The Intricate Web of Plan Amendments Explained
May 2008Executive Compensation, Benefits and Employment Law Focus
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Employers who sponsor tax-qualified retirement plans have many responsibilities with respect to the administration and maintenance of such plans. Written plan documents, for example, must be kept up to date by means of the timely adoption of plan amendments, to reflect changes in the law or changes in the operation of the plan. Generally stated, plan amendments made for purposes of conforming plan provisions to changes in the law must respond to changes brought about by new legislation and the issuance of government regulations or other official pronouncements. New legislation affecting tax-qualified plans has been enacted periodically, either on a stand-alone basis or as part of some larger comprehensive tax legislation. Additionally, both the US Department of the Treasury (the "Treasury") and the US Department of Labor (the "DOL")1 periodically issue regulations relating to tax-qualified plans, along with other official guidance (e.g., revenue rulings, general counsel memoranda, announcements and/or notices), all of which can necessitate changes in plan language.
Both newly enacted legislation and the issuance of new regulations or other official guidance typically contain specific deadlines for amending tax-qualified plans. Further, sponsors of individually designed plans may and generally do submit such plans to the Internal Revenue Service (the "IRS") for a favorable determination letter on a five-year cycle, a process which requires amendment and restatement of such plans. In addition, certain plan amendments (i.e, interim and discretionary amendments, described later in this article) must be made by deadlines other than those in connection with submissions for determination letters or regarding statutory and regulatory changes. Therefore, it is apparent that the issue of when and why to amend plans can become very confusing. The purpose of this article is to identify, and generally describe, the various categories of amendments that must be made to individually designed tax-qualified plans during and after the 2008 plan year, and to describe when such amendments must be made.2
Categories of Plan Amendments
The three main categories of plan amendments that employers need to be aware of are generally described as follows:
I. Amendments Required by the Pension Protection Act of 2006
On August 17, 2006, the Pension Protection Act of 2006 (PPA) was enacted, containing a significant number of provisions that directly impact both the form and administration of tax-qualified plans.3 Due to the extensive revisions that PPA made to both ERISA and the Code, all tax-qualified plans will eventually need to be amended to comply with the applicable provisions of PPA, many of which are already in effect and, thus, require plans to be currently compliant in operation. For single employer plans, the deadline for making amendments in response to PPA, as specified in PPA, is on or before the last day of the plan year beginning on or after January 1, 2009. Thus, for calendar year plans, the deadline for amending tax-qualified plans in response to PPA is December 31, 2009. For a July 1st to June 30th plan year, the deadline would be June 30, 2010.
II. Amendments Required by the IRS Determination Letter Submission Process, and the Annual "Cumulative List"
Although not explicitly required by law, virtually all tax-qualified plans are periodically submitted to the Internal Revenue Service (the "IRS") for a determination letter as to whether such plans meet, in form, the qualification requirements of the Code.4 With respect to individually designed plans, IRS determination letter submissions are now made on a five-year cycle, depending upon the last digit of a sponsoring employer's employer identification number (EIN).5 One of the requirements for making a determination letter submission to the IRS is that the plan must be amended and restated to take into account changes in the law, as enumerated in the applicable cumulative list (the "Cumulative List") published annually by the IRS. Determining the applicable Cumulative List to follow depends upon the plan's submission cycle.
Employers whose EINs end in "3" or "8" are considered to be in Cycle C, which began on February 1, 2008 and ends on January 31, 2009.6 Section 4 of IRS Revenue Procedure 2007-44 ("Rev. Proc. 2007-44"), issued on July 9, 2007,7 clarifies that, with respect to Cycle C submissions, plans must be amended and restated to take into account those provisions applicable to such plans contained in the 2007 Cumulative List, which was released as IRS Notice 2007-94 on December 17, 2007.8
In general, in issuing determination letters, the IRS is not taking into account changes made to plan documents in response to PPA. Employers sponsoring individually designed plans have the option to amend such plans to include certain PPA provisions, other than those provisions becoming effective in a calendar year after the calendar year in which the submission period begins; however, except with respect to terminating plans, plan sponsors may not rely on a Cycle A, Cycle B or Cycle C determination letter with respect to such PPA provisions, since the IRS has indicated that it will not rule on PPA provisions at this time.
The 2007 Cumulative List, used for Cycle C submissions, reflects law changes under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the Pension Funding Equity Act of 2004, the American Jobs Creation Act of 2004 (JCWAA), the Gulf Opportunity Zone Act of 2005, the US Troop Readiness, Veterans' Care, Katrina Recovery and Iraq Accountability Appropriations Act of 2007, and various Treasury regulations. The 2007 list includes, among other things:
- Final Treasury regulations under Section 401(a) of the Code regarding permissible normal retirement ages.
