The current system for applying for opinion, advisory or determination letters for qualified plans under Section 401(b) of the Internal Revenue Code (“Code”), employing cyclical remedial amendment periods, was established in Revenue Procedure 2005–66 (“2005–66”). Recently, the Internal Revenue Service (“IRS”) issued Revenue Procedure 2007–44 (“2007–44”), updating the procedures set forth in 2005–66. 2007–44 makes changes to many provisions of 2005–66, mostly minor, with some relatively significant changes. This article presents an overview of those changes, concentrating mainly on the more significant modifications.
Qualification Issues That Will Be Considered
In order for the IRS to issue the Cumulative List in mid-November of each year, the scope of the qualification issues that will be considered in opinion, advisory or determination letter applications has been reduced. Unless otherwise provided in the applicable Cumulative List, the following issues will not be considered:
- Guidance or statutes issued or enacted after the October 1 preceding the date the applicable Cumulative List is issued;
- Qualification issues that become effective in a calendar year following the calendar year in which the submission period begins with respect to the applicable Cumulative List (e.g., qualification requirements that become effective in 2009, but are submitted in an application during the submission period beginning on February 1, 2008 and ending on January 31, 2009, which is based on the 2007 Cumulative List); and
- Statutes that become effective in the year in which the submission period begins with respect to the applicable Cumulative List for which there is no guidance specified on the Cumulative List.
Special Rules Regarding Amendment for the Pension Protection Act of 2006
Changes made by the Pension Protection Act of 2006 (“PPA”) will be considered by the IRS in its review of an application only if:
- The application is for a terminating plan; or
- The plan is a pre-approved defined benefit plan, and the changes are effective in 2006 and 2007 and are specifically listed on the 2006 Cumulative List.
While individually designed and multiple employer plans may be amended for the PPA, the IRS will not consider those amendments in its review of plans under the 2006 and 2007 Cumulative Lists. If a plan amended for the PPA is submitted under the 2006 or 2007 Cumulative Lists, the application must identify (in the cover letter or an attachment) the PPA provisions that have been included and the plan provisions that reflect the changes. Determination letters issued under those Cumulative Lists may not be relied upon with respect to any provision identified as a PPA provision, regardless of whether the determination letter is caveated for the amendments making those changes.
- Off-cycle submissions will be reviewed using the “current” Cumulative List (the Cumulative List that would be applied to an on-cycle filing filed on the same date), not the Cumulative List of the plan’s cycle. This rule applies to all submissions, including those given priority review, except submissions for terminating plans (which must adopt amendments to reflect all qualification requirements that apply as of the date of termination).
- Three new classes of off-cycle submissions are now eligible to be given priority review (the same priority as on-cycle applications):
- New individually designed plans (plans within their initial remedial amendment cycle under Treasury Regulations section 1.401(b)–1(B)(1)) whose next regular on-cycle submission period ends at least 2 years after the end of the off-cycle submission period may make an off-cycle submission. The IRS has clarified that filing under this exception is optional. Because the initial remedial amendment cycle for a new plan is extended to the end of the remedial amendment cycle that includes the date on which the 401(b) remedial amendment period would otherwise end, an off-cycle filing need not be made to maintain plan qualification.
- Off-cycle submissions will be given priority review if made in accordance with published guidance issued by the IRS requiring the submission in connection with a particular event.
- An employer may request off-cycle priority review due to urgent business needs. The IRS will consider these requests based on the facts and circumstances. The IRS expects that these submissions will be given the same status as on-cycle submissions “only in limited cases where exceptional circumstances exist.”
Rules Relating to Determination Letter Submissions
- Form 6406 (Short Form Application for Determination for Minor Amendment of Employee Benefit Plan) may no longer be used to apply for determination letters.
- Individually designed plans must always be restated for submission. If the determination letter filing accelerates the deadline for incorporation of interim amendments into the restated document to a date earlier than the deadline for adopting interim amendments provided elsewhere in 2007–44, a working copy may be submitted if copies of timely executed amendments (both interim and discretionary) are also included in the application. In addition, a proposed restatement may be submitted, but only if all interim and discretionary amendments are included, along with a copy of the prior plan document.
Special Adoption Deadlines for Interim and Discretionary Amendments for Governmental and Tax-Exempt Employers
- Deadlines for governmental employers are extended to the last day of the next regular legislative session beginning after the amendment’s effective date in which the amendment can be legally considered, if that date is later than the otherwise prescribed amendment deadline.
- Deadlines for tax-exempt employers are based on the due date of the Form 990 series filing rather than a tax return, with a default date of the 15th day of the 10th month after the end of the employer’s tax year for cases where the employer is not required to file a tax return. If the Employer does not have a tax year, the deadline will be determined based on the end of the calendar year.
