Compliance Issues for Pension Plans after the Change to the Determination Letter Program

Transcription

1 Compliance Issues for Pension Plans after the Change to the Determination Letter Program American Bar Association Section of Labor and Employment Law Employee Benefits Committee 2017 Midwinter Meeting Panelists: Sharon Goodman, Slevin & Hart T. Katuri Kaye, Trucker Huss February 8, 2017

2 Panelists Sharon Goodman, Esq. Principal Slevin & Hart 1625 Massachusetts Avenue, NW, Suite 450 Washington, DC (202) T. Katuri Kaye, Esq. Special Counsel Trucker Huss, APC One Embarcadero Center, 12 th Floor San Francisco, CA (415)

3 Agenda Background: Determination Letter Program Before 2017 Elimination of 5-Year Remedial Amendment Cycles For 2017 Forward Revenue Procedure Considerations for Plan Sponsors Other Impacts of Changes Q&A 3

4 Background: Determination Letter Program Determination letters not required to be tax qualified BUT most plan sponsors of individually designed plans (IDPs) get one BENEFIT: favorable DL generally protects against IRS later seeking retroactive correction of plan defects as to form of plan WISHFUL THINKING: DL does not provide protection against plan s failure to operate in compliance with qualification requirements 4

5 Basics Of Remedial Amendment Period Corrective plan amendments retroactively cure erroneously drafted plan provision ( disqualifying provision ) if correction adopted within remedial amendment period. Treas. Reg (b)-1(d)(1) If timely adopted, plan considered to satisfy Code as of date original error adopted. Remedial amendment period generally starts: > For new plans date plan effective > For existing plans date amendment adopted/effective (whichever earlier) > For Code/regulatory changes date change applicable to plan End of remedial amendment period varies based on due date for sponsor s tax return, end of plan year or when plan amendment adopted/effective, depending on type of plan, plan sponsor, etc. Section 401(b) permits IRS to extend remedial amendment period 5

6 Staggered RAP Program From 2007 to 2017 Before Revenue Ruling , all plans filed within same deadlines set by IRS floods of applications at the same time or on ad hoc basis RP created new 5-year cycles for DL requests for IDPs and 6-year cycles for master/prototype/volume submitter plans GOAL: To better manage IRS workflow for plan amendments than prior process. Cycle A through E, based on last digit of the sponsor s EIN (with exceptions) Each Cycle = 12-month submission period starting February 1st and ending on January 31st in which to file for on-cycle DL First 5-year cycle: 2/1/06 (Cycle A) and ended on 1/31/11 (Cycle E) Second 5-year cycle: 2/1/12 (Cycle A) and ended on 1/31/17 (Cycle E) 6

7 The Cumulative List For each Cycle, IRS published Cumulative List of Changes in Plan Requirements with changes in qualification for written plan document When plan filed in its designated Cycle, IRS reviewed plan for relevant items on CL Cumulative List is CUMULATIVE had all required rules for prior years (for example, for Cycle A in 2012, all changes since Cycle A in 2007) Cycles didn t changes rules for interim amendments required for statutory/regulatory changes to plan qualification requirements If interim amendments timely adopted, RP extended corrective RAP to end of plan s 5 or 6 year Cycle for adoption of interim amendment or absence of required provision if plan sponsor determines in good faith before interim amendment deadline that no amendment required Cycles did NOT impact deadline for discretionary amendment, such as benefit formula change, which must be adopted by end of plan year in which effective 7

8 Elimination of 5-Year Remedial Amendment Cycles IRS Announcement : End of staggered 5-year determination letter remedial amendment cycles for individually designed plans IRS Notice : Additional guidance on determination letter program changes Revenue Procedure : Key changes for individually designed retirement plans 8

9 Revenue Procedure Cycle A was final filing period for 5-year remedial amendment cycles > Filing deadline of January 31, 2017 New limited circumstances under which plan sponsor can apply for determination letter > Initial plan qualification > Qualification upon plan termination > Other Circumstances At discretion of the IRS, based on current case load and resources, significant law changes, new approaches to plan design, etc. 9