- Section 401(a)(17) of the Code, as amended by Section 611(c) of EGTRRA, to increase the compensation limit to US$200,000 (as indexed for inflation).
- Section 401(a)(31) of the Code, as amended by Section 643(b) of EGTRRA, to allow employees' after-tax contributions to be rolled over under certain circumstances.
- Section 401(a)(31)(B) of the Code, as amended by Section 657(a) of EGTRRA (and as further amended by Section 411(t) of JCWAA), to provide for the automatic rollover of certain mandatory distributions (effective date March 28, 2005).
- Modifications to the definition of "eligible rollover distribution" to exclude hardship distributions, as required by EGTRRA.
- Sections 401(k)(2) and 401(k)(10) of the Code, as amended by Section 646(a)(1) of EGTRRA, to permit distributions of elective deferrals from a "401(k)" plan upon severance from employment.
- Revisions to the Treasury regulations relating to safe harbor hardship distributions of elective deferrals from "401(k)" plans, reducing the time that an employee is prohibited from making elective and employee contributions following a hardship distribution from one year to six months.
- Section 401(m)(9) of the Code, as amended by Section 666 of EGTRRA, to eliminate the multiple use test.
- Section 402A of the Code, as added by Section 617 of EGTRRA, to offer optional treatment of elective deferrals as "designated Roth contributions" to defined contribution plans, effective for taxable years beginning after December 31, 2005.
- Section 409(p) of the Code, as added Section 656 of EGTRRA, relating to restrictions on the allocation of employer securities in ESOPs maintained by S Corporations.
- Final Treasury regulations permitting some employees of tax-exempt organizations to be excluded when determining whether a "401(k)" plan meets the Section 410(b) minimum coverage requirements.
- Section 411(a) of the Code, as amended by Section 633 of EGTRRA (and as further amended by Section 411(o) of JCWAA), to provide for more rapid vesting of matching contributions.
In addition, the 2007 Cumulative List includes changes made to Section 415 of the Code, along with other miscellaneous law changes.
Practice Pointer: As a rule of thumb, tax-qualified plans submitted to the IRS for a determination letter must be amended to include the applicable provisions contained in the annual Cumulative List issued in the year which is two years prior to the year which includes the last date on which such submission must be made (i.e., January 31). For example, plans being filed during Cycle C must be amended to reflect the applicable changes contained in the 2007 Cumulative List, on or before January 31, 2009.9
III. Interim and Discretionary Amendments
In addition to amendments required by PPA and amendments required to be made in connection with IRS submissions, as contained in the applicable Cumulative List, tax-qualified plans are subject to the IRS's rules regarding "interim amendments" and "discretionary amendments." An interim or discretionary amendment may have an amendment deadline different from either of the two amendment deadlines previously described in this article.
Generally stated, an "interim amendment" is an amendment made in response to changes in the law (other than PPA) or regulations. As previously stated, such amendment deadline may differ from the PPA amendment deadline or the deadline for submitting a plan to the IRS for a determination letter. Plan sponsors generally must make interim amendments during, as opposed to at the end of, a plan's submission period, i.e., its applicable remedial amendment cycle. Such amendment deadline may either be (i) on or before the end of the generally applicable "remedial amendment period" as described below (e.g., changes made in response to EGTRRA) or (ii) the amendment deadline specified in the applicable legislation or regulation (e.g., amendments made to conform with final Treasury regulations under Section 415 of the Code, which, for calendar year plans, would have to be made on or before September 15, 200910).
Generally stated, the "remedial amendment period" applicable to an interim amendment ends on the later of (i) the due date (including extensions) for filing the income tax return for the sponsoring employer's taxable year that includes the date on which the remedial amendment period begins or (ii) the last day of the plan year that includes the date on which the remedial amendment period begins. For this purpose, the remedial amendment period begins on the date on which the change becomes effective with respect to the plan or, in the case of a provision that is integral to a changed qualification requirement, the first day on which the plan is operated in accordance with the provision, as amended. A change in the qualification requirements means a statutory change or a change in the regulations or other official IRS guidance.
Conversely, a "discretionary amendment" is an amendment made in response to a provision in the law (including PPA) which is optional as opposed to mandatory (e.g., certain permissible distributions under a "401(k)" plan made in connection with Hurricane Katrina, as provided in the Gulf Zone Act of 2005). In general, a discretionary amendment must be adopted on or before the end of the plan year in which the amendment is effective. Notably, this same rule would apply in the case of a plan amendment made for reasons other than compliance with applicable law or newly issued regulations; for example, an elective plan amendment made solely to change the amount of an employer's discretionary contribution under a profit sharing or "401(k)" plan or to add a participating employer.
