ERISA Pre-Approved and Customized Benefit Plans: Overhauled IRS Procedures and Determination Letter Process

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A ERISA Pre-Approved and Customized Benefit Plans: Overhauled IRS Procedures and Determination Letter Process TUESDAY, NOVEMBER 14, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Kevin E. Nolt, Director, Trucker Huss, San Francisco Carolyn M. Trenda, Counsel, McGuireWoods, Chicago The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 ERISA Pre-Approved and Customized Benefit Plans: Overhauled IRS Procedures and Determination Letter Process Kevin E. Nolt, Esq. Trucker Huss, APC Carolyn M. Trenda, Esq. McGuireWoods, LLP 5

6 Agenda Changes to determination letter process under Revenue Procedure New procedures for IRS review and approval of pre-approved retirement plans under Revenue Procedure Guidance for employers transitioning from customized to pre-approved plans Questions and answers 6

7 CHANGES UNDER REVENUE PROCEDURE

8 Revenue Procedure Makes significant changes to determination letter program for individually designed qualified plans Changes landscape of on-going compliance for individually designed qualified plans The significant changes mostly relate to when a plan: > Must be amended for law and other guidance changes > May request a determination letter Generally effective January 1,

9 Background and Key Concepts Individually designed qualified plans are custom drafted documents that are not on an IRS preapproved vendor document > Many reasons why sponsors have chosen to (or been required to) sponsor individually designed qualified plans Sponsors have been able to file for IRS determination letters for their individually designed qualified plans Sponsors can rely on a favorable IRS determination letter 9

10 Background and Key Concepts IRS determination letters are used for many purposes including: > Internal controls > Government plan audits > Tax footnote in Form 5500 financial statements > Mergers and acquisitions > Trustees, TPAs and investment managers > Rollovers > Credit agreements > EPCRS 10

11 Background and Key Concepts Qualified plans must be timely amended for law changes Section 401(b) provides a remedial amendment period during which a plan may be amended retroactively to fix disqualifying provisions IRS has a broad definition of disqualifying provisions 11

12 Background and Key Concepts Revenue Procedure created a staggered 5- year remedial amendment cycle (RAC) > Sponsors of individually designed qualified plans submitted applications for determination letters once every five years > IRS review was based on applicable Cumulative List > Off-cycle submission originally put at bottom of the IRS s review stack but after July 21, 2015, off-cycle submissions not accepted 12

13 Changes Under Revenue Procedure Staggered 5-year RAC for submitting determination letters is eliminated as of January 1, 2017 Cycle A3 was the final filing period for the 5-year RAC > Filing deadline was January 31, 2017 Sponsors are no longer required to adopt interim plan amendments with adoption deadlines on or after January 1, 2017 IRS will no longer issue its annual Cumulative List 13

14 Changes Under Revenue Procedure New limited circumstances under which a Plan sponsor can apply for a determination letter for an individually designed qualified plan: > Initial plan qualification > Qualification upon plan termination > Other Circumstances 14

15 Changes Under Revenue Procedure Revised extended remedial amendment period. > New Plan: Later of (i) 15 th day of the 10 th calendar month after the end of the initial plan year or (ii) the modified 401(b) expiration date > Amendment to existing plan: End of the second calendar year after the amendment is adopted or effective, whichever is later > Changes in qualification requirements: End of the second calendar year that begins after the issuance of the Required Amendments List > Different timing for governmental entities 15

16 Changes Under Revenue Procedure Examples from Revenue Procedure > Remedial amendment period for an amendment to an existing plan > Remedial amendment period for a change in qualification requirements 16

17 Changes Under Revenue Procedure IRS will issue an annual Required Amendments List after October 1 st of each year > Item will appear on list only after guidance provided in regulations or other form > Sets timing of remedial amendment period for changes in qualification requirements 2016 list is set forth in Notice > List is divided into Part A and Part B > Included only 1 item 17

18 Impact on Timing of Amendments Required amendments due by end of extended remedial amendment period noted on prior slide Discretionary amendments must generally be adopted by the end of the plan year in which the plan amendment is operationally put into effect Amendments resulting in cutbacks must be adopted before they are effective Terminating plans have special rule 18

19 Operational Compliance IRS also intends to release an annual Operational Compliance List > Identifies matters that may involve mandatory or discretionary amendments > May contain items that only impact plan operations > Web only. Not in Internal Revenue Bulletin > Certain items will not be included > Not meant to be comprehensive 19

20 Operational Compliance IRS issued 2016 and 2017 Operational Compliance Lists Lists cover various changes impacting DB and DC plans Lists can be found at 20

