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.

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.

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.

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.”

The IRS released Rev. Proc. 2011-49 today (Oct. 5, 2011). Rev. Proc. 2011-49 is the update to Rev. Proc. 2005-16, and officially supersedes Rev. Proc. 2005-16.

Rev. Proc. 2005-16 contained the specifics on applying for EGTRRA opinion/advisory letters during the last 6-year cycle. Rev. Proc. 2011-49 contains the specifics on applying for PPA opinion/advisory letters for the next 6-year defined contribution prototype and volume submitter cycle.

It states:

The 12-month applicable on-cycle submission period for non-mass submitter sponsors and practitioners, word-for-word identical adopters, and M&P minor modifier placeholder applications will end on January 31, 2012. Section 18.02(1) of Rev. Proc. 2007-44, 2007-2 C.B. 54, provides that the 9-month applicable on-cycle submission period for sponsors and practitioners maintaining defined contribution mass submitter plans will end on October 31, 2011. Section 23 of this revenue procedure extends the submission deadline to submit applications for opinion and advisory letters for sponsors and practitioners maintaining defined contribution mass submitter plans from October 31, 2011 to January 31, 2012.

This is good news for TPA firms because they now have another 3 months to decide which document provider they want to use for their defined contribution plan documents, including 401(k) plan documents, for the next 6-year plan document cycle.

This is also good news for plan document providers who are waiting for the IRS to issue the updated Defined Contribution List of Required Modifications (DC LRMs) needed to actually write their plan documents.

Can a 413(c) multiple employer plan use a pre-approved prototype plan document? I am asked this question frequently, and I’m not sure what the answer is. Will the IRS accept a 413(c) multiple employer plan created by using a pre-approved prototype plan document with additional adopting employer agreements as within the scope of the opinion letter issued to the prototype plan document?

If the plan document is outside the scope of the opinion letter issued to the prototype plan document, Rev. Proc. 2007-44 classifies the plan as individually designed. Section 19.01 of Rev. Proc. 2007-44 states that:

“an employer that amends any provision of an approved master & prototype plan including its adoption agreement (other than to change the choice of options if the plan permits or contemplates such a change) is considered to have adopted an individually designed plan. (See section 5.02 of Rev. Proc. 2005-16.)”

One of the issues is whether the IRS contemplated the approved master & prototype plan being used to create a multiple employer plan when the IRS issued the opinion letter. Some would argue that because the IRS approved language in the prototype plan documents which permit additional adopting employer agreement, the IRS did contemplate prototype plan documents being used by 413(c) multiple employer plans.

For multiple employer plans, not understanding whether the plan document is individually designed or not can have especially cruel consequences. Section 10.03 of Rev. Proc. 2007-44 assigns all individually designed multiple employer plans to restatement Cycle B. Submit a plan to early but within a few years of the correct submission date, and the IRS will mail it back with an admonition to submit the plan on-cycle. Submit a plan too late, and the plan is headed to the Voluntary Correction Program (VCP) because it missed the applicable restatement and submission deadline.

Section 6.02(1) of Rev. Proc. 2005-16 states that opinion letters will not be issued for multiple employer plans, which means that the IRS will not pre-approved a prototype plan document as a multiple employer plan document. I’m not absolutely certain this means that the IRS will not accept a 413(c) multiple employer plan using a prototype plan document with additional adopting employer agreements which the IRS has approved for general use.

I checked a number of EGTRRA opinion letters for various prototype plans, and the IRS has not included a caveat in the letters stating that use of a prototype plan document by a multiple employer plan is outside the scope of the opinion letter. I don’t believe the lack of a caveat answers this question but the existance of a caveat certainly would have made answering this question much easier.

The reason this matters is that, with the recent increase in fees the IRS charges for determination letter applications, whether a plan is classified as individually designed is no longer a minor consideration. For individually designed plans submitting a determination letter application using Form 5300 with no Demo 5 or 6, the fee starts at $3,000 for a multiple employer plan with 2 to 10 Form 5300s submitted at the same time. Compare this to the $300 fee charged to each plan which uses a pre-approved plan document.

Pre-approved plan documents also have an advantage under Rev. Proc. 2007-44 in that they are not required to file a determination letter application with the IRS because the IRS has already reviewed the plan document before it was issued an opinion/advisory letter.

