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CCH® PENSION AND BENEFITS — 6/25/07

IRS updates employee plan staggered remedial amendment procedures

The IRS has updated its employee plan staggered remedial amendment period procedures for individually designed and pre-approved qualified plans under the system of cyclical amendment periods instituted under Code Sec. 401(b) . Rev. Proc. 2007-44, generally effective June 13, 2007, supersedes and modifies Rev. Proc. 2005-66 (CCH Pension Plan Guide ¶17,299R-69) and modifies Rev. Proc. 200516 (CCH Pension Plan Guide ¶17,299R-58).

Background of cyclical amendment system

In Rev. Proc. 2005-16, the IRS announced the opening of the initial six-year remedial amendment cycle for defined contribution pre-approved plans. In Rev. Proc. 2005-66, the IRS established a system of cyclical remedial amendment periods under Code Sec. 401(b) for individually designed and pre-approved qualified plans. The IRS annually issues cumulative lists of necessary plan changes based on changes in legislative and regulatory requirements.

Under the cyclical amendment system, every individually designed qualified plan has a regular, five-year remedial amendment cycle. The cycles are staggered. The effect of this system is that plan sponsors need to apply for new determination letters generally only once every five years in order to continue to have a letter on which to rely. In addition, every pre-approved plan (i.e., master and prototype (M&P) and volume submitter (VS) plans), generally has a regular, six-year remedial amendment cycle. As a result, sponsors and practitioners generally need to apply for new opinion, advisory, or determination letters only once every six years. Pre-approved defined contribution plans have different six-year remedial amendment cycles than pre-approved defined benefit plans.

Changes made by new revenue procedure

The new revenue procedure contains more detail on the plan qualification requirements the IRS will consider in its review of opinion, advisory or determination letter applications. It clarifies that:

1. Except as otherwise provided on the applicable cumulative list, the IRS will not consider guidance or statutes issued or enacted after the October 1st preceding the date the applicable cumulative list is issued, qualification requirements that become effective in a calendar year following the calendar year in which the submission period begins with respect to the applicable cumulative list, or statutes that are first 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.
2. Special rules apply with respect to the IRS’s review of plans for amendments to reflect the Pension Protection Act of 2006 (PPA; P.L. 109-280) and the procedures to submit those amendments. Although individually designed plans and multiple employer plans submitting determination letter applications may be amended to reflect the PPA, the IRS will not consider these PPA provisions in its review of plans using the 2006 and 2007 cumulative lists. In contrast, pre-approved, defined benefit plans must be amended for certain provisions of the PPA, and the IRS will consider these amendments in its review of opinion and advisory letter applications.
3. These limitations on the IRS’s review of certain plans do not apply to terminating plans.

The new revenue procedure provides more detail on adoption deadlines for interim and discretionary amendments, including special deadlines for governmental and tax-exempt employers. In addition, the revenue procedure clarifies that other statutory provisions or guidance may set forth earlier or later deadlines, such as the delayed amendment deadline under PPA Sec. 1107.

Conditions for five-year RAP. The exceptions to the general rule for determining a plan’s five-year remedial amendment cycle are expanded and clarified. Under the modifications:

1. A governmental plan’s cycle (Cycle C) applies to a governmental plan that is also a multiemployer plan, as well as to a governmental plan that is also a multiple employer plan.
2. Another exception is added for a jointly trusteed single-employer collectively bargained plan, where the joint board of trustees is treated as the plan sponsor for purposes of Form 5500. The cycle for such a plan is determined based on the Employer Identification Number (EIN) used on the Form 5500.
3. The exception specifying that a plan’s cycle for multiple members of a controlled group or an affiliated service group is determined with reference to the last digit of the EIN used to report the plan on the Form 5500 is clarified to provide that this exception does not apply to multiemployer, multiple employer, or governmental plans.
4. The rules on alternative elections and the rules on entities that may make these elections have been revised. The new revenue procedure clarifies that members of a controlled group or affiliated service group (controlled group) that may make the election to choose Cycle A include a parent-subsidiary controlled group, as well as a controlled group that is not a parent-subsidiary controlled group.
5. A new exception is added allowing an election to be made by certain groups of tax-exempt organizations that are not controlled groups or affiliated service groups. An election may be made by a centralized organization that the cycle is determined based on the EIN of the centralized organization, if such centralized organization handles the administration and operation of plans that have substantially the same terms and are maintained by separate tax-exempt organizations (or related taxable entities in the group maintaining plans whose terms are substantially the same).
6. The new procedure adds details on what to include and when to file the alternative elections, including a new requirement that the election be filed with each determination letter application.
7. In the case of a parent that has no EIN, the highest level entity in the U.S. that has an EIN is permitted to be substituted for the parent for purposes of making the alternative elections.