21 Determination Letter Expiration Dates New letters will not contain expiration dates Expiration dates in old letters no longer operative What does this mean? > No reliance for post-determination letter amendments or law changes > But post-determination letter plan amendments will not affect sponsor s reliance for provisions that are not amended or affected by a law change 21

22 Impact on Plan Sponsors Plan sponsors lose ability to receive protection in case of IRS audit In mergers, acquiring company cannot rely on a target plan s determination letter Plan auditors no longer can rely on determination letters 22

23 Plan Sponsors Options and Action Steps Periodic review and check up of individually designed plan documents > Seek a periodic opinion from another source Convert to a pre-approved plan format (if feasible) Periodic review of plan operation Submit any document or operational defects through VCP 23

24 Related Updates to EPCRS IRS released Revenue Procedure , an updated version of EPCRS, effective January 1, 2017 Update addresses the elimination of determination letter program and 5-year RAC > Elimination of the requirement to submit a determination letter application > Elimination of the requirement to have a current determination letter to use the self-correction program 24

25 CHANGES UNDER REVENUE PROCEDURE

26 Background and Key Concepts: Pre-approved Plans As with individually designed plans, Revenue Procedure established remedial amendment periods and six-year filing cycles for pre-approved plans > Master & Prototype > Volume Submitter > Both defined benefit plans and defined contribution plans Adopting employers could rely on the opinion letters issued to the plan sponsor of the pre-approved plan, provided certain requirements were met Many employer plan sponsors could not use preapproved plans as a result of the complexity of plan design and/or administration 26

27 Background and Key Concepts: Pre-approved Plans Prior six-year pre-approved amendment cycles as follows: > Defined contribution plans: February 1, 2017 to January 31, 2023 (submission period now revised under Revenue Procedure ) > Defined benefit plans: scheduled from February 1, 2019 to January 31, 2025 (revised submission period not yet determined) 27

28 Revenue Procedure Issued June 30, 2017; effective October 2, 2017 Effort to encourage employers to switch from individually designed plans to pre-approved plans Establishes (with Notice ) the qualification requirements (Cumulative List) for pre-approved defined contribution plans. Opens the third pre-approved defined contribution plan six-year remedial amendment cycle for opinion submissions beginning October 2, 2017 and ending October 1,

29 Changes Under Revenue Procedure Makes several changes to the pre-approved plan opinion letter landscape, with two types of preapproved plans going forward: > Standardized (similar to Master & Prototype) > Non-standardized (similar to Volume Submitter) > Both types can be designed as a basic plan document with an adoption agreement or a single plan document Minor amendments can be made by an adopting employer to non-standardized plans, but continuing reliance requires separate determination letter filings which may constrain certain adopting employers 29

30 Changes Under Revenue Procedure A money purchase plan and a Code Section 401(k) or profit sharing plan can be combined in the same pre-approved plan document An ESOP and a 401(k) plan can be combined in the same non-standardized pre-approved plan document A non-standardized cash balance plan can use the plan s return rate as the interest crediting rate A non-standardized plan can use non-safe harbor standards for hardship distributions. 30

31 Changes Under Revenue Procedure A non-electing church plan can file for an opinion letter Trusts cannot be submitted and will not be considered as part of the pre-approved plan process. Future enhancements include: > Updates to the procedure based on comments received > Separate note seeking comments regarding conversions from individually designed plans to preapproved plans where the individually designed plans maintain legacy benefit formulas 31

32 Pre-Approved Plan Requirements Amendments: plans must establish procedures for amendments Anti-Cutback: plan must provide protection under Code Section 411(a)(10) and 411(d)(6) Annual Additions Limitation: plan must permit plan amendments to allow an adopting employer to pass Code Section 415 and 416 requirements; plan must also provide for aggregation of all adopting employer plans of the same type Top Heavy: Either provide that all additional requirements applicable to top-heavy plans apply at all times or provide that such requirements apply automatically if the plan is top-heavy 32

33 Pre-Approved Plan Requirements Adopting Employer Reliance: plans must contain a statement close to the signature line that describes the limitation of reliance on the opinion letter Trust Provisions: plans must contain a statement that provisions of the plan override conflicting provisions of the trust Provider Information: plans must include contact information (name, address, phone) for the provider 33

34 Pre-Approved Plan Requirements Adoption Agreement Signature Requirements: Plans must have: an adopting employer signature and date line, a statement that the provider will inform the adopting employer of any amendments signatures when first adopting and when restating the plan electronic signatures are OK adoption agreement can only be used with one plan statement that failure to properly complete the adoption agreement may result in a qualification failure 34

