The In s and Out s of Plan Amendments and Current Document Issues Robert M. Richter, J.D., LL.M., APM, Vice President, SunGard Relius Donald Kieffer, Esq., Tax Law Specialist, IRS Robert Richter, JD, LLM, APM, Vice President, SunGard Robert M. Richter, JD, LLM is a Vice President with SunGard Relius in Jacksonville, Florida. Robert manages the consulting department and is instrumental in authoring and supporting SunGard Corbel's retirement plan documents. He is a frequent lecturer and author on matters involving qualified retirement plans and cafeteria plans. He has held numerous positions within the American Society of Pension Professionals and Actuaries (ASPPA), including President from October 2011 to October 2012. 2014 SunGard 1
Robert Richter, JD, LLM, APM, Vice President, SunGard Robert is a Fellow of the American College of Employee Benefits Counsel and is a member of the National Institute of Pension Administrators (NIPA), the Florida Bar, and other organizations. Robert received a B.S., with a major in Finance, from the University of Florida, a J.D. from Florida State University, and an LL.M. in taxation from the University of Florida. Donald Kieffer, Esq., Tax Law Specialist, IRS Donald Kieffer, Tax Law Specialist, Internal Revenue Service, Mountainside, NJ, is a tax law specialist in the IRS Employee Plans Technical Guidance function. A 1991 graduate of the Seton Hall University School of Law, he is admitted to the State bars of New Jersey and Pennsylvania. He is a member of the Taxation Section of the American Bar Association. 2014 SunGard 2
Agenda What is a plan amendment What laws or rules apply to plan amendments The timing of plan amendments The mechanics of amending a plan Amendment or Not? #1 Payroll clerk receives letter from TPA regarding catch-up contributions Payroll clerk is over 50 and returns forms and catch-up contributions for herself No other employees informed of change 2014 SunGard 3
Has the Plan Been Amended? Probably not. Payroll clerk did not have authority to amend. Amendment or Not? #2 HR director thinks it is prudent to change eligibility from 6 months to 1 year Board agrees and notice is sent to TPA and employees Adoption Agreement not changed 2014 SunGard 4
Has the Plan Been Amended? Maybe. It might depend on plan terms. Amendment or Not? #3 CEO signs EGTRRA restatement TPA forgot to exclude a division of Company that had always been excluded from the plan 2014 SunGard 5
Has the Plan Been Amended? Maybe. This is a scrivener s error. Amendment or Not? #4 CEO signs EGTRRA restatement Plan document excludes union employees Collective bargaining agreement requires coverage of union employees 2014 SunGard 6
Has the Plan Been Amended? Maybe. This is a scrivener s error. Failure to cover union employees would be violation of labor laws. Amendment or Not? #5 Employer wants to change MP contribution from 10% to 6% Board approves and plan amendment is drafted and adopted No other actions taken 2014 SunGard 7
Has the Plan Been Amended? No. Failure to give ERISA 204(h) notice voids the amendment. APPLICABLE LAWS Internal Revenue Code (Code) ERISA 2014 SunGard 8
General Requirements Written and Communicated A qualified pension, profit sharing, or stock bonus plan is a definite written program and arrangement that is communicated to the employee and which is established and maintained by an employer. Reg. Section 1.401-1(a)(2). Definitely Determinable Benefits or Allocations General Requirements (Cont d) Exclusive Benefit Rule Permanency Requirement Qualified Status throughout year A qualified status must be maintained throughout the entire taxable year of the trust in order for the trust to obtain any exemption for such year. Reg. Section 1.401-1(c). 2014 SunGard 9
General Timing Rules Section 5.05 of Revenue Procedure 2007-44 Service generally will require the adoption of interim plan amendments Plan amendment must match operation of plan Timing is different for adoption of interim amendments vs. discretionary amendments Deadline for Discretionary Amendment End of plan year in which plan amendment is effective A discretionary amendment is an amendment that is not a disqualifying provision or integral to a disqualifying provision 2014 SunGard 10
Deadline for Interim Amendments Later of: due date (including extensions) for filing income tax return for employer s taxable year that includes date on which remedial amendment period (RAP) begins, or last day of plan year that includes date on which RAP begins Exception if plan maintained by more than one employer Last day of 10 th month following last day of plan year in which RAP begins Governmental plan: Later of regular deadline or last day of next legislative session after effective date Exceptions to Timing Rules Statutory, regulatory, or IRS relief PPA (end of 2009); HEART (end of 2010); WRERA (end of 2011); Roth rollover (end of 2011); IRC 436 (end of 2013); Roth transfer (end of 2014) IRC 412(c)(8) has funding exception of 2 ½ months after end of plan year Reg. 1.401(a)(4)-11(g) permits corrective amendments to be made within 9 ½ months after end of plan year 2014 SunGard 11
