This Blog has Moved

Some months ago, this blog broke. For a while, it seemed that it was irretrievably broken and all my information was lost. Thanks to a spectacular save by an amazing tech guy, I have all of the information contained in my previous posts, and was able to move it to a new home –

http://www.erisafile.com/blog.

Go check it out. I already have some new posts there. From this point on, I will only be posting over there.

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IRS Extends DC Opinion/Advisory Deadline to April 2, 2012

It is rare that anything released by the IRS elicits a response of “We celebrate tonight!”, but it happened today with Announcement 2012-3. At 11:31am ET today, Dec. 22, 2011, the IRS extended the deadline to submit defined contribution opinion/advisory letter applications from Jan. 31, 2012 to April 2, 2012.

For those of us writing PPA restatement specimen plan documents, it means more time to wrestle with the 2011 DC LRMs, and that our families will see more of us over the holidays. For my staff, it also means that we are now closed on Monday, Dec. 26th.

For the rest of the industry, it means more time to contemplate Announcement 2011-82. If you missed Announcement 2011-82, released last Friday, I’ll have more about it tomorrow. Right now, I’m headed out to pick up a tray from the deli.

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2011 IRS Cumulative List Provides Year in Review

2011
Nothing provides a Year in Review list for plan documents like the annual IRS Cumulative List. Yesterday, the IRS released Notice 2011-97 containing the 2011 Cumulative List. It’s primary purpose is to provide the guidance which must be included in the Cycle B plan documents. It is also a good reminder from the IRS of guidance released during the year which impacts plan documents.

New to this year’s Cumulative List:

  • Rev. Rul. 2011-1, 2011-2 I.R.B. 251, revises the generally applicable rules for group trusts and, if certain requirements are met, permits the participation in group trusts of custodial accounts under Code section 403(b)(7), retirement income accounts under Code section 403(b)(9), and governmental retiree benefit plans under Code section 401(a)(24). This revenue ruling also modifies the transition relief provided in Rev. Rul. 2008-40.
  • Notice 2011-19, 2011-11 I.R.B. 550, provides that the terms readily tradable on an established securities market and readily tradable on an established market mean employer securities that are readily tradable on an established securities market within the meaning of Treas. Reg. 1.401(a)(35)-1(f)(5) for purposes of Code sections 401(a)(22), 401(a)(28)(C), 409(h)(1)(B) and 409(l). Notice 2011-19 is effective for plan years that begin on or after January 1, 2012, except for certain plans that have a delayed effective date.
  • Notice 2011-85, 2011-44 I.R.B. 605, extends the deadline for adopting an interim or discretionary amendment under Code section 411(a)(13) (other than section 411(a)(13)(A)). Notice 2011-85 also announces that the Treasury Department and the Service intend to amend the 2010 final hybrid plan regulations to postpone the effective/applicability date of Treas. Reg. 1.411(b)(5)-1(d)(1)(iii), (d)(1)(vi), and (d)(6)(i) to plan years that begin on or after a date to be specified in those regulations that is not earlier than January 1, 2013. This notice also extends the deadline for adopting an interim or discretionary amendment under Code section 411(b)(5).
  • Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (PRA 2010), Pub. L. No. 111-192, section 211(a)(2) added section 431(b)(8) to the Code, which provides two special funding rules available to multiemployer plans.
  • Notice 2010-83, 2010-51 I.R.B. 862, provides guidance with respect to the special funding rules under Code section 431(b)(8).
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Target Benefit Plans: On the Edge of Extinction

One of the more interesting effects caused by the IRS’ elimination of the National Sponsor category in Rev. Proc. 2011-49 may be the projected elimination of pre-approved target benefit prototype and volume submitter plans. While some of you may be thinking “who cares” and others may be thinking “this will never happen”, let me share some analysis that may change your mind. Think of target benefit plans as the canaries in our coal mine of a plan document system.

