans only sponsored profit-sharing and money purchase prototype plans. With the enactment of EGTRRA and catch-up contributions, it became practical for the institution to offer one-person 401(k) plans Previously, having submitted their GUST profit-sharing document timely, they could go back and submit a new additional 401(k) adoption agreement. There was no limitation on such later submissions. Under the new guidance, if some future legislation is enacted that opens up business opportunities that did not previously exist, sponsors will be prohibited from offering new documents to supply that product. Under another hypothetical, a firm timely submitted their preapproved plans by the January 2006 deadline. However, they did not offer cross-tested plans at that time, because there was confusion over what prototype cross-tested provisions would ultimately look like. If they want to add cross-tested adoption agreements at this time, they are now prohibited from doing so, even though the prohibition did not exist at the time that they initially submitted.

Revenue Procedure 2007-49: Late Submission of Pre-Approved Documents
Rev. Proc. 2007-49 has two stated purposes; first, to address the consequences for pre-approved sponsors and practitioners that missed the January 2006 deadline, and second, to modify the streamlined VCP application procedure for failures set forth in section 11.01 and Appendix F of Rev. Proc. 2006-27. Rev. Proc. 2006-27 updated the IRS’ Employee Plans Compliance Resolution System (EPCRS) and provided for an expedited Voluntary Correction (with Service approval) Program (VCP) for certain plan failures. One of the listed failures was the failure to timely amend plans for EGTRRA. The rules for the expedited or “streamlined” procedure were laid out in Appendix F.

Appendix F is modified to provide that its format should not be altered. Additionally, since the IRS will sign off on it, the Appendix cannot be on the plan sponsor’s letterhead or that of its authorized representative. For technical reasons, these provisions become effective August 28, 2007, though they should be followed currently.

Section 4 of the Revenue Procedure lays out no significant penalties for the late submission. Other than the $375 VC fee for use of the EPCRS program, the sponsor suffers no additional penalties for the late submission other than the increase in User Fees that took place in July 2006. The IRS does warn that documents are theoretically reviewed in order of receipt and, therefore, it may take longer for the documents to be reviewed. In that case, the employer may have less than the previously described two years to execute their plan document.

Conclusion
ASPPA GAC is taking an active role in evaluating the issues arising under Rev. Proc. 2007-44 and will issue additional member communications as appropriate.