|
 |
|
|
 |
| |
|
|
|
|
| |
Yes, you will have to restate and amend your current plan document, even if it is only a year or two old. |
The Employee Plans (EP) section of the IRS has focused much of its resources over the last three years on revamping the process for keeping qualified plans updated for changing laws and regulations. These procedural changes were designed to expedite the IRS’s review of the current plan restatement process with a minimum of additional IRS personnel. The whole process has been carefully planned, but it has many moving parts, and so far, much of these processes have only been tested in theory. With May 1, 2008 being the start date for restatement of all preapproved defined contribution plans, these new processes are about to be fully tested by both practitioners and the IRS.
One issue that is likely to resurface again and again for employers with preapproved defined contribution plans is what to do about the “interim amendments.” These are the annual amendments that the IRS requires to keep the plan compliant with changing laws and rules between dates when the plan is fully restated.
For most plans there has been an annual requirement to adopt an interim amendment every year since the last “GUST” restatement program. Note that employers who will be restating their preapproved defined contribution documents for EGTRRA this year also will need to adopt one or more interim amendments for post-2004 rule changes. Additionally, there will be interim amendments required for plan years up until the next defined contribution plan restatement period, which is scheduled to begin in 2014. One certain amendment is the required addition of the legislation in the 2006 Pension Protection Act (“PPA”). This must be adopted by the end of the plan year beginning in 2009.
Rev. Proc 2007-44, the most current guidance on the restatement process, states that any reliance on an advisory or opinion letter for a preapproved EGTRRA document is contingent upon timely adoption of interim amendments as required by the IRS. This year almost all plans will be adopting interim amendments for changes in the IRC § 415 regulations and their revised definition of plan compensation.
Interim amendments are required to keep a plan in compliance with certain rule changes that first become effective in the plan year. Frequently, these are in the form of an IRS released model amendment and can be adopted by all employers, or the preapproved plan sponsors, with little or no modification. It is a part of an IRS policy allowing employers to operate a plan consistent with a law or rule change without a need to immediately incorporate the rule change into the plan document. The interim amendment for IRC § 415 and PPA will be incorporated in documents in the next restatement cycle for preapproved documents, sometime in 2014. In the meantime, the employer will need to adopt the interim amendment and fully conform the plan’s operation to the change in law or regulations. When an employer with a preapproved document, or the document sponsor, adopts an interim amendment in the form set by the IRS, the “reliance” provided by the IRS on the document remains in effect.
The date for adopting interim amendments is set by the “remedial amendment period” (RAP) of the plan. Each plan will have its own RAP based on the employer’s and the plan’s tax year. Basically, the amendment must be adopted by the end of the plan’s RAP for each required interim amendment. The RAP begins on the date the rule change first becomes effective with respect to the plan, and ends on: (1) the last day of the plan year containing the day when the RAP began for optional amendments, or (2) for required amendments, the due date, including any extension, for filing the employer’s federal income tax return for the employer’s taxable year containing the day on which the RAP began. For plans with a plan year that coincides with the employer’s tax year, the RAP is extended to the due date—with approved extension—of the employer’s tax return. Special RAP rules apply for a plan that is maintained by more than one employer.
One of the traps in keeping a plan in compliance by timely adopting an interim amendment can occur when the employer’s tax year and the plan year differ. Then, the RAP typically ends with the last day of the plan year in which the rule first became effective. Employers sometimes think the date for filing Form 5500 affects the date when the interim amendment can be adopted. It doesn’t.
The IRS will occasionally delay the date when an interim amendment must be adopted. This may be done to give practitioners additional time to address IRS guidance on a law change that was released close to the effective date of the rule change. When this occurs, the due date of the employer’s tax return has no effect on the extension of the RAP. Additionally, the extended due date for adopting an interim amendment doesn’t extend to the date when a discretionary amendment must be adopted. Discretionary amendments are plan changes elected by the employer—such as adding a Roth 401(k) option or changing a testing method—and are not required by a law or regulatory change. As noted above, discretionary amendments must be adopted by the end of the plan year for the year in which the change would be effective.
Note that while the date for adopting an interim amendment can be after the effective date of the law or regulatory change, the plan must be operated according to the required plan modification as if it had been amended on the effective date of the rule change.
