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.

In late 2004, Great-West decided to cease providing medical coverage to the long-term disability claimants, and mailed all participants a letter advising them of the changes to the plan effective January 1, 2005. Specifically, the letter stated:

“effective December 31, 2004, ‘medical benefits will no longer be continued for current or future Long Term Disability claimants.’ Further, the letter stated that ‘due to the change in the 2005 benefit package, your health coverage will terminate December 31, 2004, and you will be offered the option to elect coverage under COBRA.”

The letter was signed by one of Great-West’s officers. Along with the letter, Great-West mailed all participants an unsigned summary plan description (SPD).

The participants who were former employees also receiving long-term disability benefits brought a lawsuit against Great West, claiming that the letter did not constitute a valid amendment to the plan. The Court found that it did constitute a valid amendment to the plan. In making this determination, the Court looked at the language in the plan document, which stated:

“5.1 Amendment of the Plan. The Company reserves the right at any time or times to amend the provisions of teh Plan to any extent and in any manner that it may deem advisable, by a written instrument signed by an officer of the company; provided, however, that no such modification shall divest a Participant of benefits under the Plan to which he has become entitled prior to the effective date of the amendment.”

Applying this language, the Court found that the letter and the SPD, when reviewed together in harmony with each other, constituted a valid amendment to the Plan because it was a written instrument signed by an officer of the company.

The former employees also claimed that benefits were vested at the time Great-West made its decision to eliminate them, and, as such, Great-West violated the plan’s terms by discontinuing them.

The Court stated that, unlike pension benefits, ERISA does not mandate vesting for employee welfare benefit plans. Because of this, the only way the benefits discontinued by Great-West could have become vested is if the plan document provided vesting for these benefits. The Court found, after reviewing Section 5.1, that the plan language was ambiguous as to whether Great-West intended to vest these benefits. For this reason, the Court reversed the district court’s grant of summary judgment, and remanded the case for a trial on the issue of whether the welfare benefits were vested.

[tag]pension protection act, ppa, vesting, amendment, halbach, Great-West, 8th Circuit, ERISA[/tag]

Recently, it seems that the IRS auditors have been running a governmet fundraiser by imposing inordinately large fines for small missed tack-on amendments. Just today, I received a call from a fellow attorney. For the last 18 years, he has been funding a small profit sharing plan for his retirement. Like clockwork, each year he timely files his Form 5500EZ and signs the forms and amendments he received from his third party administrator. In 2005, his third party administrator died. It took him a couple of months to find a new third party administrator but he did so in time to timely file his Form 5500EZ for that year.

About a year ago, he receives a notice that his plan is under audit. He wasn’t worried. He felt he had done everything correctly. The only two participants in the plan were him and his wife, who has answered the phones, made his coffee and typed all of the paperwork at his office since he graduated from law school and passed the bar 18 years ago.

The auditor found one problem. In 2005, the IRS required all qualified plans to adopt an amendment which changed the plan document language to comply with Code section 401(a)(31)(B) and Notice 2005-5. This amendment is also known as the Automatic Rollover Amendment. The change provided that once an employee terminated employment, the employer could cash the employee out of the plan without the employees permission if the employee had an account balance of less than $1,000. If the terminated employee had a balance of more than $1,000 but less than $5,000, the employer could cash the terminated employee out of the plan without their permission by setting up an IRA and rolling their account balance into the IRA.

With Notice 2005-5, the IRS required all qualified plans to adopt an amendment for this change by the end of the plan year which began on or after January 1, 2005. For calendar year plans, this meant that the amendment had to be signed by December 31, 2005. In December of 2005, the IRS issued Notice 2005-95, which extended the deadline for adopting this amendment until the later of December 31, 2005 or the due date, including extensions, for filing the income tax return for the employer’s taxable year which included March 28, 2005. With the prior third party administrator dying in 2005, this amendment somehow was missed.

In Revenue Procedure 2008-50, the IRS issued guidance for how to bring plans back into compliance once a mandatory amendment is not timely signed. If the attorney or the new third party administrator had realized that the plan was missing the Automatic Rollover amendment from 2005, the plan could have been brought back into compliance by paying a $375 fine and filing an application with the IRS’ Voluntary Compliance Program (VCP). The VCP program can only be utilized to bring a plan back into compliance before the IRS discovers the mistake. Because this mistake was discovered by an IRS auditor, the VCP program was unavailable to bring this plan back into compliance.

If the plan had filed for a determination letter, and the missing amendment had been discovered by the IRS during the determination letter review, the IRS would have allowed this plan to pay a $3,000 fine, sign the amendment, and the plan would have been brought into compliance.

Instead, once the plan is audited and the IRS auditor discovers the missing amendment, the auditor applies a formula based upon the number of years the plan has been out of compliance and the total dollar amount in the plan. For this attorney’s plan, the IRS auditor decided that the appropriate fine is $45,000. The attorney has been given the choice of paying $45,000 or having the plan disqualified. At age 62, if the plan is disqualified, he won’t be able to start saving for retirement again.

The greater question he is pondering is how does this fine make sense because failing to sign this amendment had no impact on any participant in the plan because no employees were cashed out of the plan pursuant to Code section 401(a)(31)(B) ever, much less cashed out between 2005 and now.

[tag]pension protection act, ppa, automatic rollover, amendment, notice 2005-5, 401(a)(31)(B), IRS, fine, penalty, ERISA[/tag]