35 Pre-Approved Plan Requirements Employee Definition: must encompass all employees of employer group using Code Section 414 rules; for ESOPs to participate employees also must be employed by the corporation that issues the stock held by the ESOP or in the same controlled group (using Code Section 1563 rules) Service Crediting: plan must credit service also using Code Section 414 rules; plan must contain provisions consistent with the requirements of USERRA (Code Section 414(u)) 35

36 Pre-Approved Plan Requirements Some additional separate plan provision requirements depending on the type of plan: > Non-standardized > Standardized > ESOP > Cash balance 36

37 Opinion Letters Opinion Letters > Only issued to Providers and Mass Submitters Provider: Any person that (i) has an established business in the US, and (ii) represents to the IRS in its application that it has at least 15 employer clients reasonably expected to adopt the same pre-approved plan. Providers can submit more than one plan where it represents to the IRS that it has at least 30 employer clients in the aggregate expected to adopt one of the Provider s plans Mass Submitter: Any person that: (i) has an established business in the US, and (ii) submits opinion letter applications on behalf of at least 30 unaffiliated Providers, each of which is offering, on a word-for-word identical basis, the same plan 37

38 Opinion Letters > Opinion Letters will not cover: IRAs Multiemployer plans Single employer collectively bargained plans Stock plans other than ESOPs ESOPs that are a combination of a stock bonus plan and a money purchase plan and ESOPs that hold preferred stock Pooled fund arrangements Certain hybrid plans Target benefit plans Certain other plans including welfare benefit related plans, plans that incorporate certain portions of the Code by reference, etc. 38

39 Reliance on Opinion Letter & Amendments Standardized Plan rules: > Opinion Letter + identical + non-discriminatory + no amendments (other than to choose options or certain amendments permitted) > Certain specific issues: Code Sections 415, 401(a)(26), 401(a)(4) amendments Non-standardized Plan rules: > Opinion Letter + identical + no amendments (other than to choose options or certain amendments permitted) > No reliance for: Code Sections 401(a)(4), 401(a)(26), 401(1), 410(b), or 414(s) > Certain specific issues: Code Sections 415, 410(b), 401(a)(26), 401(a)(4) amendments 39

40 Reliance on Opinion Letter & Amendments Reliance conditions and limitations for Adopting Employers: > Valid reliance for amendments and restatements only if plan is qualified > No reliance if plan adoption precedes issuance of Opinion Letter > No reliance if adoption agreement not completed correctly > Valid reliance if plan is identical to pre-approved plan with valid Opinion Letter (cannot have added terms, modified or deleted terms or amended unless in accordance with Rev. Proc.) > No reliance where normal retirement age is lower than 62 > No reliance where plan s trust contains a provision that the trust overrides provisions of the plan. 40

41 Reliance on Opinion Letter & Amendments Amendments that will not cause an adopting employer to lose reliance on an Opinion Letter: > Add or change a provision provided such a change permitted under the plan and the provision is identical to another plan provision > Adopt sample or model IRS amendments that specifically permit adoption by pre-approved plans > Adjustments to annual cost of living increases, except an amendment that adds an automatic increase > Amendments to satisfy Code Section 415 or 416 as a result of aggregation 41

42 Reliance on Opinion Letter & Amendments Amendments that will not cause an adopting employer to lose reliance on an Opinion Letter (continued): > Interim or discretionary amendments related to a change in qualification requirements > Changes to Provider s name > Changes to administrative provisions in the plan that are not in conflict with any other plan provision Non-standardized plans make may obtain reliance after making a non-permitted amendment by requesting a determination letter under certain circumstances. > Reference back to Revenue Procedure , Section 20.03(3) 42

43 When a Pre-Approved Plan Becomes Individually Designed An adopting employer makes a non-permitted amendment to a standardized plan An adopting employer amends a pre-approved plan to incorporate a plan not allowed in the Opinion Letter program The IRS determines, in its discretion, that the plan is individually designed due to the nature and extent of amendments made Adopting employer discontinues participation in the pre-approved plan that has been amended by the Provider, and has not substituted another preapproved plan 43

44 Contact Kevin E. Nolt, Esq. Trucker Huss, APC One Embarcadero Center, 12 th Floor San Francisco, CA (415) Carolyn M. Trenda, Esq. McGuireWoods, LLP 77 West Wacker Drive, Suite 4100 Chicago, IL (312)

45 Disclaimer These materials have been prepared 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 tax-related transaction(s) or matter(s) addressed herein 45