Exceptions to Timing Rules Written plan must be in place by last day of first plan year 401(k) plan cannot accept elective deferrals until deferral provisions are adopted EPCRS SCP via plan amendment generally permitted for: Loans Hardships Early inclusion of participants Anti-cutback rules of IRC 411(d)(6) (TAM 9735001) ADP/ACP test safe harbor plans TAM 9735001 Contractual type analysis Modification of allocation conditions after end of PY and after contribution has been made was not permitted TAM also provides that conditions cannot be changed after allocation conditions satisfied even when contribution is discretionary and has not been made for the PY yet 2014 SunGard 12
ADP/ACP Safe Harbor Exceptions GR: Provisions must be in plan by first day of PY Except for maybe approach Exiting SH mid-year generally allowed if 30 days notice Other mid-year plan changes (IRS Announcement 2007-59 and Notice 2010-84): Addition of Roth provisions In-plan Roth rollovers or conversions (transitional relief only) Hardship changes due to PPA Other Specific Rules Nondiscriminatory benefits, rights and features under IRC 401(a)(4) Nondiscriminatory pattern of amendments Changes in vesting schedules (e.g., 3 year rule) IRC 4980F (and ERISA 204(h)) advance notice of significant reduction of accruals Amendments resulting in a blackout under Sarbanes- Oxley 2014 SunGard 13
Summary of Code Requirements If no violation of cutback or other rules, may amend up to last day of PY Generally may not amend after end of PY For DC plans, IRS uses contractual type of analysis RAP only applies to disqualifying provisions not voluntary changes Communicate to employees APPLICABLE LAWS Internal Revenue Code (Code) ERISA 2014 SunGard 14
ERISA General Requirements Written plan requirement Broader than Code (e.g., separate loan program) CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011) SPD does not constitute terms of plan because it is a summary of the plan Ability to make retroactive amendments No general principles restricting timing of amendments May be much broader than Code ERISA General Requirements Procedure for amending plan and for identifying who has authority to amend Notification of Employees Provide SMM within 210 days after end of PY in which amendment is adopted 2014 SunGard 15
ERISA Specific Rules Similar to Code requirements Anti-cut back rules Changes in accrual rules (204(h) notice required) Changes in vesting schedules Amendments resulting in a blackout under Sarbanes- Oxley General Contract Law In seeking damages under ERISA 502(a)(1)(B), contract law principles are being used Issue of fairness Bad facts make bad law 2014 SunGard 16
Scrivener Errors Emerging Trends IRS does not permit self-correction of scrivener errors Courts believe they are the only ones who can authorize correction of scrivener errors Generally must be: Mutual mistake; or Unilateral mistake coupled with fraud 2014 SunGard 17
Case Law Cross v. Bragg, 4th Cir., No. 07-1699, unpublished 7/24/09 Error in formula when restated plan (higher benefits for participants) IRS allowed correction under EPCRS Participants win Young v. Verizon's Bell Atlantic Cash Balance Plan, 7th Cir., No. 09-3872, 8/10/10) Conversion to DB plan Cut and paste error Employer wins Example - Scrivener Error Plan had 1,000 Hours of Service requirement to enter EGTRRA restatement had no age or service conditions Plan administered with 1,000 HOS requirement There are affected part-time employees Scrivener error VCP (IRS may require correction as improper exclusion) SCP as improper exclusion Amend plan prospectively Can require 1,000 HOS and exclude affected EEs prospectively No distributable event for affected EEs 2014 SunGard 18
Example Scrivener Error (Reversed) Plan had no age/service conditions EGTRRA restatement imposed 1 YOS/age 21 Plan administered with no conditions There are affected employees Scrivener error VCP (maybe needed if HCEs) SCP Amendment permitted for early inclusion Can t be discriminatory and DL needed if deviation from pre-approved plan Distribution Examples Assume CY PY for all examples 2014 SunGard 19
Example 1 Employer wants to add participant loan feature to plan Plan started making loans 2/1/14 When does employer need to adopt the discretionary amendment? No later than 12/31/14 But, under ERISA, does this create a PT? Example 2 PS allocated pro rata by comp Allocation condition: 1,000 HOS Employer wants to amend to use permitted disparity for 2014 Can employer amend by 12/31/14? Too late under IRC 411(d)(6)? 2014 SunGard 20
Example 3 Employer wants to eliminate hardship distributions from the plan This is a voluntary amendment Can employer implement now and amend by the last day of the plan year? Hardship distributions may be eliminated without violating the anti-cutback rules Do participants have a right under Title I of ERISA to a hardship distribution if the plan has not been amended? Example 4 ADP Safe Harbor Plan Does not permit a profit sharing contribution Employer wants to amend to permit profit sharing contributions Can employer amend by 12/31/14? Safe harbor notice did not refer to profit sharing contributions Not addressed in Ann. 2007-59 Profit sharing contributions should not impact a participant s decision to defer 2014 SunGard 21