Notwithstanding the above, Section 5.07 of Rev. Proc. 2007-44 provides that the PPA amendment deadline — i.e., on or before the last day of the plan year beginning after January 1, 2009 (see "Amendments Required by the Pension Protection Act of 2006, above) applies even to interim amendments and discretionary amendments, reflecting either required or optional PPA provisions, as the case may be, that are made pursuant to PPA or regulations issued under PPA.
Recently, the IRS posted on its website a list of recent guidance that may require interim or discretionary amendments.11 The list is meant to be a supplement to, and does not in any way supersede, the 2007 Cumulative List. Items of note appearing on the list include the following:
- Notice 2007-69, 2007-35 I.R.B. 468, provides temporary relief, until the first day of the first plan year that begins after June 30, 2008, for certain pension plans under which the definition of normal retirement age may be required to be changed to comply with final regulations on distributions from a pension plan upon attainment of normal retirement age.
- Announcement 2007-59, 2007-25 I.R.B. 1448, provides that a plan will not fail to satisfy the requirements of a "401(k)" safe harbor plan because of a mid-year change to implement a designated Roth contribution program.
- Rev. Rul. 2008-7, 2008-7 I.R.B. 419, addresses (i) the application of the backloading provisions of Sections 411(b)(1)(A), (B), and (C) of the Code to defined benefit cash balance plans and (ii) the use of a "greater of" formula in the instance of a conversion of a defined benefit pension plan to a cash balance plan, including limited Code Section 7805(b) relief.
- Section 6613 of the US Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007 amends Section 420(c)(3)(A) of the Code regarding minimum cost requirements for transfers of excess pension assets to retiree health accounts.
Changes in law regarding tax-qualified plans are occurring with increasing frequency, and each such change generally requires an amendment to such plans. With the arrival of the staggered IRS determination letter submission cycle, the issuance of annual Cumulative Lists and the concept of interim and discretionary amendments, it is readily apparent that determining deadlines for amending tax-qualified plans is no simple, one-step matter. As always, White & Case would be happy to assist you in keeping your plan timely amended or to review your plan document to determine whether and when any plan amendments need to be made.
1 Although not tax-specific, DOL regulations can impact tax-qualified plans because such plans are also subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA), an act which made extensive revisions to both the US labor laws and the US Internal Revenue Code. In practice, to avoid contradictory requirements, the Treasury and the DOL generally coordinate their efforts when issuing regulations impacting tax-qualified retirement plans.
2 Special amendment deadlines applicable to governmental plans and certain tax-exempt employers, along with amendment deadlines applicable to master and prototype or volume submitter plans, are not covered in this article.
3 See the August 2006 special edition of the White & Case Executive Compensation, Benefits and Employment Law Focus.
4 Among the many reasons why a plan should be submitted to the IRS for a determination letter are that (i) corrections can be made within the extended remedial amendment period; (ii) once a determination letter is issued, reliance thereon may be available if the applicable conditions are satisfied and (iii) the plan may be eligible for correction of plan defects under the IRS Employer Plans Correction Resolution System (EPCRS) (see Revenue Procedure 2006-27 Section 4.03).
5 See IRS Updates Determination Letter Procedures, November 2007 edition of the White & Case Executive Compensation, Benefits and Employment Law Focus.
6 Employers whose EINs ended in "1" or "6" were considered to be in Cycle A, which began on February 1, 2006 and ended on January 31, 2007. Employers whose EINs ended in "2" or "7" were considered to be in Cycle B, which began on February 1, 2007 and ended on January 31, 2008. Cycles D and E, respectively, are considered to begin on February 1, 2009 and February 1, 2010, and end on January 31, 2010 and January 31, 2011, respectively.
7 See Internal Revenue Bulletin ("I.R.B.") 2007 — 28.
8 Similarly, plans subject to Cycle B submissions had to be amended and restated to take into account those provisions applicable to such plans contained in the 2006 Cumulative List, and, presumably, plans subject to Cycle D submissions will have to be amended and restated to take into account those provisions applicable to such plans contained in the 2008 Cumulative List.
9 Since calendar year plans must also be amended in response to the applicable provisions of PPA on or before December 31, 2009 (see "Amendments Required by the Pension Protection Act of 2006, above), to avoid having to amend plans twice within a month's time, year-end PPA restatements should also include the applicable 2007 Cumulative List provisions.
10 See The IRS Performs Some Much-Needed Housekeeping by Issuing 415 Final Regulations, October 2007 edition of the White & Case Executive Compensation, Benefits and Employment Law Focus.
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