IRS and IRC 412(d)(2)
Recently, in the review process for determination letter applications, the IRS has taken issue with “412(d)(2)” plan amendments. Some plan sponsors have been told by IRS reviewers that the amendments were not permissible if adopted after the close of the plan year, and that a closing agreement would be necessary to avoid disqualification. ASPPA and ACOPA sent a letter
to IRS on June 9, 2014, expressing disagreement with the position being taken as contrary to the clear statutory language of IRC Section 412(d)(2). (The June 2014 letter was in addition to a July 2011 letter
in which ASPPA and ACOPA first expressed concern about this issue.)
Until this matter can be given further consideration by the IRS National Office, ASPPA and ACOPA requested that the IRS put in abeyance determination letter applications where disqualification is being threatened. At a meeting with ASPPA and ACOPA’s Government Affairs representatives last week, the IRS agreed. They indicated that closing agreements with regard to IRC Section 412(d)(2) amendments are being put on hold while they discuss the matter internally and consider any possible resolutions. We are hopeful that this is the first step in the right direction on this matter.
IRC Section 412(d)(2) (and identical pre-PPA IRC Section 412(c)(8)) provide that if an amendment increasing benefits for a plan year is made within 2½ months after the end of the year, the plan administrator can elect to treat the amendment as if it had been made on the first day of the year. The first sign of trouble in this area came in the response to a 2011 Enrolled Actuaries Meeting Gray Book question. An answer from the IRS took the position that a discretionary 412(d)(2) amendment could not be considered effective before the year of adoption for funding purposes. This Q&A prompted the July 2011 letter to IRS from ASPPA and ACOPA. At last week’s meeting, we were told by the IRS that our concerns about IRC Section 412(d)(2) and the funding rules are not being ignored, but the issue is not likely to be considered until after other regulations currently being worked on are finished.
Judy Miller is ASPPA’s Director of Retirement Policy and ACOPA's Executive Director.