Target benefit plans have never been wildly popular. They are designed to pay a targeted benefit at retirement (hence the name “target benefit plans”) funded by annual contributions. Even though target benefit plans combine some aspects of defined benefit plans with other aspects of defined contribution plans, the IRS classifies target benefit plans as defined contribution plans for purposes of the filing deadlines contained in Rev. Proc. 2007-44. This means that the deadline is Jan. 31, 2012 for filing prototype and volume submitter target benefit plans with the IRS for PPA Restatement opinion/advisory letters.

Rev. Proc. 2011-49, released by the IRS in Oct. of 2011, contains the filing instructions for PPA Restatement prototype or volume submitter plans submitted to the IRS for an opinion/advisory letter. One of the requirements contained in Rev. Proc. 2011-49 is that each master or specimen plan have 30 firms register as word-for-word adopters of that plan. The only exception to the 30 word-for-word sponsor rule is money purchase plans, which are required to have 10 word-for-word sponsors. The IRS created this exception for money purchase plans a number of years ago when EGTRRA’s contribution limit changes triggered merger-mania between profit sharing and money purchase plans, merging many money purchase plans out of existence. Rev. Proc. 2011-49 did not grant target benefit plans the same 10 word-for-word sponsor exception.

For plan document providers, the lack of an exception to the 30 word-for-word sponsor rule wasn’t much of a concern because they could rely on the National Sponsor category for receiving the opinion/advisory letters for their EGTRRA target benefit prototype and volume submitter plans. The National Sponsor category permitted an opinion/advisory letter to be issued to a master or specimen plan that did not have 30 word-for-word sponsors but the plan document provider could meet other criteria, including having adopters of that plan in at least 30 states. The National Sponsor category was popular for large banks and investment providers who write plan documents for a nationwide clientele but were not interested in finding 29 other firms to join them in sponsoring a plan document.

For target benefit plans, a review of the IRS’ list of prototype and volume submitter plans filed for EGTRRA defined contribution opinion/advisory letter reveal that every master and specimen target benefit plan depended on the National Sponsor category for an opinion/advisory letter. If the National Sponsor category has not existed for the EGTRRA restatements, all target benefit plans would have defaulted to using individually designed plan documents when restating for EGTRRA.

For example, only 14 master and specimen target benefit plans were submitted to the IRS for pre-approval as volume submitter plans. Of those 14 master and specimen plans, 6 were submitted by Corbel Relius (1), Datair (4), and Accudraft (1) and the remaining 8 were submitted for word-for-word sponsors of those 6 target benefit master and specimen plans. Due to the lack of 30 word-for-word sponsors of their EGTRRA volume submitter target benefit plans, Corbel Relius, Datair and Accudraft relied on the National Sponsor category to file their plan documents for opinion/advisory letters. If Rev. Proc. 2011-49′s elimination of the National Sponsor category had been in place on Jan. 31, 2006, when the EGTRRA defined contribution prototype and volume submitter plan documents were filed with the IRS, Corbel Relius, Datair and Accudraft would not have received opinion/advisory letters for their target benefit volume submitter plan documents.

Hopefully, the IRS will reconsider the elimination of the National Sponsor category and issue a revision of Rev. Proc. 2011-49 before the Jan. 31, 2012 deadline. If not, sponsors of target benefit plans can expect to see their determination letter filing fees increase from $300 for using a pre-approved document to $1,800 for using an individually designed plan document. And the IRS can expect to allocate personnel and many more man-hours to reviewing individually designed target benefit plans.

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Just in Time – The IRS Issues an Extension and a Sample Amendment for Code sec. 436

Just when the mad scramble to adopt last minute Code section 436 amendments was about to begin, the IRS has issued another extension, accompanied by a sample amendment.

Notice 2011-96, released Nov. 29, 2011, extends the deadline to adopt an interim amendment for Code section 436 to the latest of:

1) the last day of the first plan year that begins on or after Jan. 1, 2012;

2) the last day of the plan year for which Code section 436 is first effective for the plan, or

3) the due date (including extensions) of the employer’s tax return for the tax year (determined in accordance with section 5.06(2) of Rev. Proc. 2007-44, in the case of a tax-exempt employer) that contains the first day of the plan year for which Code section 436 is first effective for the plan.