Cycle-changing events. The definitions of cycle-changing events (e.g., merger or acquisition, change in plan sponsorship) have been expanded to include a plan changing its status by becoming or ceasing to be a multiemployer plan or a multiple employer plan. Additional rules relating to determination letter applications specify that individually designed plans must be restated when they are submitted for determination letters and Form 6406 may no longer be used to apply for determination letters.

Details are provided on the types of off-cycle applications for determination letters that will be given the same priority as on-cycle applications. Applications for determination letters for terminating plans, certain new plans and applications due to urgent business need are listed.

Rules are rewritten to clarify that the initial remedial amendment cycle for a new plan is the applicable cycle that includes the date on which the plan’s initial remedial amendment period under Reg. §1.401(b)-1 ends.

More examples are added or revised to reflect what the IRS will review based on the cumulative list and to illustrate the rules regarding submissions for a new plan or existing plan whose remedial amendment cycle ends after the applicable Code Sec. 401(b) remedial amendment period. Details are provided on when an employer’s plan is treated as a pre-approved plan and is eligible for a six-year remedial amendment cycle, including clarifying definitions of prior adopter, new adopter, intended adopter, and existing and interim plans.

The deadline to submit applications for opinion and advisory letters for sponsors and practitioners maintaining defined benefit mass submitter plans and national sponsors is extended from October 31, 2007, to January 31, 2008.

Application of 6-year RAP after adoption of individually designed plan. Rules are clarified on when an employer is entitled to remain in the six-year remedial amendment cycle (six-year cycle) after adopting an individually designed plan and making certain types of amendments, with examples. These clarifying rules include the following:

1. With certain exceptions described in (2) and (3) below, an employer that modifies a plan so that it is no longer considered an MP or VS plan will nevertheless stay in the six-year cycle for the current and subsequent six-year cycles.
2. 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 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 for the current cycle, and then switches to the five-year remedial amendment cycle (five-year cycle).
3. If (a) the nature and extent of amendments made by the employer fall within Rev. Proc. 2005-16, §24.03, or (b) an employer amends an M&P or VS plan to incorporate a type of plan not allowed in the pre-approved plan program within one year after the date the employer initially adopted the pre-approved plan, the applicable cycle is immediately the five-year cycle.

The new revenue procedure removes the rule under which an M&P sponsor’s authority to amend on behalf of an adopting employer is conditioned on the plan being covered by a favorable determination letter if the employer is required to obtain a determination letter in order to have reliance. It also clarifies that a sponsor should generally continue to amend on behalf of the adopting employer even if the adopting employer makes amendments to the plan. However, the sponsor no longer has the authority to amend on behalf of the employer if the IRS has exercised its authority under Rev. Proc. 2005-16, §24.03, or the amendment is an impermissible type not allowed in the M&P pre-approved program.

Off-cycle filing. New details on what constitutes an off-cycle filing for pre-approved plans are added that clarify the provisions of Rev. Proc. 2005-16 on off-cycle filings. The guidance specifies:

1. 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.
2. Sponsors or practitioners who submitted applications for opinion or advisory letters prior to the submission deadline for the applicable six-year cycle, with respect to pre-approved plans that were in existence prior to such submission deadline, may not also submit off-cycle applications for such plans.

Good faith compliance. A provision is added stating the conditions under which sponsors, practitioners or employers who made a determination with respect to a particular plan based on a reasonable and good faith interpretation of Rev. Proc. 2005-66 prior to the issuance of the new revenue procedure will be deemed to have complied with the new procedure.

For more information on this and related topics, consult the CCH Pension Plan Guide.

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