Another troublesome issue relates to whether the pre-2005 interim amendments need to be submitted to the IRS when the employer submits an EGTRRA master/prototype (M&P) document or volume submitter (VS) document to the IRS when a determination letter for that employer’s plan is requested. Here, the IRS generally requires the pre-2005 interim amendments, but not the post-2004 interim, with the determination letter filing. There is an exception to this requirement that allows the employer to omit the interim amendments if the document sponsor of the preapproved document retains the right to amend an employer’s document. This right is available in most M&P plans and, after the EGTRRA restatement is adopted, in VS plans. However, current guidance from the IRS on the submission process reserves the right to request all interim amendments for any determination letter filings. It has been our experience that some IRS reviewers disregard these types of submission exemptions and exercise their discretion to ask for the documents anyway. Thus, many practitioners will include the interim amendments to expedite the process if their document gets forwarded to one of these reviewers.
One final point: the final date for the RAP for an interim amendment or a discretionary amendment does not offer any relief from a prohibited cutback in accrued benefit. Thus, while it may be possible to delay the date when an interim amendment may be adopted by waiting until the end of the RAP, this may result in an operational failure for violating the anti-cutback rules of IRC § 411(d)(6). Thus, many employers are adopting in 2008 the 415 amendments for the revised definition of compensation prior to participants accruing a benefit so as to avoid an anti-cutback issue. Wow! And that was supposed to be a simple explanation. Better idea, call us if you have a question. |
| |
| Back To
Top |
|
|
|
|
| |
The IRS permission to exclude part-time employees as a class comes with a trap for the unwary. |
Those of us who have worked with qualified plans know that the IRS has long objected to plan provisions that exclude part-time, temporary, and seasonal employees from plan participation. It based its objection on Treas. Reg. § 1.410(a)-3, which notes that the maximum service requirement a plan can impose is one year of service (in some cases two years). The regulation explains that a clause excluding part-time employees whose “customary employment is for not more than 20 hours per week” is an impermissible service requirement because such an employee could actually work more than 1,000 hours in an eligibility computation period. Therefore, the “part-time” exclusion would be a service requirement exceeding the IRC § 410(a) limits.
Thus, we were surprised to see that the adoption agreements for the new prototype and volume submitter documents from some document providers allow the plan sponsor to exclude part-time, temporary, and seasonal (collectively “part-time”) employees from the definition of Eligible Employees for plan purposes if the “regularly scheduled service” of those employees is less than a specified number of hours during the plan’s eligibility computation period.
To understand this unusual provision, we contacted Robert Richter of SunGard Relius, who explained why the IRS approved this language in the SunGard plans. He noted that over time the IRS position regarding the exclusion of part-time employees has evolved. Its most recent statement was a Quality Assurance Bulletin (“QAB”) issued on February 14, 2006.
The QAB directed IRS document specialists to challenge plans with potentially improper exclusions, including those relating to part-time, seasonal, or temporary employees. The QAB indicates that a plan may exclude part-time employees if the employer designs the provision in such a way that there is no possibility of indirectly imposing an hour of service requirement in excess of the Code § 410(a)(1) statutory maximum. (The SunGard Relius Web site has a link to a more detailed discussion of the QAB requirements:
http://www.relius.net/News/TechnicalUpdates.aspx?ID=333.)
The QAB includes an example that is the key to the exclusion language in the SunGard plans. Generally, a plan provision that excludes an employee who “is scheduled” to work less than 1,000 hours of service is impermissible because the employee could work more than 1,000 hours and still be excluded. However, an employer can salvage the provision by including fail-safe language addressing the situation where the employee works more than 1,000 hours of service during a computation period. In effect, the provision excluding part-time employees operates as a prospective exclusion, subject to the fail-safe inclusion when an otherwise ineligible part-time participant is credited with 1,000 hours of service. Then they are in the plan! If the plan has immediate eligibility for full-time employees, the part-time provision creates two sets of eligibility conditions, one for full-time employees (immediate entry) and one for part-time employees (one year of service).
The SunGard plans meet the fail-safe requirement by including the required fail-safe language in the basic plan document that underlies the adoption agreements. The definition of Eligible Employee states that any part-time employee who actually works one year of service is eligible to participate in the plan. Thus, the part-time exclusion in the SunGard plans does not reflect any IRS oversight in the review process but is consistent with the QAB requirements.
We are not aware of EGTRRA documents from other document providers that include a part-time exclusion comparable to that of SunGard. That does not mean that plan sponsors using documents from other providers, or their own individually designed documents, are out of luck. This type of provision can be easily added to an individually designed document. Addition of such a small provision to a volume submitter document should not deprive the document of volume submitter status. Even non-standardized prototype documents typically include an open-ended “Other” option in the definition of Eligible Employee that could accommodate a part-time exclusion consistent with the QAB requirements. That means that virtually any employer could include this type of exclusion when it adopts its EGTRRA plan restatement. |
| |
| Back To
Top |
|
|
|
|
| |
The DOL can bar you from ever servicing qualified plans. |
DOL enforcement activity usually involves the restoration of plan assets and/or some sort of fine by the perpetrators of malfeasance regarding plan operation. Plan fiduciaries are often barred from serving in such capacity again. Recent DOL enforcement activity shows that DOL enforcement can extend well beyond these common sanctions.