With the start of another restatement cycle, I hope the IRS clarifies this. The submission deadline for opinion letters is fast approaching, and whether the IRS will issue an opinion letter to a multiple employer plan using a prototype plan document is a growing issue as the number of 413(c) multiple employer plans using prototype plan documents increases.

413(c) multiple employer plans using volume submitter documents do not face the same issue. Section 16.02 of Rev. Proc. 2005-16 does not include multiple employer plan documents on the list of plans that IRS will not issue an advisory opinion for. This means that the IRS will approve a multiple employer plan document as a pre-approved volume submitter plan, so a 413(c) multiple employer plan can use a volume submitter plan document and not be classified as individually designed for purposes of Rev. Proc. 2007-44.

The new edition of Employee Plan News, released today by the IRS, contains this warning information about the new Form 5307 – it is important that customers send in the original copy of the application and not a photocopy. Photocopies of the bar code will not scan properly.

It seems that the bar code contains important information that will be optically scanned into the IRS’ computer system. What information the IRS is optically scanning from the bar code is not known. The same edition of Employee Plan News contains information that the DOL/EBSA is moving forward with the development of the EFAST2 system, which will receive, process, store, publicly disclose, distribute, and archive approximately one million Form 5500 submissions filed annually via the Internet. Mandatory electronic filing of Form 5500 is required for plan year 2009 filings, which will be filed in 2010.

Additionally, in this edition of Employee Plan News, Monika Templeman explains that one of the IRS’ critical priorities for this year is to target noncompliance through data-drive case selection methodologies.

In the private sector, this is called data mining and has been going on for years. It is a little disquieting that the IRS will be data mining both Form 5307s and Form 5500s. The new Form 5307 was first announced in Announcement 2008-23, and is available now. Use of the new Form 5307 becomes mandatory beginning Octoboer 1, 2008.

The IRS will still permit practitioners to create their own version of IRS bar coded Form 5307s and Schedules 8717 and 8905 by following the procedures in Publication 1167. The IRS notes that:

The substitute version of the form that is created MUST mirror (exactly) the IRS-printed Form 5307. (emphasis provided by the IRS).

The IRS is offering a limited number of paper copies of Form 5307 and Schedules 8717 and 8905, imprinted with bar codes for optical scanning through their form ordering service at 1-800-TAX-FORM.

[tags]Pension Protection Act, ppa, Form 5307, 8717, 8905, Publication 1167, IRS, data mining, ERISA[/tags]

In Announcement 2008-23, released on Friday, the IRS announced that:

1. The EGTRRA defined contribution prototype and volume submitter opinion/advisory letters will be issued March 31, 2008 for many plans. Some plans will have their opinion/advisory letters issued after March 31, 2008.

2. April 30, 2010, is the restatement deadline for plan sponsors using pre-approved defined contribution prototype and volume submitter plans to restate for EGTRRA.

3. May 1, 2008, is when the IRS will start accepting applications for individual determination letters submitted by plan sponsors using the new pre-approved EGTRRA defined contribution prototype and volume submitter plans.

4. Form 5307 is being revised to allow the form to be optically scanned. The new revised Form 5307 will be available soon. Applications filed on the current Form 5307, which was last revised in 2001, will continue to be accepted through Sept. 30, 2008.

The IRS also announced some important changes to when Form 5300 should be filed instead of Form 5307 by a plan using a prototype or volume submitter plan document, and which Cumulative List will be used to review a prototype or volume submitter plan document filed using Form 5300.

Generally, Form 5300 is used to file for an individual determination letter for an individually designed plan and Form 5307 is used to file for a determination letter for a plan using a pre-approved prototype or volume submitter plan document which has a valid opinion/advisory letter. In Announcement 2008-23, the IRS re-interates that an application for an individual determination letter on a pre-approved plan is to be filed on Form 5300 instead of Form 5307 where:

“1. the adopter of a prototype plan amends the basic plan document or adoption agreement, other than by choosing among options permitted under the plan or amending the plan in the manner described in sections 5.02 and 19.03 of Rev. Proc. 2005-16;

These are consistent with previous IRS guidance on the different standard applied when amending a pre-approved prototype compared to amending a volume submitter plan in a manner which makes the plan individually designed. The new information contained in Announcement 2008-23 on this point is that:

“Except as otherwise provided in this announcement, an application for an individual determination letter on a pre-approved plan that is filed on Form 5300 will be reviewed on the basis of the Cumulative List in effect when the application is filed. For example, a determination letter application filed on Form 5300 on May 1, 2008, will be reviewed on the basis of the 2007 Cumulative List (Notice 2007-94, 2007-51 I.R.B. 1179).”

