IRS Proposes Interim Amendment Solution
ATLANTA (May 13, 2011)– Interim amendments could possibly be replaced by a system of notices to employees, according to an IRS official.
Interim amendments burden employers and practitioners, and they also consume as much as much 20 percent of the IRS’s manpower for plan qualification reviews, according to Andrew E. Zuckerman, IRS Director of Employee Plans Rulings and Agreements. So the IRS is considering a number of alternatives to the current system in which employers must adopt certain amendments every year or two in addition to the requirement to restate the document every five or six years.
Zuckerman announced the proposal to use notices to replace some interim amendments at the Benefits Conference of the South (BCOS) in Atlanta on May 12. The Internal Revenue Service (IRS) and the American Society of Pension Professionals & Actuaries (ASPAA) jointly sponsor the annual regional conference.
Customized plans (also called “individualized” plans) must be restated every five years; and pre-approved plans (prototype and volume submitter plans) must be restated every six years. A plan’s five- or six-year restatement cycle is the plan’s “remedial amendment period.” Employers must adopt amendments for certain mandatory changes caused by new laws and regulations in between these restatements, and the IRS calls these amendments “interim amendments.”
One of the leading alternatives being considered within the IRS, according to Zuckerman, is to memorialize the plan changes between restatements with notices to participants. The notices would explain to participants how the plan’s operations would change to meet new legal requirements.
Internally, the IRS rejected suggestions that retirement plans return to the prior system, before the IRS began requiring Economic Growth and Tax Relief Reconciliation Act (EGTRRA) interim good-faith plan amendments. Under the prior system, employers were only required to amend their plans to conform to law changes at the time of restatement, as long as they operated their plans in good faith compliance with the changes in the interim period. IRS officials believe that employees need notice of how a plan’s operations will change and need that notice sooner than the end of the plan’s remedial amendment period, Zuckerman said.
Zuckerman emphasized that the IRS does not want to create a new system of notices to participants. If the IRS approved the notice alternative to interim amendments, the IRS would allow employers to include the notice of plan changes in one of the other required notices that must already be issued to participants.
Employers and practitioners have complained to the IRS about the cost and time required to adopt interim amendments between restatements. The IRS’s panel of outside advisors on retirement plan matters, the Advisory Committee on Tax Exempt and Government Entities (ACT), issued a report last June examining five alternatives to the current interim amendment system.
The ACT recommended two of those alternatives, but the notice system Zuckerman suggested is an entirely new idea.
Richard A. Hochman, president and COO of McKay Hochman Company, said the new notice proposal makes sense as a way to keep participants informed of plan changes. “Participants and even employers do not read plan documents,” he said.
That means that, despite the rush to get interim amendments formalized into plan documents, participants never learn about many of these amendments. Participants only learn of these changes if the plan sponsor believes the change will significantly affect participants and issues a summary of material modifications (SMM) (an update to the summary plan description document). Even if the employer issues an SMM, participants may not receive the SMM for nearly a year after the amendment is made.
Hochman said the proposed notice method of addressing plan changes could save employers time and be a very efficient method of meeting the requirements for legal updates.
“I have mixed emotions. It could be a good way of going, depending on the way it’s handled,” Hochman said. “But it could be a great solution.”
Zuckerman said a notice system would greatly reduce the burden on the IRS specialists who review applications for determination letters. The IRS only has about 125 agents dedicated to that task, and it has a backlog of filings. According to the IRS’s website, the agency is still reviewing Cycle D submissions filed in April 2009, which was near the beginning of the Cycle D filing period. The IRS has just begun reviewing Cycle E submissions, the earliest of which were filed in February 2010.
Hochman noted that no alternative system would entirely eliminate the need to amend plans between restatements. Employers would still need to formally amend their plans for any changes that would prospectively decrease or eliminate any benefits protected under Code Section 411(d)(6).
The ACT recommended the IRS adopt one of the two following alternatives:
• Require only the adoption of amendments needed to avoid a cutback of benefits protected under Code Section 411(d)(6) in the plan year they become effective. All other plan amendments could be adopted any time before the end of the plan’s remedial amendment period. This approach, which Zuckerman said was rejected internally by the IRS, harkens back to the pre-EGTRRA approach.
• Require only the adoption of “core amendments” in the plan year they become effective. Core amendments should include those that modify eligibility or vesting provisions, materially change benefits, or decrease or eliminate benefits protected under Code Section 411(d)(6), according to the ACT report. Under the proposal, plan sponsors would only be required to adopt any non-core amendments by the end of the plan’s remedial amendment period.
Zuckerman said this approach sounds good but begs the question of what issues are “core” issues that would justify interim amendments. Indeed, the ACT provided a five-level decision tree in its report to show how plan sponsors would decide whether an amendment is a “core” or “non-core” amendment.
Hochman said the next step in the consideration of an alternative amendment system is for the IRS and the ACT to discuss the notice alternative and the five other alternatives proposed by “stakeholders” in the benefits community. If the IRS decides on a final alternative, it could issue guidance in the next year or two.
Seminars at BCOS 2011 included discussions of the DOL’s final fee disclosure regulations, top IRS audit issues, healthcare reform, and expanded fiduciary rules.
The Benefits Conference of the South (BCOS) is ASPPA’s annual regional IRS conference for the southern United States. BCOS provides an opportunity to discuss employee benefits issues with colleagues and local, regional and national government representatives from the Internal Revenue Service and Department of Labor as well as private sector experts.
For more information on 2011 BCOS sessions, to propose a topic, or nominate a speaker for BCOS 2012, please e-mail conferences@asppa.org.
–Matthew J. Cristy, Esq.
BCOS Conference Committee
The Law Offices of Ilene H. Ferenczy, LLC
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