This extends the previous deadline, which was contained in Notice 2010-77. It required that an amendment containing the Code section 436 provisions be adopted by the last day of the first plan year that began on or after Jan. 1, 2011 (meaning Dec. 31, 2011 for calendar year plans).

Hats off to the IRS for also giving us a sample Code section 436 amendment in Notice 2011-96. The sample amendment captures the complexity of Code section 436 while granting relief for plans that adopt the sample amendment by the deadline. It also addresses several potential issues that may be caused by adopting the amendment, including potential 411(d)(6) issues.

The IRS states that sponsors of pre-approved prototype and volume submitter plans may adopt the amendment on behalf of the pre-approved plans’ adopting employers, so if you are using a prototype or volume submitter defined benefit plan, it is worth checking with your plan document provider to see if they will be adopting a Code section 436 amendment at the sponsor level. The same goes for word-for-word sponsors of prototype and volume submitter defined benefit plans, who should check with their plan document provider to see if they will be offering a customized sample amendment, keeping in mind that the IRS is specifically limiting the amount of customizing that can be done to this amendment. Sponsors of individually designed plans, such as cash balance and DBK plans, will need to adopt the amendment directly.

It is also worth noting that the IRS sample amendment contains a number of optional provisions, so even if your plan document provider is adopting the amendment at the sponsor level, you may still want to adopt a Code section 436 amendment for each plan in order to utilize some of the optional provisions not contained in the sponsor-level amendment.

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Free ERPA CPE from the IRS on Nov. 30, 2011

free
On Nov. 30, 2011, the IRS is holding a free phone forum on the Self Correction Program (SCP) and the Closing Agreement Program (CAP). It will focus on: (1) current EPCRS issues found in SCP and CAP cases; (2) procedures and requirements for participating in EPCRS cases; and (3) how CAP sanctions are determined and negotiated. The speakers are Michael Sanders and Kathleen Schaffer from the IRS Employee Plans Examination program. To attend, you register through the IRS’ website here.

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ERPAs and the PTIN Requirement – as Clear as Mud

Today, Nov. 3, 2011, the IRS issued Notice 2011-91 on Certain Enrolled Retirement Plan Agents Not Required to Obtain a PTIN. The notice is a short 2-pages long.

It states that the IRS intends to amend Circular 230 to remove the requirement contained in Section 10.4(b) that an individual who wants to become an ERPA, or renew their status as an ERPA, must have a valid preparer tax identification number (PTIN). Notice 2011-91 says effective immediately, ERPAs and applicants to become ERPAs are not required to have a PTIN to apply for enrollment or renew enrollment as an ERPA. ERPAs must still obtain a PTIN if, for compensation, they prepare, or assist in the preparation of, all or substantially all of any tax return or claim for refund that is not on the list of forms exempt from the PTIN requirement as provided in section 1.03 of Notice 2011-6 or any future guidance.

This is good news for the ERPAs, and good news for the industry. Notice 2011-91 does create one problem. It says

“Notice 2011-6 further provides a list of forms for which no PTIN is required. Among the forms included on this list are the Form 5300 and the Form 5500 series returns.”

Earlier this year, during a webinar hosted by the IRS, the IRS stated that Notice 2011-6 did not exempt the entire Form 5300 series from the PTIN requirements. I don’t think it is fair to quote statements made by IRS personnel during webinars because the webinars provide such a tremendous benefit to the ERPA community by providing great information along with free ERPA CPE credit for attending, and no one should be zinged for making a misstatement during a live presentation.

The problem here is that their statements during the webinar were very clear. Only three forms from the Form 5300 series were exempted from the PTIN requirement in Notice 2011-6 – Form 5300, Form 5307, and Form 5310 – and not the entire Form 5300 series. At that time, the IRS said it was considering exempting the entire Form 5300 series from the PTIN requirements, and would issue a new Notice or Revenue Procedure if and when this decision was made. I don’t think Notice 2011-91 can be read as that future guidance which exempts the entire Form 5300 series from the PTIN requirements.