One recent enforcement action started off on the normal path. The DOL brought suit in a Miami federal district court against the principal of a plan sponsor. It established that he had failed to pay over $60,000 to the plan. The district court ordered that he repay the plan and imposed over $110,000 in fines. It also barred him from serving as a fiduciary to an employee benefit plan governed by ERISA. Unfortunately, this gentleman failed to make the required payments, and the DOL sought an order of civil contempt against him. The district court found that he had failed to pay $75,000 to the plan, as required by earlier orders. As a remedy, the court found him to be in contempt and ordered him jailed until he complied with the court orders directing the payments. Obviously, the targets of DOL enforcement activity ignore directions to restore plan assets at their own peril.
The second enforcement activity targeted the actions of a Washington, D.C. attorney who advised two pension plans of a now bankrupt Chattanooga company. According to DOL filings, the attorney knowingly participated in the improper transfer of plan assets to companies affiliated with the president of the plans’ sponsor. The attorney also received fees drawn from plan assets following the improper transfers. Eventually, the Pension Benefit Guaranty Corporation had to take over both plans. According to a DOL press release, the federal court for the Eastern District of Tennessee granted the DOL a judgment that permanently bars the attorney from “providing advice or services to any benefit plan” covered by ERISA. He is also barred from receiving any compensation and serving in a fiduciary capacity for any ERISA plan. EBSA Assistant Secretary Bradford Campbell commented that the DOL “was pleased that this defendant will no longer be allowed to advise employee benefit clients.” This enforcement effort demonstrates that the DOL will also pursue plan service providers who are complicit in improper diversion of plan assets. |
| |
| Back To Top |
|
|
|
|
| |
Monitoring investments just one responsibility of a plan sponsor. |
Fiduciaries of qualified retirement plans which allow the participants to self-direct the investment of their accounts have an affirmative duty to select and monitor investment options the participants have under the plan. The question often arises: Does a fiduciary’s duty to monitor investments apply for each individual option or merely for the plan as a whole? What are the relevant fiduciary duties when determining what investment options to have available under the plan?
The fiduciary’s duty of loyalty requires that a fiduciary solely act in the interest of the participants and for the exclusive purpose of providing benefits to the plan participants and beneficiaries. Since the fiduciary is required to act for the exclusive purpose of providing benefits, the fiduciaries must select and monitor investments with the sole purpose of providing retirement income to the plan participants and beneficiaries. In making these decisions for the plan, the fiduciary must act as a prudent person with the experience dealing with a similar enterprise would act. This is known as the “prudent expert” standard. This standard would seem to require that a plan fiduciary apply generally accepted investment theories and evaluate and choose the investments using prudent industry practices.
When applying the duties of loyalty to the investment selection process, the fiduciary must give appropriate consideration to the facts that the fiduciary knows or should know are relevant to the particular investment involved, including the method in which the investment plays in the plan’s investment portfolio. When one considers the above application of the duty of loyalty, it becomes clear that the consideration of an investment in a plan must include both a consideration of the investment in the context of the plan as a whole as well as the investment itself.
It is clear that fiduciaries are required to prudently monitor all the investment choices to ensure they achieve the goal of providing plan participants and beneficiaries retirement benefits. Since fiduciaries have a responsibility to continually monitor investments within the plan, as well as the plan as a whole, it is of paramount importance that fiduciaries regularly review their portfolios considering the suitability of their investment choices using generally accepted investment principles. |
| |
| Back To Top |
|
| |
|
|
| |
Note: Occasionally, articles we feel would be of interest to our E-newsletter readers will be presented that previously appeared in other compilations of writings by Greg Matthews who is the Editor for the 401(k) Advisor, a monthly newsletter from Aspen Law & Business. The newsletter may be ordered at www.aspenpublishers.com or by calling 1-800-638-8437. |
| |
IRS CIRCULAR 230 DISCLOSURE: To ensure
compliance with the requirements imposed on us by IRS
Circular 230 (31 C.F.R. 10.33 - 10.37, et. seq.), we
inform you that to the extent this communication, including
attachments, mentions any federal tax matter it is not
intended or written and cannot be used, for the purpose
of avoiding Federal Tax penalties. In addition, this
communication may not be used by anyone in promoting,
marketing or recommending the transaction or matter
addressed herein. Anyone other than the recipient who
reads this communication should seek the advice based
on their particular circumstances from an independent
tax advisor. |
|
| |
|
 |
|