Exceptions to the General Rule for Determining a Cycle
The exceptions to the general rule for determining a plan’s five-year remedial amendment cycle are expanded and clarified. The rules for the exception applicable to controlled and affiliated service groups have been changed as follows:
- In the event that a controlled or affiliated service group of employers make an election for all plans to submit in Cycle A, the requirement that the election be made jointly by all members of that group of employers is waived for parent-subsidiary controlled groups, in which case the election may be made on behalf of all members by the parent.
- A controlled or affiliated service group of employers that is a parent-subsidiary controlled group may elect to use the cycle determined by the last digit of the EIN of the parent, in which case the election must be made by the parent.
- A group of related tax-exempt organizations maintaining separate plans that is not a controlled group under Code section 414(b) or (c) or an affiliated service group under Code section 414(m) may, if the terms of the plans are substantially the same and all or substantially all of the discretionary authority for the operation and administration of the plans is handled by a centralized organization (e.g., a national headquarters or common administrative committee), elect that all plans be submitted in the remedial amendment cycle determined based on the EIN of the centralized organization. This election is made by the centralized organization and could, if desired, also apply to any taxable organization related to the group of tax-exempt organizations to which this provision would apply if they were tax-exempt.
- Elections must be in writing and must be signed and dated before the end of the earliest cycle for which a determination letter would have been required had the election not been made (or by the end of Cycle A, if the Cycle A election described above is made).
- Elections made by a controlled group that is not a parent-subsidiary must list all of the qualified plans sponsored by each member of the group. If a new member joins the controlled group, it must make an election no later than one year from the date it joins the group in order for the original election to remain valid. When determination letter applications are submitted, copies of all elections made to date must be attached, with an updated list with current information.
- Elections made by a parent-subsidiary controlled group must include the same information as elections by non parent-subsidiary groups, but may also provide that new members of the group will automatically be added to the election and that the election will automatically cease to apply to members that leave the group. If the election contains these provisions, no additional elections need be made, but a list with current information must be maintained and attached to all determination letter applications.
- Elections by related tax-exempt organizations are similar to those for parent-subsidiary controlled groups.
- In the event that the parent has no EIN (e.g., a foreign entity) the highest level U.S. entity with an EIN will take the place of the parent for the purposes of making elections and maintaining lists of current information.
The definitions of cycle-changing events have been expanded to include either becoming or ceasing to be a multiemployer or multiple employer plan. More specific guidance is given on when a change occurs under an election to become a multiple employer plan. Additional guidance is also given on the interaction between the pre-change, open, and expired cycles.
Rules Relating to Pre-Approved Plans
Treatment as a Pre-Approved Plan and Eligibility for the Six-Year Remedial Amendment Cycle
- Additional guidance is provided on when an employer’s plan is treated as a pre-approved plan and is eligible for a six-year remedial amendment cycle. This includes clarifying the definitions of prior adopter, new adopter, intended adopter, and existing and interim plans. Detailed examples are provided, illustrating the various principles in this section.
- 2007–44 clarifies the rules as to when an employer is entitled to remain in the six-year cycle after adopting an individually designed plan or amending a plan so that it is no longer considered to be a Master & Prototype or Volume Submitter plan.
M&P Sponsor’s Authority to Amend
- An M&P sponsor’s authority to amend on behalf of an adopting employer, in the case where the employer is required to obtain a determination letter in order to have reliance, is no longer conditioned on the plan being covered by a favorable determination letter.
- A sponsor should generally continue to amend on behalf of the adopting employer even if the adopting employer makes amendments to the plan.
- The sponsor does not have the authority to amend on behalf of the employer if the IRS has determined the plan to be individually designed (under Revenue Procedure 2005–16) or the adopting employer has adopted an amendment of a type not allowed in the M&P pre-approved program.
Off-Cycle Filings by Sponsors of Pre-Approved Plans
- New details are provided on when to submit applications for new pre-approved plans created after the submission period for the applicable six-year cycle, when adopting employers must adopt such plans, and the applicable Cumulative List that will be used in reviewing these plans.
- 2007–44 provides that a sponsor or practitioner may not submit an off-cycle application for an opinion or advisory letter for a pre-approved plan that was in existence prior to the submission deadline for the applicable six-year cycle, if they have submitted an application before the submission deadline.
Good-Faith Reliance on Revenue Procedure 2005–66 Will Constitute Compliance with 2007–44
If a sponsor, practitioner or employer made a determination that a plan is not a Cycle A plan, based on a reasonable and good faith interpretation of 2005–66, and under the provisions of 2007–44 the plan is determined to be a Cycle A plan, then the sponsor, practitioner or 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 annual Cumulative List based on the date of the determination letter submission. For example, a plan submitted on August 31, 2007 will be reviewed on the basis of the 2006 Cumulative List and the plan will be considered to have been submitted within the extended remedial amendment period.