Whether Form 5300 or the entire Form 5300 series has been exempted from the PTIN requirements is a non-issue until you need to file a determination letter application for a type of plan which includes a form from the Form 5300 series which was not excluded by Notice 2011-6. For example, Form 5309 is required as part of a determination letter application for ESOPs/KSOPs. Form 5309 is part of the Form 5300 series but it was not includes on the list of forms exempted from the PTIN requirements by Notice 2011-6, so do you need a PTIN to file a determination letter application for an ESOP or not.

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ESOP/KSOP Determination Letter Backlog Here to Stay (for now)

Miracle on 34th Street mail
I was fortunate to attend the IRS phone forum on ESOP determination letters last Friday. The webinar was very good. The IRS addressed a number of outstanding issues, and provided some handy tips.

First, the IRS acknowledged that there is currently a lag between when the IRS receives an ESOP/KSOP determination letter application and when that application is reviewed by an agent. Despite their best efforts, the IRS is currently reviewing ESOP determination letter applications received in 2008 during Cycle C. According to the Form 5500 information posted on the DOL’s website, there are approximately 1,300 ESOP/KSOP plans required to be submitted to the IRS for a determination letter during each Rev. Proc. 2007-44 cycle, so unless something drastically changes, the backlog will continue to grow. Like a soldier in an old World War II movie peeling potatoes from a stack of potatoes that only continues to grow, each and every Jan. 31st adds another 1,300 applications to the already existing stack of determination letter applications waiting to be reviewed.

One option the IRS is currently exploring is opening an opinion/advisory letter program for ESOPs/KSOPs in 2018 (the beginning of the next restatement cycle). This would reduce the overall number of ESOP/KSOP determination letter submissions the IRS receives because some plans would have reliance on an opinion/advisory letter and would not be required to file for a determination letter.

Before you ask “why 2018″, think about the steps the IRS has to undertake to accomplish this under the current system stated in Rev. Proc. 2007-44. First, ESOPs/KSOPs are classified as a type of defined contribution plan. Under Rev. Proc. 2007-44, the deadline to submit DC plans for opinion/advisory letters is Jan. 31, 2012. This means that by Jan. 31, 2012, the IRS would need to amend Rev. Proc. 2011-49 to include ESOPs/KSOPs as plans which are eligible for opinion/advisory letters, issue LRMs for ESOPs/KSOPs (LRMs contain suggested language for writing plan documents), and update the opinion/advisory forms to include provisions unique to ESOP/KSOP plans, such as 1042 provisions and exempt loan language. Realistically, this means that the next 6-year cycle for DC opinion/advisory letters, starting in 2018, is the target date for adding ESOPs/KSOPs to the pre-approved plan program.

Imagine how quickly the stack of determination letter applications waiting to be reviewed would shrink if the IRS received approx. 325 applications each cycle instead of approx. 1,300 applications. This would require moving 75% of the existing ESOP/KSOPs on to pre-approved prototype or volume submitter plan documents, which is possible if the IRS commits to making two simple changes in the opinion/advisory program. First, the IRS returns the filing fee to the EGTRRA level of $4,500 per opinion/advisory letter (the current fee is $21,000+ per opinion/advisory letter). Second, the IRS reinstates the National Sponsor category or reduces the number of word-for-word adopters to 10 (the current number of word-for-word adopters required for an opinion/advisory letter is 30).

In the meantime, the IRS has created a webpage showing which plans they are currently reviewing. For example, if you mailed a Cycle D ESOP to the IRS for a determination letter in January of 2010, the odds are pretty good that the submission is sitting on a shelf somewhere waiting for an agent to be assigned to review the application. I’m finding this website to be a handy tool to set expectations with plan sponsors on how long the ESOP/KSOP determination letter process may take.