10 Revenue Procedure (Cont.) Impact on Remedial Amendment Period > Unless otherwise provided, end of remedial amendment period for required plan amendment is end of second calendar year following year in which required amendment published May be extended for governmental plans to date that is 90 days after close of third regular legislative session of legislative body, if later than standard deadline > Discretionary amendments must generally be adopted by end of plan year in which plan amendment is operationally put into effect, provided that amendments resulting in cutbacks must be adopted before they are effective > Discretionary amendments to plans which result in disqualifying provisions generally must be corrected by end of 2 nd calendar year following calendar year in which disqualifying provision becomes effective > Remedial Amendment Period for New and Terminating Plans 10

11 Revenue Procedure (Cont.) Treasury and IRS intend to publish annually (starting in 2016) a required amendments list to establish deadlines for required plan amendments IRS also intends to release annual operational compliance list for changes to operational requirements that may not necessitate plan amendment Expiration dates for determination letters are eliminated (prospectively and retroactively) 11

12 How To Keep IDP Plan Document Qualified Now? Review plan now for compliance with requirements since last DL Review New Required Amendments List annually and amend IDP plans as needed Review plan operations under new annual Operational Compliance List (once issued) If establishing new IDP or terminating existing one, review plan for required amendments and timely request a determination letter, if available Keep track of whether IRS is accepting DL applications for other circumstances and whether your plan fits and wants to submit for new DL Get familiar with IRS correction programs self correction (SCP) and voluntary correction (VCP) to be aware of how and by when operational errors need to be corrected (document and operational error tied together) Follow these steps whenever major plan transaction plan mergers, spinoffs, changes in record-keepers or administrator 12

13 Considerations For Plan Sponsors For small plans (especially DC plans), is it time to consider a prototype/pre-approved plan? Does IDP plan document maintenance need to be moved from in-house HR or outside TPA to plan counsel? Will IRS change its approach on incorporation by reference or issue more model amendments? Will IRS change EPCRS on need for DL in many corrections? Will IRS soften approach on minor plan errors/scriveners errors? Will plan sponsors be less willing to amend plans? 13

14 The Promises Plans Make. Impact on representations by sponsor in corporate and plan mergers? Example: The Surviving Plan qualifies and on the Transfer Date will qualify in form and operation under Code Section 401(a) and that its related trust is and will be exempt under Section 501(a) of the Code. To the knowledge of the Receiving Pension Plan, the Plan has been operated at all times in accordance with its terms and in material compliance with the Code, ERISA, and other applicable law. Impact on representations by plan counsel in corporate and plan mergers that both plans are qualified and have operated under Section 401(a) of the Code? 14

15 The Promises Plans Make. Impact on representations by sponsor in making investments collective trusts, Foreign Account Tax Compliance Act ( FATCA ), CRS etc.? Investments often require reps that plan is: > Qualified under Code Section 401(a) > That any representation deemed to continue until such time Trust s interest completely withdrawn from Collective Trust > That plan sponsor will indemnify collective trust for any claims arising out of violation of those representations, even if in good faith 15

16 The Promises Plans Make. Impact on annual audit and typically required representation by sponsor/ administrator about DL and plan status that state: > We have no knowledge of any noncompliance with laws/regs. (including IRS) whose effects should be considered in financial statements. > Pension Fund is qualified under appropriate section of Code and we intend to continue it as qualified plan. > Sponsor has operated Pension Fund in manner that did not jeopardize this tax status. > IRS advised Fund by letter dated 1/20/16 that it qualifies under Code Section 401(a). If Plan has been amended since receiving this letter, Trustees believe that Fund is currently designed and being operated in compliance with applicable Code requirements. Will FASB change these representations to lesser assurance under new process? Impact on contracts with plan providers need for clarity/liability on plan document errors? 16

17 What About The Future? Impact on contracts with plan providers need for more clarity/liability on plan document errors? Will Providers ask for more money/less liability for IDPs? Will the private determination letter assurance offered by some (one) law firms catch on? Will clients expect all firms to offer it? Is this as big a deal as some fear if EPCRS still exists? 17

18 Q & A 18

19 Disclaimer These materials have been prepared by Trucker Huss, APC and Slevin & Hart, P.C. for informational purposes only and constitute neither legal nor tax advice Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship Anyone viewing this presentation should not act upon this information without seeking professional counsel In response to new IRS rules of practice, we hereby inform you that any federal tax advice contained in this writing, unless specifically stated otherwise, is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax-related penalties or (2) promoting, marketing or recommending to another party any taxrelated transaction(s) or matter(s) addressed herein 19