Example 5 ADP Safe Harbor Plan Excludes HCEs from SH contribution Employer wants to amend to include HCEs Can employer amend by 12/31/14? HCEs not required to receive SH notice Increases benefits Does not affect NHCE decision to defer What about amending to include a group of new employees (HCEs and NHCEs) from an acquisition? Example 6 ADP Safe Harbor Plan Does not exclude HCEs from SH contribution Employer wants to amend to exclude HCEs Can employer amend by 12/31/14? HCEs not required to receive SH notice No exception from 411(d)(6) for HCEs 2014 SunGard 22
Example 7 Plan provides for prior year testing method for ADP test Employer wants to switch to current year testing for 2013 plan year When must amendment be made? No later than 12/31/2013 Example 8 Employer allowed in-plan Roth conversion as of July 1, 2013 When does employer need to amend plan? No earlier than end of 2014 Otherwise, last day of PY unless ADP safe harbor SMM needed sooner? 2014 SunGard 23
Example 9 Plan has 6 months of service condition Amendment made to change to 1 YOS Effective date is 7/1/2014 How does it apply to those already in plan? How does it apply to those who were already hired but haven t entered? Example 10 Plan amendment reducing eligibility from 12 months to 3 months effective 8/1/2014 Pete was hired on 2/1/2014 As of 8/1/14 Pete has 3 months of service but not 1 YOS When is Pete eligible? 8/1/14 (effective date of amendment) 1/1/15 (entry date after 8/1/14) 2014 SunGard 24
Example 11 Plan has 6-year graded vesting Amendment made to change to 5-year graded Effective date is 1/1/2014 How does it apply to those who have terminated but not been paid? Example 12 Plan has many small account balances under $5,000 Employer wants to amend plan to have mandatory distributions of amounts $5,000 or less When does amendment need to be adopted? What happens to accounts of $5,000 or less at date amendment is adopted? 2014 SunGard 25
Example 13 Plan has owners and non-owners in classes Allocated pro-rata on compensation to each class and no allocation conditions Employer wants to amend to put each person in his or her own class Is it a cutback or does each person need to get at least the same % of comp (up to date of amendment)? Example 14 Employer A buys assets of Employer B Employer A wants the new EEs to be eligible to defer immediately Can this be operationally implemented now with an amendment by end of year? No specific prohibition closest is that must adopt plan prior to accepting deferrals, but that appears to be for trust purposes (i.e., at a plan level) Maybe use SCP corrective amendmet 2014 SunGard 26
Example 15 Plan has been an ADP test SH with EACA since 2009 Employer was not been automatically enrolling participants Is it possible to eliminate automatic enrollment for 2014? What if plan was only a traditional automatic enrollment plan? THE MECHANICS OF AMENDMENTS 2014 SunGard 27
The Mechanics of Amending a Plan Plan document provisions Timing of amendment Form of plan amendment Communication to employees Plan Document Provisions ERISA requires Procedure for amending identification of who has authority Some plans may contain specific procedures on amendments 2014 SunGard 28
Procedure for Amending Plan Curtiss-Wright Supreme Court decision The company reserves the right at any time to amend the plan is sufficient The company means anyone who has right to bind the company under general corporate law principles Best Practices on Authority Board approves in advance and CEO signs CEO signs and Board ratifies after-the-fact Less senior officer signs with Board pre-approval or ratification Amendment included in Board resolution Signed by officer with actual or apparent authority to bind corporation 2014 SunGard 29
Pre-approved Plans Pre-approved plan sponsors have authority to amend on behalf of adopting employers No IRS guidance regarding operation of this authority Is signature needed? If so, who is authorized to sign on behalf of sponsor? Interim Amendments and Restatements If plan is restated, do interim amendments need to be readopted? Restatement means entire plan is being replaced Rev. Proc. retains interim amendment if effective date of restatement is prior to effective date of interim amendment (e.g., PPA restatement is retroactive to date prior to date of implementation of Roth conversion Safest position is re-adopt (n/a if adopted at sponsor level for pre-approved plan) 2014 SunGard 30
Best Practices on Timing Prospective is best Be specific as to how effective date applies to a group of employees Retroactive amendments Generally permissible if adopted before end of year Amending after end of year generally a problem under the Code Form of Amendment Restatement Short amendment Incorporated in resolution Page replacement Communication signed by officer 2014 SunGard 31
Employee Communication SMM only required after plan is amended Effective availability under the Code may be a concern Advance notice for blackouts ERISA 204(h) and IRC 4980F must be advance notice QUESTIONS? 2014 SunGard 32