The good news is that once the plan is assigned to an agent for review, the IRS has created a group of highly trained agents within Employee Plans who only review ESOP/KSOP determination letter applications, so once the review process begins, it should proceed quickly and efficiently. The IRS recognized during the webinar that writing plan documents is a niche among ERISA attorneys, and within that niche, there is a smaller niche of ERISA attorneys that write ESOP/KSOP plan documents. Connecting the small group of ERISA attorneys who actually write ESOP/KSOP plan documents with the group of agents within Employee Plans who are devoted to reviewing those plan documents should speed the entire process up. And, as one of the ERISA attorneys who write ESOP/KSOP plan documents, I hope not only will it make the current process faster and more efficient, but will start a dialogue between the groups which will continue over the next six years and result in a smooth transition between the current process and an ESOP/KSOP opinion/advisory program in 2018.

Other handy tips are included in the handout material, including making sure to check that the determination letter application includes plan documents and amendments that are signed AND dated.

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Free IRS Webinar about ESOP Determination Letters on Oct. 28, 2011

Tomorrow, Oct. 28, 2011, the IRS is holding a free webinar on ESOP determination letter applications from 2pm ET to 3pm ET. Even if you do not handle ESOPs, it is worth taking an hour to attend this webinar because some of the issues the IRS is finding in ESOP determination letter submissions are applicable to all determination letter applications submitted using Form 5300. It is not too late to register. You can register to attend through the IRS’ website here.

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IRS Re-Interprets the Form 8717 Determination Letter Fee Exemption

magician's hat
On Oct. 20, 2011, the IRS issued Notice 2011-86, which re-interprets when a plan qualifies for exemption from paying user fees when filing a determination letter application. With the recent IRS increase in user fees for determination letter applications (individually designed plans including Demo 5 or Demo 6 in their determ letter application now pay $4,500 in filing fees for the determ letter application), plan sponsors are finding that qualifying for the exemption is more important than ever.

The exemption was created by Section 620 of the Economic Growth and Tax Relief Act of 2001 (EGTRRA) and allows plans that meet certain conditions to obtain a determination letter application without paying the filing fee for that determination letter application.

First, the plan sponsor must be an “eligible employer” for purposes of the exemption. “Eligible Employers” are defined as employers with:

    1. no more than 100 employees who receive a least $5,000 in compensation from the employer for the preceding plan year; and
    2. at least one non-highly compensated employee (NHCE) participating in the plan.

Second, the application must be filed by the later of the last day of:

  • the fifth plan year of the plan’s existence, or
  • any remedial amendment period for the plan that begins within the plan’s first five plan years.

It was the “remedial amendment period” condition which the IRS has reinterpreted. Prior to Notice 2011-86, the remedial amendment period could stretch back pretty far. The draft instructions to the most recent version of Form 8717 (May 2011) state:

“Under section 620 of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), an application for a defined contribution plan from an eligible employer for a plan that was first effective on or after Jan. 2, 1997, will automatically meet this requirement. An application for a defined benefit plan from an eligible employer for a plan that was first effective on or after Jan. 3, 1996, will automatically meet this requirement.”

Notice 2011-85 changes this. The IRS says the “Service will treat an application as having been filed by the last day of a remedial amendment period with respect to the plan beginning within the first five plan years if both of the following conditions are met:

    1. the application is filed with the Service by the last day of the submission period for the plan’s current remedial amendment cycle; and
    2. the plan is first in existence no earlier than Jan. 1 of the tenth calendar year immediately preceding the year in which the submission period for the plan’s current remedial amendment cycle begins.”

The IRS applies this change to the information contained in the instructions to Form 8717 as:

“The service will treat an application for a determination letter for a Cycle A plan as filed by the last day of a remedial amendment period with respect to the plan beginning within the first five plan years if the application is filed with the Service by Jan. 31, 2012 (i.e., the last day of the submission period for the plan’s current remedial amendment cycle) and the plan is first in existence no earlier than Jan. 1, 2001 (i.e., Jan. 1 of the tenth calendar year immediately preceding 2011, the year in which the submission period for the plan’s current remedial amendment cycle begins). An application for a determination letter for a Cycle B plan will be treated as filed by the last day of a remedial amendment period with respect to the plan beginning within the first five plan years if the application is filed with the Service by Jan. 31, 2013, and the plan is first in existence no earlier than Jan. 1, 2002.”

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