Announcement 2008-23 then explains that “Except as otherwise provided in this announcement” applies only to a pre-approved plan filing for a determination letter using Form 5300 because the plan is a multiple employer volume submitter plan, or because the employer is requesting a determination regarding a partial termination, affiliated service group status or leased employees. A determination letter application filed on Form 5300 for these reasons will be reviewed on the basis of the 2004 Cumulative List.

A pre-approved prototype plan filing for a determination letter using Form 5300 because the plan was amended in a manner beyond choosing among options permitted under the plan will be reviewed on the basis of the Cumulative List in effect on the date the application is filed. A pre-approved volume submitter plan filing for a determination letter using Form 5300 because the adopter of the volume submitter plan made changes to the pre-approved plan that are “too extensive or complex or otherwise determined by the Service to be incompatible with the purposes of the volume submitter program”, will be reviewed on the basis of the Cumulative List in effect on the date the application is filed.

Announcement 2008-23 does not address what happens when such an amended prototype or volume submitter plan submits for an individual determination letter application using a plan document last updated for the 2004 Cumulative List, which is the Cumulative List in effect for the new EGTRRA defined contribution prototype and volume submitter plan documents about to be issued opinion/advisory letters by the IRS on March 31, 2008. The implication is that such a prototype or volume submitter plan filing for a determination letter application using a plan document last updated for the 2004 Cumulative List will be found to be deficient. I expect to see a more definitive statement from the IRS prior to the opening of the EGTRRA defined contribution determination letter program on May 1, 2008.

The other conclusion which can be drawn from this part of Announcement 2008-23 is that the IRS may have found a way to stop Form 5307 Roulette. Form 5307 Roulette is where an amended prototype or volume submitter plan is submitted to the IRS on Form 5307 even though the plan is a prototype which has been amended beyond the pre-approved options contained in the specimen plan, or the plan is a volume submitter plan which has been amended in a manner which is “too extensive or complex or otherwise determined by the Service to be incompatible with the purposes of the volume submitter program.” The theory behind Form 5307 Roulette is the plan sponsor bets that the IRS agent reviewing the application will let the determination letter application slide through, and will not request Form 5300 along with the higher user fee. Winning Form 5307 Roulette means the plan sponsor pays a $300 submission fee for Form 5307 instead of a $1,000 submission fee for Form 5300. In the past, losing at Form 5307 Roulette simply meant that the reviewing agent would request the additional fee and a completed copy of Form 5300. After Announcement 2008-23, losing at Form 5307 Roulette could mean that the reviewing agent requests the additional fee, a completed copy of Form 5300, and a copy of the plan document restated for the Cumulative List in effect when the determination letter application was submitted.

[tags]Pension Protection Act, PPA, IRS, Announcement 2008-23, Cumulative List, Rev. Proc. 2005-16, Form 5307, Form 5300, determination letter, ERISA[/tags]

6.05 Except in the case of applications involving master and prototype plans filed on Form 5307 or determination letters for volume submitter plans under section 9.02(2)(d), a complete copy of the plan and trust instrument is required to be included with the determination letter application. All changes made to the most recently approved version of the plan must be redlined or highlighted. An application will be returned as incomplete if it fails to include a copy of the plan that redlines or highlights the changes to the most recently approved version of the plan. The determination letter application must also include a copy of the signed and dated timely good faith EGTRRA amendments, required interim and other plan amendments (even if these amendments are dated earlier than a previous determination letter issued with respect to the plan) to show that the conditions for eligibility for the EGTRRA remedial amendment period as set forth in Notice 2001-42 are satisfied. Also see sections 7.03 and 7.04 for what must be included with applications involving plan amendments.

The penalty for not including a copy of the redlined or highlighted copy of the plan document is that the application will be returned as incomplete.

In a special edition of Employee Plan News issued by the IRS earlier this month, the IRS clarified that Cycle B submissions are not required to submit a redlined plan document. The requirement to include a redlined or highlighted copy of the plan document begins with Cycle C determination letter submissions. Cycle C begins this Friday, February 1, 2008.

[tags]Pension Protection Act, ppa, determination letter, Rev. Proc. 2008-6, Cycle C, Cycle B, IRS, EGTRRA, ERISA[/tags]